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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI G.S.PANNU & SHRI JOGINDER SINGH
consolidated order is being passed for the sake of convenience and brevity.
We may first take the appeal in pertaining to the assessment year 2000-01 as the lead case, which is an appealdirected against the order passed by the CIT(Appeals) –XXI, Mumbai dated 31/03/2004, which in turn arises out of an order passed by the Assessing Officer under section. 143(3) of the Act, 1961 ( in short ‘the Act’) dated 26/03/2003.
In this appeal, although assessee has raised multiple Grounds of appeal, but the pertinent dispute arises from the action of the income- tax authorities in assessing the long term capital gain and short term capital gain earned on the sale of shares as ‘business income’. Briefly put, the relevant facts are that the appellant is a company incorporated under the provisions of the Companies Act, 1956. It is an investment company incorporated with the object, inter-alia, of undertaking and transacting in all kinds of investments and financing activities. Precisely put, it is an investment company holding the equity shares of Piramal Group of Companies. In the previous year relevant to the assessment year 2000-01, it earned long term capital gain on sale of shares of M/s. Nicholas Piramal India Ltd and Reckitt & Colman India Ltd. amounting to Rs.1,07,70,080/- and Rs.2,52,794/- respectively. Additionally, it also earned short term capital gain on sale of shares of Piramal Healthcare Ltd. amounting to Rs.12,748/-. The assessee reflected the aforesaid gain as its income assessable under the head ‘Capital Gains’ in the return of income. The Assessing Officer treated the said transactions as trading transactions and accordingly, assessed the resultant income as ‘business income’ instead of ‘capital gains’. The discussion made in the assessment order reflects that the primary argument of the Assessing Officer, is to the effect that the assessee company had undertaken purchase and sale of shares throughout the year under consideration, and thus, such income was to be assessed as ‘business income’.
In appeal before the CIT(Appeals), the assessee company assailed the decision of the Assessing Officer in law and on facts. The CIT(Appeals) upheld the action of the Assessing Officer and after referring to the details of purchase and sale of shares undertaken by the assessee from financial years 1996-97 to 1999-2000 he reinforced the argument of the Assessing Officer that purchase and sale of shares have been regularly undertaken by the assessee. Thus, the stand of the Assessing Officer to tax the gain on sale of shares as business income was affirmed.
4.1 At this point, it would also be relevant to note that the CIT(Appeals) not only affirmed the stand of the Assessing Officer, but also enhanced the total income on account of interest costs. The Assessing Officer has allowed the deduction in respect of interest cost of Rs.95,79,195/-, while assessing the gain on sale of shares as ‘business income’. The CIT(Appeals) was of the view that disallowance is required to be made out of interest expenditure on an application of section 14A of the Act and/or that the same was not relatable to the year under consideration. On both the aspects, the CIT(Appeals) show caused the assessee. In response, the assessee company objected to the enhancement on the ground that, if interest is paid on amount borrowed for investment in shares held as investments it must be added to the cost of acquisition for computing capital gains and that, if the income arising from sale of shares is held as ‘business income’, then the interest expenditure of Rs.95,79,195/- was allowable as a deduction, and, thus no disallowance was merited. In so far as the break-up of interest cost was concerned, assessee submitted that interest of Rs.32,21,278/- related to the instant assessment year and the balance of Rs.63,57,919/- related to the preceding assessment year of 1999-2000.
4.2 In this background, the CIT(Appeals) disallowed the interest cost of Rs.63,57,919/- on the ground that it pertained to an earlier year and the balance of Rs.32,21,278/- was disallowed by invoking the provisions of section 14A of the Act, thereby resulting in a total enhancement of Rs.95,79,195/-.
4.3 In this background, the assessee company is in appeal before us challenging the assessability of gain on purchase and sale of shares as business income and the disallowance of interest expenditure of Rs.95,79,195/-.
Before us, the Ld. Representative for the assessee has vehemently pointed out that the shares sold by the assessee were reflected as investment in the Balance sheet all along and that they were being valued ‘at cost’ in the books of account. Countering the charge made by the Assessing Officer that assessee has undertaken multiple transactions, it was pointed out that the sale and purchase of shares involved scrips of only three group companies and, therefore, the stand of the Assessing Officer was incorrect. In this context, our attention was invited to pages 3 to 4 of the Paper Book, wherein is placed scrip-wise details of short term capital gain and long term capital gain annexed with the return of income. Furthermore, it is sought to be pointed out that the assessee was an investment company and the shares in question related to the group companies and it cannot be regarded as a ‘trading activity’ per-se. The Ld. Representative for the assessee also referred to the details of sale and purchase of shares to show that the transactions were not spread out throughout the year but were being carried out at in-frequent intervals. Ld. Representative for the assessee also explained that the sale of shares was undertaken as a normal investor would do, because there was a reasonably high appreciation in their values. In sum and substance, the plea set up by the appellant is that the purchase and sale of shares cannot be construed as a trading activity. Another aspect contended by the Ld. Representative for the assessee was with respect to the decision of the Assessing Officer in assessment year 1999-2000, wherein also the income arising from sale of shares was assessed as ‘business income, which was sustained by the CIT(Appeals) and, thereafter no appeal was filed by the assessee before the Tribunal, Ld. Representative for the assessee pointed out that the aforesaid is no ground to hold the issue against the assessee, because in assessment year 1999-2000, assessee did not prefer further appeal before the Tribunal primarily for the reason that the amount involved was very small i.e. Rs.47,000/- only.
On the other hand, Ld. Departmental Representative for the Revenue has defended the action of the income-tax authorities by pointing out that the sale of shares have been undertaken by the assessee on multiple occasions and, therefore, such activity has been rightly regarded as a trading activity.
We have carefully considered the rival submissions. The controversy as to whether sale and purchase of shares is to be regarded as an investment activity, so as to tax the resultant gain as ‘business income’ is not without precedents. In fact, there is a plethora of judicial pronouncements on the said subject. So however, it is quite well understood that each case has to be decided, having regard to its peculiar facts and circumstances. In the present case, it is an established position that assessee company is an investment company primarily involved in undertaking transactions in the shares of Piramal Group of companies. This feature contrasts it from an investment company, who otherwise freely operates in the market place looking for opportunities to trade in all or any available scrips in the market. Therefore, in such a situation, in our view, the onus is on the Revenue to establish that assessee has indeed undertaken trading in the shares, though the transaction have been confined to the scrips of Piramal Group of companies.
7.1 We have perused the detail of the sale and purchase of shares in question, which has been placed at pages 3 to 4 of the Paper Book. The detail reveals that assessee has undertaken sale of shares only in respect of three group companies namely, Nicholas Piramal India Ltd., Reckitt & Colman India Ltd., in which has earned long term capital gain and thirdly, in Piramal Healthcare Ltd., in which it has earned short term capital gain. The detail also reveals that assessee purchased the shares in the three companies in small lots on varying dates. So however, the sales have been made together on proximate dates. Though the gain/loss on each lot has been separately shown, but it is not a case where each purchase lot has been sold separately on different dates. Therefore, the manner of making sales of shares does not reflect any trading, though there is an intention to make profits, which is a feature not uncommon even in cases of sale of investments. The fact that assessee has treated the acquisition of shares as investment, as also the fact that the same were being valued at cost in the books of account, also shows that assessee has considered such activity as an investment activity. Therefore, having regard to the facts and circumstances of the case, we are unable to uphold the stand of the Revenue that the purchase and sale of shares have been undertaken regularly so as to be treated as a business activity. Reference made by the CIT(Appeals) in assessment year 2001-02 to the factum of assessee not disputing the stand of Assessing Officer in assessment year 1999- 2000 is not determinative of the issue because ostensibly, the amount involved was very small and for that reason assessee did not prefer an appeal before the Tribunal, an assertion of the Ld. Representative for the assessee, which is not controverted by the Ld. Departmental Representative for the Revenue before us.
7.2 Considering the entirety of facts and circumstances of the case, we hereby affirm the stand of the assessee and hold that the impugned income earned on sale and purchase of shares is liable to be assessed as capital gains, as claimed by the assessee. Resultantly, on this aspect the assessee company succeeds.
In so far as the action of the CIT(Appeals) to enhance the income on account of disallowance of interest cost of Rs.95,79,195/- is concerned, in our view, the CIT(Appeals) was not justified. Consequent to our decision to treat the gain on sale and purchase of shares as income assessable under the head capital gains, the interest costs incurred for investment in shares held as investment is liable to be added to the cost of acquisition of the shares for computing capital gains. In this view of the matter, the disallowance made by the CIT(Appeals) becomes untenable. We hold so. Thus, on this aspect also assessee succeeds.
8.1 Resultantly, the appeal for the assessment year 2000-01 is allowed.
It was a common point between the parties that the facts and circumstances in the appeal for assessment year 2001-02 are similar to that of assessment year 2000-01 and, therefore, our decision in the appeal of the assessee for assessment year 2000-01 shall apply mutatis mutandis in the appeal for assessment year 2001-02 also.
Resultantly, both the appeals of the assessee are allowed, as above.
Order pronounced in the open court on 29/04/2016