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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
ORDER This is an appeal by the Assessee against the order dated 28.02.2011 of CIT(A)- VI, Kolkata, relating to AY 2005-06. 2. The Grounds of appeal raised by the Assessee read as follows :- 1. a) FOR that the Ld. CIT(Appeals) erred in treating the Short Term Capital Gain of Rs.1,00,73,530/- as business profit. Such treatment has resulted in enhancement of the assessment which is outside the scope of the direction in the order uls.263 of the C.IT. b) FOR that in any case the Ld. CIT(Appeals) erred in enhancing the assessment without complying with the requirement of sub-sec.(2) of sec.251.
2. FOR that the issue in the assessment as well as in the appeal before the Ld. CIT(Appeals) was the determination of the amount of interest deductible in computing the income from Short Term Capital Gain. That the gain was Short Term Capital Gain was not in dispute. The Ld. CIT(Appeals) has erred in traversing beyond the scope of the appeal filed before him in holding that the profit on sale of shares was a 'business profit' and not a Short Term Capital Gain.
3. Without prejudice to the foregoing grounds, the Ld. CIT(Appeals) should have directed the allowance of the interest claimed in computing the Short Term Capital Gain.
4. FOR that the appellant craves leave to alter, amend, modify any of the grounds and/or take additional grounds before or at the time of hearing of this appeal.
M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 3. The Assessee is a company. It is a non-banking finance company mainly engaged in granting and taking of loans. The assessee filed return of income for A.Y.2005-06 on 31.10.2005 declaring a total income of Rs.95,03,100/-. The assessee declared short term capital gain on sale of shares held as investments of Rs.95,22,232/- in arriving at the aforesaid short term capital gain. The assessee had reduced from the full value of consideration received on sale of shares interest expenditure of Rs.7,09,614/-as expenses incurred in connection with transfer of shares. In the order of assessment passed on 25.05.2007 u/s 143(3) of the Income Tax Act, 1961 (Act), the AO computed the capital gain by attributing the interest expenses of Rs.20,07,292/-. The taxable short term capital gain was determined by AO at Rs.95,22,232/-.
The CIT in exercise of his powers u/s 263 of the Act was of the view that the aforesaid order of the AO was erroneous and prejudicial to the interest of the revenue for the reason that while computing the short term capital gain interest expenditure cannot be considered as expenditure in connection with the transfer or cost of improvement of the capital assets within the meaning of section 48 of the Act. He therefore directed the AO to make the required disallowances after cancelling the order of assessment. The following were the relevant observations of the CIT in the order dated 12.12.2008 passed in the order u/s.263 of the Act:- “Assessment was completed u/s.143(3) on 25-05-2007. Later on proceeding uls.263 was initiated (a) for not considering the provision of Section 14A and (b) allowing payment of interest to the tune of Rs.20,07,292/- from Short Term Capital Gain. The Ld. CIT-II, Kolkata, vide his order dated 12-12-2008 observed that - . "The submission put forwarded by the assessee company was considered with due attention and it was found that there was no: provision in the I.T,.Act for deduction of interest from capital gains. Such claim of interest is allowable uls.36(1)iii) of the I.T.Act when the transactions of shares is disclosed as trading of the assessee. Regarding application of Section 14A the assessee's claim of no expenditure in earning dividend is also not acceptable. In the case of Oberoi Leasing & Finance Company Pvt. Ltd. -vs- A.C.IT., Circle(6). KoL (ITA No.2363 (Kol) of 2005) relating to the assessment year 2002-03, the Honorable 1.T.A.T. has held that the entire administrative and other expenses should have been considered for. working out the proportionate expenditure due to have incurred in earning dividend income. Further, since the assessee claimed that the income from dividend is an exempt income, the provision of Section 14A is applicable. 2
M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 Considering the facts stated above, it has been thought fit to cancel the assessment to be reframed de novo after making the required disallowance and also after allowing the assessee an opportunity of being heard." 5. The assessee challenged the aforesaid order of the CIT before the Hon 'ble ITA T, Kolkata. The Hon 'ble ITAT, Kolkata vide. its order dated 09-10-2009 dismissed the assessee's appeal.
In the order passed u/s 143(3) r.w.s.263 of the Act, the AO held that there was no provision in the Act to allow interest on borrowed capital as deduction while computing capital gain. The AO accordingly re-computed the short term capital gain of the assessee at Rs.1,16,05,085/- which was originally determined at a sum of Rs.95,22,232/. The total interest expenditure claimed in the profit and loss account by the assessee was Rs.35,94,527/-.
Aggrieved by the order of AO the assessee preferred appeal before CIT(A). The CIT(A) in exercise of his power of enhancement was of the view that the gain on sale of shares ought to have been assessed by the AO under the head income from business and not under the head short term capital gain. He accordingly called for the required details of purchase and sale of shares from the assessee and concluded as follows :- 7.5 During the appellate proceedings Ld. A.R. of the assessee was asked to provide the details of the shares on which the short term capital gain was claimed to be earned by the assessee Ld..A.R. submitted these details. These details are enclosed with this order in Annexure-' A'. From the above details it can be seen that during the previous year under consideration the assessee has shown two types of short term capital gain (STCG). The first type of STCG is related to the transactions on which no STT is paid. On this STCG the assessee has paid tax at the normal tax rate. The second type of STCG is the one on which STT has been paid. On this type of STCG the assessee has paid tax at the concessional rate of 10%. Now if we look at the purchase and sale of shares for the STCG on which STT is paid we find that almost all these shares are those which were purchased during the previous year and also sold during the previous year itself. (Three shares are those which were stock in trade last year but were converted into investment; this year). There are many transactions in which the shares were sold within few days of purchase. Further, it can be seen that the assessee has purchased and sold as many as 39 scripts and has made sales on as many as 116 dates. The frequency of the transactions, the number of scripts purchased and sold and the short duration of retention of shares suggest that these transactions are not in the nature of investment but in the nature of trading in shares. Further, it was seen that in this purchase and sale of shares the assessee made use of its borrowed funds also on which it had claimed payment of interest. 3
M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06
In view of the above discussion I was of the opinion that the activity of the assessee company involving purchase and sale of shares during the previous year could not be, treated as an investment. activity but actually it was an activity of trading in shares. Therefore, during the appellate proceedings Ld. A.R. was given an opportunity to explain why the purchase and sale of shares made during the year using borrowed funds should not be treated as share trading business and not as investment, Ld. A.R. of the assessee opposed this preposition and made following submission: i) The assessee is Non-Banking Financial Company (NBFC)and is mainly engaged in granting and taking of loans. ii) The assessee has been maintaining separate portfolios in its accounts for shares held as stock in trade and those held as investments. The observation that the shares have been sold within a short period is wrong and misconceived. Most of the shares are sold after a period of 15 days or more. Only some of the shares were sold within a short period of less than 15 days but that does (lot, mitigate against its character of the shares being held as investments. iii) In the balance sheet the book value of quoted investment was Rs.4, 15,60, 190/- and their market value was Rs.5,35,02~693/-. Despite the gain of about Rs.l.2 crore in the investment shares the assessee preferred to hold these shares. iv) The assessee has also received the delivery of the shares purchased as investment. This clearly shows the nature of holdings by the assessee as investor. v) The assessee has been showing investment and capital gain in earlier years also which has been accepted by the Assessing Officer. Simply because some of the shares held as investments were sold within a short period of 15 days, it will not alter the character of the shares as sale of investments. Ld A.R. has cited two High Court decisions and has claimed that under similar circumstances in these decisions Hon ble High Court held that sale of shares was capital gain and not business income. 7.6 On this issue I find that there are no fixed, criteria to decide whether any transaction of purchase and sale of shares by an assessee should be treated as investment transaction or business transaction. The Income Tax Law has not prescribed any fixed guidelines to distinguish between an investment transaction. On this issue a plethora of Court Judgments are available but even these judgments have not prescribed any formula to take a decision on this issue. However majority of the judgments are of the view that this issue cannot be decided on the basis of one single criterion. It has been held that this issue will have to be decided on the facts of each case considering various factors such as nature of business of the assessee, motive of purchase of shares, frequency of dealing in shares, funds utilized for acquiring the shares, period of holding of the shares, ratio of dividend to other incomes of the assessee etc. Therefore, in this case also the issue should be decided by keeping in mind the specific facts of this case. In this regard first of all it should be noted that the assessee is a company which has been incorporated to carry on certain businesses. The businesses of the assessee not only consist of granting of loans and advances but also dealing in purchase and sale of shares. It is not that the assessee company deals in shares only in the form of investments. They deal in shores as a trading activity also. They have done trading in shares not only during the previous under consideration but also in past many years. The assessee has shown 4
M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 stocks of trading shares in the current year as well as in earlier Years. Thus it can be seen that the assessee has been very much doing trading in shares regularly. Therefore, on the first impression it has to be said that if the assessee has purchased and sold any shares the nature of such transaction would be a trading activity and not an investment. When the assessee sells the shares purchased by it, it cannot be said that it is an ordinary investor who is realizing his holdings through such sale. The Ld. A.R. has objected to this inference by arguing that under the law there is no restriction on the share trader to make investment in shares. Yes, it can be accepted that a share trader can have a separate trading portfolio and a separate investment portfolio. However, to decide this issue we have to consider another factor i.e. the source of fund used in purchasing the shares. From the balance sheet of the assessee reproduced above it can be seen that last year as on 31.03.2004 the assessee had capital and reserve and surplus of Rs.2.72 crore against which the investment in shares was 1.86 crore. This shows that till last year the investment in shares was made out of surplus funds of the assessee. On the other hand at the end of the current year as on 31.03.2005 the capital and reserve and surplus was about 4.15 crore but the investment in shares was Rs.6.49 crore. It is also seen that from 31.03.2004 to 31.03.2005 the borrowed funds of the assessee increased from Rs.2.29 crore to Rs.6.39 crore. Thus during the previous year the borrowed funds of the assessee increased by about Rs.4.1 cr. and the investment in shares also increased by about Rs.4.63 cr.(6.49 – 1.86). These figures show that during the previous year under consideration the borrowed funds of the assessee were used to deal in purchase and sale of shares. Generally it can be said that a business man will make investment only when he has surplus funds. When borrowed funds are used by a business entity it can be said that they are used for carrying on the normal business activity. In view of this discussion I am of the view that the purchase and sale of shares done by the assessee and shown as STCG with STT payment is not investment but the share trading income of the assessee and this STCG of Rs.l ,00,73,530/- should be treated as the business income of the assessee.
7.7 Now we have to decide about the allowability of interest amount of Rs.20,07,292/-. In the above discussion I have held that the purchase and sale of share done by the assessee during the previous year under consideration is mainly done out of the borrowed funds and these purchase and sale cannot be treated as investment but trading in shares which is a business activity of the assessee. Therefore, the whole of the remaining amount of interest of Rs.20,07 ,292/- will be allowable to the assessee as a business expenditure. In view of the above discussion the A.O. is directed to treat STCG Rs.l,00,73,530/- as business income and allow deduction of interest of Rs.20,07,292/-from this income. The net amount of Rs. 80,66,238/- will be taxed as income from share trading on which tax will be levied at the normal rate instead of concessional rate of 10%.
Aggrieved by the aforesaid order of CIT(A) the assessee has preferred the present appeal before the Tribunal.
M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 9. The first and foremost contention of the learned counsel for the assessee was that in the order u/s 263 of the Act the CIT has given a very specific direction only with regard to disallowance of interest while computing the capital gain and application of provision of section 14A of the Act. It was his submission that since the scope of the assessment proceedings pursuant to order u/s 263 of the Act are limited to the specific issues dealt with in the order u/s 363 of the Act, the CIT(A) cannot in exercise of his powers of enhancement u/s 251 of the Act seek to make any investigation on the question whether the income was short term capital gain or income from business. In support of his contention the learned counsel for the assessee placed reliance on the following decisions : a) R.K.Dave vs ITO (2005) 94 TTJ 19 (Jodhpur) wherein it was held that the powers of CIT(A) does not extend to make enhancement on the issues which was not the subject matter of remand and which stood already concluded in the first round of appeal. b) CIT vs D.N.Dosani 280 ITR 275 (Guj) wherein it was held that in the fresh assessment in pursuance of revisional order u/s 263 of the Act AO cannot exercise powers in relation to other items forming part of assessment record and substitute his opinion in place of the opinion of the CIT. c) ACIT vs M/s. Royal Western India Turf Club Ltd. In & 6333/Mum/2012 dated 22.07.2015. In the aforesaid decision the Hon’ble Mumbai Tribunal held that We have heard the rival submissions and carefully perused the record. When the Revisional Authority calls for the assessment records and proceeds to set aside the assessment the standard language employed, in the revisional orders, is to direct the AO to make de novo assessment; but one should not go by the language employed therein if it comes in conflict with the powers vested in the Commissioner while passing the order under section 263 of the Act, which were considered in detail by the Hon'ble Gujarat High Court (supra). The direction given by the Commissioner has to be understood in the context/ setting in which such direction is given; in the instant case the show cause notice was issued on specific items and upon calling for the details the Commissioner was satisfied that the AO has not made proper enquiries with regard to certain items which were specifically listed out in the order passed under section 263 of the Act and in this 6
M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 background the matter was set aside with a direction to the AO to make a fresh assessment and thus it has to be assumed that the direction was limited to the issues which were considered by the Revisional Authority. Such being the case the AO has no jurisdiction to touch upon a fresh issue which does not emanate from the notice issued by the Commissioner under section 263 of the Act, while making assessment under section 143(3) r.w.s. 263 of the Act. In the instant case the AO had not treated the entrance fees as revenue receipt despite the fact that the assessee, in the audit report annexed to the return of income, furnished the details with regard to the receipt of entrance fees from members of the club and the mode of recording the same in the books of account. Such being the case it could not have been considered in the proceedings under section 143(3) r.w.s. 263 of the Act. We, therefore, hold that the addition, towards entrance fees, made by the AO, in the proceedings under section 143(3) r.w.s. 263, is beyond the jurisdiction of the AO and therefore deserves to be deleted and we direct the AO accordingly, Though the learned CIT(A) has disposed of the appeals on merits, by following the decision of the Hon'ble Bombay High Court in the case of Diners Business Services P. Ltd. 263 ITR 1, we need not have to go into the nature of the entrance fees at this stage since the same cannot be subject matter of consideration in the proceedings under section 143(3) r.w.s. 263 of the Act. We, therefore, accept the plea raised by the assessee in the cross objections in CO No. 64/Mum/2013 (A.Y. 2005-06) and in appeal No. 6334/Mum/2012 (A.Y. 2006-07). Consequently the appeals filed by the Revenue (ITA No. 165/Mum/2012 and for A.Ys. 2005-06 and 2006-07respectively) become academic and therefore dismissed accordingly.”
The learned DR however pointed out that order u/s 263 of the Act the CIT has cancelled the original assessment and directed the reframing the assessment de novo and therefore the scope of the proceedings before the AO was very wide.
We have given a very careful consideration to the rival submissions. We have already extracted the operative part of the CIT’s order u/s 263 of the Act. It is no doubt true that in the operative part of the order, the CIT has observed that the assessment is cancelled to be re-framed denovo. But these observations are followed by the following words “for making the required disallowances”. It is not in dispute before us that the disallowance that were discussed in the order u/s 263 were whether interest expenditure should be allowed as deduction while computing the short term capital gain and disallowance of expenses u/s 14A of the Act. Thus on a reading of the order u/s 263 of the Act it is clear that the scope of the proceedings before the AO pursuant to the order u/s 263 of the Act was limited. The AO could not have gone into the question as to whether the short term capital gain declared by the assessee was income from business. 7 M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 If that be so, the CIT(A) in exercise of his powers of enhancement could not have gone into an issue on which the AO could not have made any enquiry. We therefore agree with the contentions raised by the assessee in ground no. 1 and 2 raised before us.
On the question whether the income in question has to be assessed under the head income from capital gain or income from business, the following are the particulars of the short term capital gain declared by the assessee. Annexure to this order gives the details of purchase and sale of shares by the assessee during the previous year which has given rise to the short term capital gain. We find right from A.Y.2001-02 till A.Y.2004- 05 the assessee had two portfolios of shares, one held as investment and the other as stock in trade of business. In respect of shares which were held as investment, gain on transfer of those shares was declared under the head capital gain and the same was accepted by the revenue. It is no doubt true that in those years the assessment was made u/s 143(1) of the Act. Even for A.Y.2006-07 & A.Y.2006-07 the position was the same. The claim of the assessee was accepted u/s 143(1) but for A.Y.2007-08 and 2009-10 assessment was completed u/s 143(3) of the Act. The claim of the assessee has been accepted by the revenue. It is thus seen that only the present A.Y.2005-06 the revenue is taking a stand that the sale of shares held as investment gives rise to income from business. The facts in the present A.Y. are identical to the facts in the other assessment years referred to above. In such circumstances we are of the view that taking a different stand in the present A.Y. would be violation of principles of consistency and the revenue should not be permitted to take such a stand. We are therefore of the view that the gain on sale of shares held as investments will give raise to “capital gain” and has to be assessed as such.
As far as disallowance of interest in computing the short term capital gain is concerned, we are of the view that income of an assessee has to be computed under various heads specified under Section 14 of the Act. Deductions are to be allowed in computing the income under various heads only to the extent it is provided by the Legislature under that very head. The computation of capital gain is provided in M/s. Lend Lease Company (India)Ltd. A.Yr.2005-06 Section 48 of the Act. According to Section-48, the only deductions which are allowable are - (1) the cost of acquisition of the asset, (2) the cost of any improvement thereto and (3) expenditure incurred wholly and exclusively in connection with the transfer of the asset. The cost of acquisition means the amount paid for acquiring the asset. Once the asset is acquired, then any expenditure incurred thereafter cannot be considered as the cost of acquisition, since such expenditure would not have any nexus with the acquisition of the asset. If income is generated from the capital asset, depending on the head of income under which it is assessed, deduction can be claimed either u/s.36(1)(iii) or Sec.57(iii) of the Act. The entire scheme of the Act, therefore, reveals that interest component after the date of acquisition and till the date of sale cannot be treated as the cost of acquisition. It is only allowable as a revenue deduction on year to year basis against the income generated from such asset or likely to be generated to the extent provided by the Legislature under different heads. We therefore uphold the order of the AO to this extent.
In the result the appeal of the assessee is partly allowed. Order pronounced in the Court on 11.05.2016.