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

per Explanation to Sec. 73 of the Income-tax Act, 1961 as the business of the assessee is trading in sale/purchase of mutual funds. This is without prejudice to the other grounds of appeal as agitated above. 4. On the facts and in the circumstances of the case and in law, the Learned CIT(Appeals) has erred in deleting the addition of Rs.3,89,53,657 on account of interest without appreciating that loans/advances were granted for non-business purposes.”

4) Because the action is under challenge on facts and law having followed the Hon'ble Delhi High Court overlooking the facts of the said case. 5. Because the action is under challenge on facts and law in making proportionate disallowance of Rs.24,57,661 u/s. 14A. 6. Because the action is under challenge on facts and law in making disallowance of Rs.1,09,525 u/s. 94(7) and 94(8).”

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:

i) Accra Investments Pvt. Ltd. vs. ITO – 263 CTR 48 (Bom.); ii) Ram Narain & Sons Pvt. Ltd. – 41 ITR 534 (S.C); iii) Raja Bahadur Kamakhya Narain Singh vs. CIT – 77 ITR 253 (S.C); iv) B.R. Bamsi vs. CIT – 83 ITR 223 (Bom.); v ) CIT vs. Mahalakshmi Textiles Mills Ltd. – 66 ITR 710 (S.C); 32. The learned CIT(DR), however, opposed the above request made on behalf of the assessee.

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.

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.

Assessing Officer, some of which were contested before the Learned CIT(Appeals) mentioned therein:

S.No. Nature of addition/issue Amount in (Rs.) Grounds of appeal raised 1. Long Term Capital Gain 25,59,09,101 Ground No.2 treated as business income. 2. Short Term Capital Gain 5,83,72,758 Ground Nos. 2 treated as business income and 5 3. Interest Expense disallowed. 3,89,53,657 Ground No. 7

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.

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.

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.

Shares held as stock in trade were transferred from stock in trade to

investment account. The intention of the assessee is of significance and

volume as well as frequency of transaction would decide the issue. The

Learned AR on the contrary submitted that the assessee can hold shares

either as investment or as stock in trade as clarified in CBDT Circular No. 4

of 2007 dated 15.6.2007. Entries in the books of account prove that shares in

question are held as investment. In the case of group companies, the profit

on sale of shares was allowed to be taxed under the head “capital gain”. The

Learned AR adopted similar arguments as advanced by him hereinabove on

an identical issue in the appeal for the assessment year 2006-07. He

reiterated the case laws cited therein in support and pointed out that during

the year the assessee had received dividend amounting to Rs.9.19 crores,

which is very substantial to total taxable income of the assessee, and has

been accepted by the Assessing Officer. He submitted further that the

amount of Rs.25,59,09,131 includes the amount of Rs.24,64,46,699 arisen

on account of sale of shares of Punjab Tractors Ltd. In Punjab Tractors Ltd.,

the assessee along with other group companies was enjoying management

control. The shares of Punjab Tractors Ltd. along with other group

companies were sold to Mohendra & Mohindra Ltd. vide agreement dated

8.3.2007. 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 the long term capital gain arisen on sale of shares of Punjab

Tractors Ltd. on another ground also that the investment in Punjab Tractors

Ltd. was made by the assessee in order to enjoy the controlling states in the

said company and not to trade in shares. He submitted that profit on sale of

shares enjoying managing control is always considered as capital gain and

not business income. In support, he referred following decisions cited above

in the cases of Accra Investment Pvt. Ltd. vs. ITO (supra), Ram Narain &

Sons Pvt. Ltd. (supra) and Raja Bahadur Kamakhya Narain Singh vs. CIT

(supra).

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.

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.

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.

rejected.

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.

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.

He submitted that the intention of the assessee is of paramount significance

and frequency of transaction only would not decide the issue ipso facto. The

assessee can hold shares either as investment or stock in trade as clarified in

CBDT Circular No. 4 of 2007 dated 15.6.2007. He submitted that the entries

in the books of account prove that the shares in question are held as

investment. In the case of group companies, the profit on sale of shares was

allowed to be taxed under the head “capital gain”. He pointed out that in the

case of group company, Chaudhary Associates, the Hon’ble jurisdiction

High Court of Delhi vide order dated 30.1.2015 in CIT vs. Chaudhary

Associates – ITA No. 544/2013 has reverted the order of the ITAT under

similar facts of the case that a sum of Rs.1,19,30,037 held by the ITAT in

that case was not business income but the claimed short term capital gain. In

that case also the assessee is a non-banking finance company and in the

course of its finance activity, it has purchased and sold shares for the sum of

Rs.1,19,30,037 and had claimed the income on that count as short term

capital gain. The Assessing Officer rejected the contention holding that the

said amount was business income and brought it to tax on that count. The

assessee succeeded in the appellate proceedings. Hon'ble High Court

observed that the bulk of shares held by the assessee were for a substantial

period and income was derived on account of liquidation of investment. It

was held that there cannot be a single factor or criterion to determine

whether the income falls under the head of short term capital gain or of

business income. He referred page Nos. 13 to 18 of the paper book wherein

details of short term capital gains STT paid (benefit claimed under sec.

111A) and without STT(no benefit claimed under sec. 111A) have been

furnished.

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.

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.

The assessee had furnished the list of shares and the number of scripts

involved around hundred. It had classified the gains into long term and short

term after taking into consideration the period of holding of shares. The

Learned CIT(Appeals) has simply noted that number of shares and

frequency of transaction are in the nature of regular business activity

ignoring the well established proposition of law that there are several criteria

to arrive a conclusion about the nature of transaction as to whether it is

investment or trade. Under similar facts in the assessment year 2006-07 in

the appeal for the assessee hereinabove, we have adjudicated upon an

identical issue in ground Nos. 1 to 3 hereinabove. Following the same, we

hold that the authorities below were not justified in treating the claimed

short term capital gain at Rs.5,83,72,758. We thus while setting aside orders

of the authorities below in this regard direct the Assessing Officer to accept

the claimed short term capital gain. The ground Nos. 1 to 4 of the appeal

preferred by the assessee are accordingly allowed.

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.

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:

i) CIT vs. Tin Box Co. – 260 ITR 637 (Del.); ii) CIT vs. Doctor & Co. – 180 ITR 627 (Bom.); iii) Sanghvi Swiss Refills Pvt. Ltd. vs. ITO – 85 ITD 59 (Mum); 50. Having gone through the orders of the authorities below, we find that

the Learned CIT(Appeals) has deleted the disallowance mainly on the basis

that as per balance sheet as on 31.3.2008, the assessee was having huge

reserves as detailed hereunder:

SCHEDULE ‘B’ RESERVES AND SURPLUS As on 31.3.2008 As on 31.3.2007 A)Statutory Reserve 178,875,000.00 133,875,000.00 Add: Transfer from Profit & Loss 78,500,000.00 45,000,000.00 A/c. 257,375,000.00 178,875,000.00 B) Capital Redemption Reserve 3,290,000.00 3,290,000.00 C)Share Premium Account 7,750,000.00 7,750,000.00 D) General Reserve 8,345,000.00 8,345,000.00

8,345,000.00 8,345,000.00

E) Profit and loss a/c. as 1,258,942,332.41 948,913,872.63 annexed. Total 1,535,702,332.41 1,147,173,872.63

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

Sd/- Sd/- ( L.P. SAHU ) ( I.C. SUDHIR ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22 /12/2015 Mohan Lal Copy forwarded to: 1) Appellant 2) Respondent 3) CIT 4) CIT(Appeals)

5) DR:ITAT ASSISTANT REGISTRAR

Date Draft dictated on computer 22.12.2015 Draft placed before author 22.12.2015 Draft proposed & placed before the second member Draft discussed/approved by Second Member. 22.12.2015 Approved Draft comes to the Sr.PS/PS 22.12.2015 Kept for pronouncement on 22.12.2015 File sent to the Bench Clerk 22.12.2015 Date on which file goes to the AR Date on which file goes to the Head Clerk. Date of dispatch of Order.