DCIT, NEW DELHI vs. M/S VIC ENTERPRISES PVT. LTD., NEW DELHI

The assessee ( has questioned the First Appellate Order on the following grounds:

Because the action is under challenge on facts and law in declining the claim for the investment activity relating to shares treating the same as business income which is not in accordance with the regularly followed method of accounting substantiated by the Audited Financial statement.

Because the action is under challenge on facts and law for having treated the gains accrued on disposal of shares amounting to Rs.5,83,72,758 as business income whereas per the assessee the same is sort term capital gain chargeable to tax u/s. 111A. 3. Because the action is under challenge having overlooked & ignored the CBDT Circular No. 4/2007 dt. 15.06.2007 in terms of which the gain arising on account of disposal of shares held as investment are liable to be taxed under the head capital gain and the decisions of the CIT(A) in the likely placed other cases.

Besides, the assessee has also moved application under Rule 27 of the ITAT Rules requesting therein to a new plea in order to support the First Appellate Order that the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling stakes in the said company and not to trade in shares. The Learned AR submitted that though the Learned CIT(Appeals) has allowed the appeal of the assessee, thereby holding the sale of shares of Punjab Tractors Ltd. as long term capital gain on the basis of period of holding, but the assessee wants to support the First Appellate Order in terms of Rule 27 of the ITAT Rules in relation to long term capital gain arisen on the sale of shares of Punjab Tractors Ltd. on the other grounds also i.e. the plea raised hereinabove that the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling stake in the said company and not trade in shares. The Learned AR submitted that the issue raised in the above plea is purely in legal in nature and adjudication of the same does not require consideration of fresh material outside the record. He placed reliance on the following decisions:

Considering the above submissions, we find that the plea raised is legal in nature and is in furtherance to the issue of validity of the action of the Assessing Officer in treating the claimed long term and short term gain by the assessee as business income and adjudication of the same does not require consideration of fresh material outside the record. We thus allow the above plea to be raised by the assessee in support of the issue raised in the appeals. We will deal with this plea while disposing of the issue raised in ground Nos. 1 to 3 of the appeal preferred by the Revenue and ground Nos. 1 to 4 of the appeal preferred by the assessee both on the issue of validity of the claimed long term and short term capital gain by the assessee on the transaction of shares.

Ground Nos. 1 to 3 (Revenue) & Ground Nos. 1 to 4 (assessee): The facts in brief are that the assessee a non-banking financial company registered with RBI as such is one of the promoter company holding controlling interest in Dabur India Ltd. We have discussed the facts in detail about the assessee company, hereinabove, in the appeals for the assessment year 2006-07. The parties have also adopted similar arguments as advanced by them on an identical issues hereinabove in the appeals for the assessment year 2006-07.

During the year in the assessments framed under sec. 143(3) of the Income-tax Act, 196, following additions/disallowances were made by the Assessing Officer, some of which were contested before the Learned CIT(Appeals) mentioned therein:

The main issue involved in the appeals is regarding taxing the profits realized on sale of shares as business income against capital gain offered by the assessee either under long term capital gain or short term capital gain depending upon the period of holding of shares.

The assessee claimed Rs.25,59,09,101 as long term capital gain which has been treated by the assessee as business income. The Learned CIT(Appeals) has, however, accepted the claimed long term capital gain against which the Revenue is in appeal raising ground Nos. 1 to 3 in this regard.

In support of the grounds, the Learned CIT(DR) has basically placed reliance on the assessment order. He submitted that the assessee was holding shares mainly of group company including Dabur India Ltd. as investment since long back. The assessee was also engaged in the purchase and sale of shares and mutual funds mostly of Blue Chip Companies as stock in trade.

Considering the above submission, we find that both the shares of MTNL and Punjab Tractors Ltd. have been shown as investment in the balance sheet as on 31.3.2007 and all the shares were sold and not many transactions are there in the scripts. As on 31.3.2008, no shares of MTNL and Punjab Tractors Ltd. are held. These shares were held for considerable long time and shares were being sold when there was appreciation in the market. Shares of ABN Amro Securities purchased in 1998-99 were sold on 14.7.2007 after a period of 7/8 years. In these shares, the assessee had not carried out the transactions on regular basis as evident from the numbers of shares and transactions. Besides, the investment in Punjab Tractors Ltd. was made by the assessee in order to enjoy the controlling shares in the said company and the profit on sale of shares enjoying managing control is always considered as capital gain as per the decision cited hereinabove in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain & Sons (P) Ltd. (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT (supra). He also referred page Nos. 7 to 15 of the paper book i.e. investments as on 31.3.2008, 31.3.2007, 31.3.2006 and 31.3.2005, and page Nos. 149 to 181 i.e. computation of income with details of capital gain with balance sheet for the year.

Having gone through the orders of the authorities below, we find that the Learned CIT(Appeals) has dealt with the issue in detail meeting out respective cases of the parties and has come to the following conclusion: “13. The facts of the case were examined from the perspective of ratio laid down in the above cases. 14. As already stated the assessee is a NBFC. The assessee has offered the profits/gains on purchase and sale of units of Mutual Funds as business income on the ground that the said activity constitutes regular business activity. However, the profits/gains realized on purchase and sale of shares were offered under the head capital gain on the ground that the shares have been held as investment in the books of account. 15. In a nutshell according to the AR, the intention and the entries in the books showing the shares as investment should be the guiding and determining factors and whereas according to the A.O., volume of business in shares and frequency of transactions and the objective of the assessee to trade in shares (as per Memorandum of Association of the company) should be taken into consideration while deciding the issue.

The above material findings of the Learned CIT(Appeals) on facts regarding showing of the shares as investment in the balance sheet, their holding period, and volume and frequencies of their transactions, have not been rebutted by the Revenue. We thus do not find reason to interfere with the First Appellate Order on the issue. The same is upheld.

In result, ground Nos.1 to 3 of the appeal of the Revenue are thus rejected.

In ground Nos. 1 to 4 of the appeal of the assessee, the assessee has basically questioned treatment given to the gain of Rs.5,83,72,758 on disposal of shares by the authorities below as business income against the claim of the assessee as short term capital gain chargeable to tax under sec. 111 of the Act.

The relevant facts are that the Assessing Officer noted that during the assessment year under consideration, the assessee had shown short term capital gain of Rs.5,83,72,785. In the computation of income furnished during the assessment proceedings, an amount of Rs.3,53,22,682 was shown as “short term capital loss under sec. 111A”. Details of capital gains and losses were furnished. On perusal of the same, the Assessing Officer noted that in the computation of taxable income only an amount of Rs.3,53,22,682 was offered for tax at special rate under sec. 111A of the Act. The amount of Rs.2,30,50,076 being short term capital gain had not been included while computing the taxable income. The Assessing Officer also noted that during the assessment years 2005-06 and 2006-07 and 2007-08, income from short term capital claimed by the assessee was treated as business income in the assessment order framed under sec. 143(3)_ of the Act. He accordingly rejected the claim of short term capital gain of Rs.5,83,72,758 by the assessee and treated the same as business income. The Learned CIT(Appeals) has upheld the same against which assessee is in appeal.

In support of the grounds, the Learned AR has adopted the similar arguments as advanced by him in support of ground Nos. 1 to 3 on an identical issue hereinabove in the appeal for the assessment year 2006-07.

Learned CIT(Appeals) on the other hand tried to justify the orders of the authorities below and he has also adopted similar arguments as advanced by him hereinabove in the appeal for the assessment year 2006-07 in opposition of ground Nos. 1 to 3 of the appeal preferred by the assessee.

Considering the above submission, we find that the authorities below have denied the claimed short term capital gain mainly on the basis that the assessee carried on the activities of purchase and sale of shares on regular basis, volume of purchase and sale of shares was huge, frequency of transaction was very high, conduct of assessee was that of a trader in shares and no proper records were maintained as per report under sec. 142(A) issued by the special auditor. The authorities below have not discussed the submissions of the assessee supported with details of the transaction in detail. Instead on general observation and the approach of the Assessing Officer in the assessments for the assessment years 2005-06, 2006-07 and 2007-08 have held that the claimed short term capital gain was actually business income. They have not discussed as to how they have arrived to the conclusion that claimed short term capital gain is actually business income.

Ground No.4 (Revenue): The Assessing Officer disallowed interest expenditure of Rs.3,89,53,657 on the basis that there are interest free advances. He noted that assessee is using interest bearing funds by giving advances to various other group concerns and individuals without charging any interest from them. He noted that loans and advances (closing balance of which has been shown at Rs.1,06,86,15,255 as on 31.3.2008) have been given or used by the assessee for non-business purposes. He accordingly disallowed a proportionate interest expenses. The Assessing Officer noted that the total interest on advances given free of interest to various parties worked out to Rs.7,91,18,129. He noted further that the claim of interest expenses at Rs.3,89,53,657 was less than the amount of Rs.7,91,18,129 and accordingly the entire amount of Rs.3,89,53,657 being interest expense was disallowed. The Learned CIT(Appeals) has, however, deleted the disallowance being satisfied with the submissions of the assessee which has been questioned by the Revenue.

In support of the ground, the Learned CIT(DR) has placed reliance on the assessment order. He submitted that assessee had taken interest bearing funds but had given interest free advances or on nominal interest rates, which was prejudicial to business interest of the assessee. The Learned CIT(Appeals) has deleted the disallowance made by the Assessing Officer without any plausible reason. The Learned AR on the other hand submitted that the assessee was having sufficient fund available and discussing the same, the Learned CIT(Appeals) has rightly deleted the disallowance. He placed reliance on the following decision:

From the above details, we find that interest receipt is more than the interest payment in respect of financial activities and the Assessing Officer has also not disputed the reserves available with the assessee. We are thus of the view that the Learned CIT(Appeals) has rightly deleted the disallowance. The same is upheld. The ground No. 4 of the appeal preferred by the Revenue is thus rejected.

The ground Nos. 5 and 6 of the appeal preferred by the assessee have not been pressed and the same are accordingly rejected.

In summary, appeals preferred by the Revenue are dismissed and those preferred by the assessee are partly allowed. Order pronounced in the open court on 22.12.2015