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Income Tax Appellate Tribunal, DELHI BENCH “A” NEW DELHI
Before: SHRI S.V. MEHROTRA : & SHRI SUDHANSHU SRIVASTAVA:
These are cross appeals preferred by the assessee as well as the revenue, relating to A.Y. 2008-09 and 2010-11. All these appeals were heard together and are being disposed of by a common order for the sake of convenience.
Brief facts of the case are that a search operation was conducted on 10.2.2010 in Jaksons Group of cases. In response to notice u/s 153C the assessee filed return declaring income of Rs. 4,88,38,540/-. The AO noticed that during the year under consideration assessee company was engaged in the business of trading/ investment in shares and mutual funds under the name and style of M/s Ascot Investments and the assessee had declared income from business and profession, income from capital gains and dividend income and interest income. The AO, after examining the assessee’s sales and purchase and the transactions being done through PMS finally determined the income declared under the head ‘short term capital gain’ and ‘long term capital gain’ by assessee as ‘income from business or profession’. The AO further observed that during the year under consideration the assessee had claimed portfolio management fee as expenses from capital gain amounting to Rs. 69,29,808/-, which was not allowable u/s 48 of the Income-tax Act. However, he observed that the expenditure incurred by the assessee on PMS becomes allowable once the income on sale of shares and units of mutual funds was held to be business income as against the capital gain claimed by the assessee. He, accordingly, allowed this sum against the business income. Ld. CIT(A) held that short term capital gain of Rs. 69,71,802/- and long term capital gain of Rs. 1,84,51,846/- returned by the assessee under the head capital gains could not be taxed under the head income from business or profession. However, as regards PMS charges ld. CIT(A) held that any expenditure on PMS was not allowable while computing income under the head ‘capital gains’. Sine AO had allowed this expenditure against the business income, therefore, he directed the AO to add back this amount.
Being aggrieved, both the assessee and the department are in appeal before us.
First we take up the departments appeals. Sole effective ground raised is as under: AY: 2008-09:
On the facts and circumstances of the case, the ld. CIT(A) has erred in directing to charge short term capital gain of Rs. 69,71,802/- and long term capital gain of Rs. 1,84,51,846/- under the head ‘Capital Gain’ instead of under the head ‘Income from Business/ Profession’ as taken by AO in the assessment order based on AY 2007-08.
“On the facts and circumstances of the case, the ld. CIT(A) has erred in directing to charge short term capital gain of Rs. 6,29,50,516/- and long term capital gain of Rs. 32,91,467/- under the head ‘Capital Gain’ instead of under the head ‘Income from Business/ Profession’ as taken by AO in the assessment order based on AY 2007-08.
At the outset ld. counsel for the assessee submitted that the ground raised
by the department is squarely covered by the Tribunal’s order dated 27.1.2016 in assessee’s own case for AY 2009-10, rendered in wherein considering the facts of the case and, thereafter, relying upon the order of the Tribunal in assessee’s own case for AY 2007- 08 in ITA no. 4691/Del/2011 dated 27.4.2015, it has been held as under:
5. We have heard both the sides and perused the material on record. We find that this issue is covered by the aforesaid decision of the coordinate Bench of the Tribunal in assessee's own case for AY 2007-08, in which one of us is a Member to the said decision. The relevant paras of the aforesaid decision are reproduced below :-
"18. We find that in the present case, all the transactions are delivery based transactions only. The assessee also earned dividend to the tune of Rs.42,77,597.73 thereon. It is also noted that the appellant had not claimed the amount of SIT paid by it as business expenditure.
Further, the courts have decided that a person can be a trader as well as an investor for same types of transactions done with different motives. (i) Ram Narain Sons (P) Ltd. v CIT as reported in 411 TR 534 (SC), (ii) Dwarkadas Kesardev Morarka as reported in 44 ITR 625 (SC), (iii) CIT vs. Madan Gopal Radheylal as reported in 73 ITR 652 (SC) , (iv) CIT v. Associated Development Co. Ltd. as reported in 82 ITR 586 (SC).
The above judgments clearly state that the same person can be a trader as well as investor in shares.
In a recent decision of Lucknow Bench of the Tribunal in the case of Sarmath Infrastructure (P) Ltd. as reported in 16 DTR (Lucknow) (Trib) 97, a view had been taken in favour of the assessee after fully 'considering the CBDT circular and the facts & circumstances of the case. The facts of the present case are more or less same as in that case, and therefore, the ratio of that decision is squarely applicable to the present case.
In view of the above and considering the intention of the parties. the fact that the mutual funds/shares have been shown as investment and not closing stock that the closing balance have been valued at cost and not at "cost or market value whichever is lower", that no borrowed funds have been used etc. the income from investment may be treated as income from capital gains and not as income from business.
Ld. CIT(A) has observed that the AO has wrongly stated that the assessee has traded in derivatives which cannot be treated as investment. On perusal of the records, it is noticed that the transactions in respect of derivatives are not part of the short term capital gain. These have been separately quantified as business transactions and on this aspect a letter dated 4th December, 2009, has also been filed with the assessing officer clarifying this position.
The Assessing Officer has reasoned that the assessee firm has earned incentive income and this incentive income has to be assessed as business income and the other income shall also become business income. We concur with the ld CIT(A) that this interpretation of the assessing officer is incorrect. The assessee having made investments and consequent to such investments some incentive is received. Treatment of that incentive income will not change the nature of the investments. On the contrary, this receipt of incentive itself confirms the fact that this assessee has earned incentive consequent to investments being made, which is normally given to the investor. 25. As regards the portfolio management, it is observed on examination of the facts and records and as explained above, that the assessee has made investments through portfolio management in five cases, and out of these five cases, the assessee has suffered losses in two cases to the extent of Rs.21,65,5511- and has made gain in three cases of Rs.36,04,177/- with the result that the net gain on account of portfolio management is only Rs.14,38,626/- out of the total capital gain of Rs.l,76,03,5801-. The investment in portfolio management is a corrunon feature and cannot be held to be a business. 26. Another reason of the Assessing Officer is that assessee has' prepared books of account, Profit and Loss Account and Balance Sheet and has got the same audited. There is nothing wrong in this. The assessee being a legal entity is required to maintain its books of account and get the same audited. This cannot be a ground for the assessing officer to hold that the assessee is carrying on business. The ld CIT(A) has rightly observed that if the contention of the assessing officer is accepted then probably in each and every case will be covered under the business income and there will be no I case for investment. The assessing officer is wrong in assuming that for the purpose of investment, the books of account are not required to be maintained or are not required to be audited.
In view of the above discussion, and after careful consideration of various case laws and the Board's Circular on the subject referred above, Ld. CIT(A) has rightly held that the Assessing Officer was not justified in changing the treatment of income of appellant from Short term' capital gains to Income from business. The Assessing Officer was accordingly, directed to treat the income of Rs.l, 76,03,581/- declared by the assessee as Short term capital gains only and not as Business income. In the background of the aforesaid discussions, we do not find any infirmity in the order of the Ld. CIT(A), hence, we uphold the same and dismiss the issue in dispute raised by the Revenue." In the light of the co-ordinate Bench decision and the fact that the ld. DR could not controvert the facts of the earlier year vis- a-vis the relevant year under consideration; and Since the issues are identical and there is no change in the facts, we, respectfully following the aforesaid order of the earlier year in assessee's own case, and dismiss the appeal of the revenue.”
6. Ld. DR has not pointed out any distinguishing feature in the year under consideration and since in preceding year as well as in subsequent year the assessee’s stand has been confirmed by ld. CIT(A), therefore, respectfully following the decision of the ITAT in assesee’s own case for AY 2007-08 and 2009-10, we confirm the findings of ld. CIT(A).
In the result, revenue’s appeals for both the assessment years i.e. 2008-09 and 2010-11 stand dismissed.
Now we take up the Assessee’s appeals, wherein following grounds are raised: AY 2008-09:
“1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in rejecting the contention of the assessee that the proceedings initiated under Section 153C and order passed by the learned Assessing Officer (AO) under Section 153C/143(3) is without jurisdiction.
3. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in rejecting the contention of the assessee that the proceedings initiated under Section 153C are bad in law in the absence of any incriminating material belonging to the assessee being found during the course of the search.
4. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in rejecting the contention of the assessee that the proceedings initiated under Section 153C and the assessment framed under Section 153C is bad and liable to be quashed in the absence of any satisfaction being recorded by the AO of the searched person that the incriminating material belonging to the assessee was found during the course of the search.
5. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in rejecting the contention of the assessee that the assessment framed under Section 153C is bad and liable to be quashed as no valid notice under Section 153C as required under the law has been issued and served on the assessee.
On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law, in rejecting the contention of the assessee that the assessment framed under Section 143(3) read with Section 153C of the Act without the issue of valid notice under Section 143(2) is bad in law and liable to be quashed.
7. On the facts and circumstances of the case the learned CIT(A) has erred both on the facts and in law in holding that the PMS amounting to Rs. 69,29,808/- being not eligible while computing capital gain has to be added to the, business income of the assessee.
8. The appellant craves leave to add, amend or alter any of the grounds of appeal.” AY 2010-11:
“1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case the learned CIT(A) has erred both on the facts and in law in holding that the PMS charges amounting to Rs. 18,09,782/-/- being not eligible while computing capital gain has to be added to the business income of the assessee.
3. The appellant craves leave to add, amend or alter any of the grounds of appeal”.
9. Vide ground nos. 1 to 6 the assessee has challenged the initiation of proceedings u/s 153C. The main contention of assessee is that since no incriminating material was found in course of search, therefore, in view of the decision in the case of Kabul Chawla, proceedings u/s 153C could not be taken.
10. The search in the case was conducted on 10.2.2010 and in course of search undisclosed income of Rs. 19.94 crores was surrendered by Shri S.K. Gupta who headed the Jakson group. Once the assessee had surrendered such huge undisclosed income, that itself is an indicator of the fact that it was only after the assessee was cornered with the incriminating material found during the course of search that it surrendered amount. As the assessment for all the assessment years have been completed and the facts for earlier years as well as in subsequent years are identical and the income has been determined for all the years covered by search operation, therefore, this plea of assessee for the intervening assessment years, in any view of the matter, cannot be accepted. We, therefore, dismiss ground nos. 1 to 6 raised by assessee. 11. Now coming to ground no. 7 we find that partners had put in their own capital Rs. 52.5 crores for investment purposes out of their surplus funds. Investment had been basically made in mutual funds and Portfolio management scheme (PMS). Trading in derivatives was done by PMS managers and not by partners. The assessee had paid management fees for managing PMS. In course of search the assessee had surrendered this amount as it has returned its income under the head ‘short term’ and ‘long term capital gains’. Therefore, once ld. CIT(A) has upheld this contention of assessee regarding taxability of the income from sale and purchase of shares under the head ‘short term’ and ‘long term capital gain’. Therefore, the surrender made by assessee gets revived. The deduction could be allowed only if the income was assessed under the head income from business or profession and not under the head capital gains. These observations were made by AO as well as by ld. CIT(A) in their orders. Ld. counsel has relied on the decision in assessee’s own case for AY 2007-08 vide dated 27.4.2015. In the said decision in para 28 & 29 the Tribunal has observed as under: “28. With regard to issue involved in ground no. 3 is concerned, we find that Ld. CIT(A) has observed that during the assessment proceedings, the assessee had surrendered and offered for taxation an amount of Rs.41,88,451 / - on account of Portfolio Management Fees being not allowable u/s 48 of the Act while calculating income from capital gains as per following details:- I. Kotak PMS Fees Rs.5,84,124/- 2. HDFC PMS Fees Rs.8,43,965/- 3. ICICI PMS Fees Rs.27,60,362/- Rs.41 ,88,451/- 29. Ld. CIT(A) has further observed that the Assessing Officer has noted that ,the above expenditure incurred by the assessee on PMS becomes allowable once the income on sale of shares, mutual funds, units was held to be business income as against capital gain claimed by the assessee. Therefore, the sum of Rs. 41,88,451/- was allowable as deduction against business profits as already claimed by the assessee in return of income and was, therefore, not added back to the income from business even though surrendered by the assessee before the AO. In view of the aforesaid facts and circumstances and as the income in question has been held to be short term capital gains only and not as business income, the aforesaid amount of Rs. 41,88,451/- has to be added back on account of Portfolio Management Fees while calculating the income from short term capital gains. We find that the Id CIT(A) has rightly directed that Rs.41,88,451 /- need to be added back while computing the income of the assessee. We do not find any infirmity in the said decision of the Id CIT(A) on the facts and circumstances of the case, which does not need any interference on our part, hence, we uphold the same. Therefore, the issue in dispute raised by the revenue is rejected.”
12. These findings are in context to ground no. 3, which reads as under: “On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law as well as in facts in ignoring the fact that the assessee during the course of assessment proceedings vide his letter dated 4.12.2009 has stated that the Management fees of Rs. 41,88,451/- paid for managing portfolio management scheme (PMS) has been wrongly claimed and offered the portfolio management fees (PMS) for taxation meaning thereby that the assessee has himself impliedly admitted that his income from the sale and purchase of shares/ mutual funds is business income though in the return of income the same has been shown income from short term capital gains.”
13. This ground was taken by the department to plead its claim that the income from sale and purchase of shares was assessable under the head “business income” and not under the head capital gains. Moreover, Tribunal has confirmed the findings of ld. CIT(A) in directing that Rs. 41,88,451/- needs to be added back while computing the income of the assessee. These findings are of little assistance in the present case to assessee. In the result this ground is dismissed.
14. Assessee’s appeals for both the assessment years in question are dismissed, accordingly. 15. In the result, all the appeals, preferred by the assessee as well as the revenue are dismissed. Order pronouncement in open court on 03/03/2016.