2007 (10) TMI 461 - AT - Income Tax

Tribunal Rules: Mutual Fund Gains as Capital Gains, Interest Exempt by Mutuality, Recalculate Section 234C Interest.

The Tribunal ruled in favor of the assessee on all issues. The gains from the sale of mutual fund units were classified as capital gains, allowing the ... Sale of units of debt-oriented mutual funds - Taxability under the head 'Business Income or Capital Gain' - Taxability of Interest income (earned on deposits) - Levy of interest u/s 234C is mandatory under the Act? Sale of units of debt-oriented mutual funds - Taxability under the head 'Business Income or Capital Gain' - 33 transactions of high magnitude - buying and selling done in 8 months out of 12 months in the present year - earlier year, same activity was accepted by the Department as investment activity and income/loss therefrom was assessed under the head capital gain - HELD THAT:- Since, facts in the present case are similar to the facts in the case of Janak S. Rangwalla [2006 (12) TMI 261 - ITAT MUMBAI], we decide this issue in favour of the assessee by respectfully following this Tribunal judgment and the judgment of the Hon’ble Apex Court relied upon by the learned counsel. Regarding the contention of the ld DR of the Revenue that entries in books are not conclusive, we would like to mention that there is no dispute on this count. It is a settled legal position by now that entries in books are not conclusive but there should be a firm basis to take a different view from entries in books of account. In the present case, the Assessing Officer has taken a different view contrary to books of account on the basis of magnitude and number of transactions without bringing anything else on record that purchases of units of mutual fund were made on account of dealing in shares and not on account of investments. We, therefore, are of the considered opinion that in the present case, the income on sale of units of mutual funds has to be assessed as capital gain as declared by assessee and set off of brought forward capital loss has to be allowed against long-term capital gain as claimed by the assessee in return of income. This ground of the assessee is allowed. Taxability of Interest income (earned on deposits) - Principle of Mutuality - HELD THAT:- We find that this issue is covered in favour of the assessee by the Tribunal judgment rendered in the case of Shivolika Co-operative Group Housing Society Ltd.[2006 (6) TMI 142 - ITAT DELHI] relied upon by the learned counsel for the assessee. In that case, issue involved was with regard to interest income of the assessee on fixed deposit with bank. It is observed by the Tribunal in that case that the interest income earned by the assessee was on surplus fund of society deposited with bank and hence same is covered by the principle of mutuality as held in the case of Director of IT (Exemptions) Oriental Bank [2003 (1) TMI 704 - DELHI HIGH COURT]. Since, facts in the present case are similar, we decide this issue in favour of the assessee by respectfully following this judgment of Hon’ble Delhi High Court and this Tribunal judgment. This ground of the assessee is allowed. Levy of interest u/s 234C - HELD THAT:- We are of the considered opinion that it is a settled issue that interest u/s 234C is mandatory but we find force in the submission of the learned counsel of the assessee that interest u/s 234C has to be calculated on the basis of returned income because we find that in section 234C, the reference to the difference regarding payment of advance tax is made as compared to tax payable on, returned income and advance tax paid by the assessee. We, therefore, direct the Assessing Officer that interest u/s 234C should be charged on the basis of returned income as provided u/s 234C. The Assessing Officer should pass necessary order as per law after providing adequate opportunity of being heard to the assessee. This ground of the assessee is allowed. In the result, the appeal filed by the assessee is allowed. Issues Involved:1. Taxability of long-term and short-term capital gains from the sale of units of debt-oriented mutual funds.2. Exemption of interest income under the principle of mutuality.3. Levy of interest under section 234C.Issue-wise Detailed Analysis:1. Taxability of Long-Term and Short-Term Capital Gains:The primary contention was whether the gains from the sale of units of debt-oriented mutual funds should be classified as 'Business income' or 'Capital gains.' The assessee argued that the gains should be taxed under 'Long-term capital gains' and 'Short-term capital gains,' whereas the CIT(A) had classified them as 'Business income.'The facts revealed that the assessee sold mutual fund units totaling Rs. 48,68,72,010. The Assessing Officer (AO) questioned the classification, noting the high frequency and magnitude of transactions. The AO argued that the assessee was engaged in the business of buying and selling securities, thus the income should be considered business income. The assessee countered, stating that the investments were made from surplus funds and were disclosed as investments in the books of accounts, referencing previous years where similar transactions were treated as capital gains.The Tribunal examined the nature of the transactions and the historical treatment of such gains. It was noted that in previous years, similar transactions were accepted as investments, and the principle of consistency should apply. The Tribunal referred to various judgments, including CIT v. H. Holck Larsen and Investment Ltd. v. CIT, supporting the view that the nature of transactions should be consistent unless there is a substantial reason to change it. The Tribunal concluded that the gains should be treated as capital gains, allowing the set-off of brought forward capital loss against the long-term capital gain.2. Exemption of Interest Income under Mutuality:The second issue was whether the interest income of Rs. 3,17,341 earned on deposits was exempt under the principle of mutuality. The assessee claimed exemption based on mutuality, referencing the judgment of the Delhi High Court in Director of IT (Exemptions) v. All India Oriental Bank of Commerce Welfare Society.The AO and CIT(A) rejected this claim, assessing the income as 'Income from other sources.' The Tribunal, however, found the issue to be covered in favor of the assessee by the Tribunal's judgment in the case of Shivalika Co-operative Group Housing Society Ltd. v. ITO, which held that interest income on surplus funds deposited with a bank is covered by the principle of mutuality. Consequently, the Tribunal allowed the assessee's claim, exempting the interest income under mutuality.3. Levy of Interest under Section 234C:The final issue concerned the levy of interest under section 234C amounting to Rs. 4,243. The CIT(A) upheld the levy, stating it was mandatory and non-appealable. The assessee argued that interest should be levied on the returned income, not the assessed income.The Tribunal acknowledged that while the levy of interest under section 234C is mandatory, it should be calculated based on the returned income, as stipulated in the section. The Tribunal directed the AO to recompute the interest based on the returned income, ensuring compliance with the legal provisions.Conclusion:The appeal filed by the assessee was allowed, with the Tribunal ruling in favor of the assessee on all three issues. The gains from the sale of mutual fund units were to be treated as capital gains, the interest income was exempt under mutuality, and the interest under section 234C was to be recalculated based on the returned income.