TaxTMI 
TaxTMI 
2016 (3) TMI 978
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.... 2005-06 and 2006-07 and cross objection of the assessee for Asst Year 2005-06 are identical and hence they are taken up together and disposed off by this common order for the sake of convenience. 4. The first issue to be decided in revenue's appeal in Asst Year 2005-06 and cross objection of the assessee for Asst Year 2005-06 is as to whether disallowance u/s 14A of the Act read with Rule 8D(2)(ii) and (iii) of the Rules could be made in the facts and circumstances of the case. 4.1. The brief facts of this issue is that the assessee is an investment company engaged in the business of dealing, trading and investing in shares and securities including units of mutual funds. The assessee derived a dividend income of Rs. 4,63,906/- for the Asst Year 2005-06. The Learned AO called for information regarding the incurrence of expenditure by the assessee for the purpose of earning this dividend income. In response to this, the assessee replied that no expenses were incurred for the purpose of deriving the dividend income. The Learned AO not satisfied with the reply sought to invoke the provisions of section 14A of the Act and disallowed 5% of Rs. 4,63,906/- amounting to Rs. 23,125/- ....
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....arning dividend income. Further and in any event the Assessing Officer as well as the Commissioner of Income Tax (Appeals) could not point out any expenditure which was directly relatable to exempt income and as such disallowance on proportionate basis even under Rule 80 of the Rules was erroneous. 4.2. The Learned AR argued that the provisions of Rule 8D of the IT Rules could be made applicable only from Asst Year 2008-09 as has been held by the Hon'ble Bombay High Court in the case of Godrej& Boyce Manufacturing case reported in 328 ITR 81 (Bom) and fairly pleaded that since provisions of section 14A of the Act has got retrospective application in the statute, disallowance thereon could be restricted to 1% of exempt income as has been held by the Jurisdictional High Court in the case of CIT vs R.R.Sen & Brothers P Ltd in G.A.No. 3019 of 2012 in ITAT No. 243 of 2012 dated 4.1.2013. In response to this, the Learned DR fairly conceded to the submission of the Learned AR. 4.3. We have heard the rival submissions. The relevant assessment year under appeal is 2005-06 at which point of time , the provisions of Rule 8D was not in force and the same was made applicable only fr....
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....g in shares for the Asst Year 2005-06. Under the investment head, the Learned AO observed that the assessee had disclosed long term capital gains of Rs. 50,10,740/- after indexation and claimed exemption for the same ; and disclosed Rs. 71,90,242/- as short term capital gains after setting off carried forward losses of Rs. 10,06,203/-. Under the head 'business income', the Learned AO observed that the assessee had disclosed Rs. 3,09,988/- as profit from trading in shares. The assessee was carrying on both trading and investment activity in purchase and sale of shares / units. The Learned AO felt that the profit on sale of investments credited in the profit and loss account amounting to Rs. 1,35,86,013/- should also be considered as business income as against claim of capital gains made by the assessee. In response to this, the assessee replied that all the shares were held for the purpose of long term investments and earned substantial dividends and there was no motive to use the shares for the purpose of trading and that the intention was to invest in shares and that the shares were held as long term investment only in earlier years and gains from sale of investments always assess....
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.... out by the assessee only with an intention to make profits out of such investments which are duly offered to tax as capital gains by the assessee. Hence the reasoning of the Learned AO that the assessee had made profits would not vitiate the intention of carrying on the investment activities of the assessee. The Learned AR explained the entire transactions from the details filed in the paper book stating that most of the shares were held for more than one year also for which long term capital gains were reported by the assessee and it is for the assessee to decide when to exit from the relevant investment depending upon the favourable market conditions. He further placed on record the copy of the tribunal order in assessee's own case , among other decisions, for the Asst Year 1992-93, wherein this tribunal had accepted the plea of the assessee that the gains derived from investment activities of assessee were accepted as capital gains. 5.3. We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee containing the scrutiny assessment orders of the assessee for the Asst years 2002-03 , 2004-05 , 2008-0....
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....al gains pursuant to introduction of securities transaction tax (STT) would change the character of the transaction We find that the entire gamut of transactions are to be viewed in the context of dominant intention of the assessee whether to hold a particular scrip in investment portfolio or in trading portfolio. We find that the levy of securities transaction tax has been introduced in the statute with effect from 1st October 2004 relevant to Asst Year 2005-06, wherein if a sale of shares transaction is routed through a recognized stock exchange and securities transaction tax is suffered by the assessee, then the long term capital gains arising on such sale would be exempt u/s 10(38) of the Act. Similarly with effect from 1.4.2005, the short term capital gains , if subjected to levy of securities transaction tax, would be liable for concessional rate of tax as against the normal rate of tax @ 30%. We also find that the Learned AO had not brought any evidence on record that the assessee was trying to shift any of its trading assets from the trading portfolio of shares & units to the investment portfolio to take advantage of lower tax rates under the head capital gains and vice ....
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....ortfolios i.e (1) shares / units held for investment and (2) shares / units held for trading purposes. It is not in dispute that in the instant case, the assessee had maintained dual portfolios in its books of accounts and had reported capital gains and business income separately as per the consistent practice followed by the assessee over the years and accepted by the revenue in the earlier years. It is well settled that it is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment or stock in trade, then onus would shift to revenue to prove that apparent is not real. In the instant case, we find from the details in the paper book that the assessee had duly discharged its primary onus of demarcating the scripts held for investment and for trading and the resultant gains derived therefrom. Even the CBDT Circular No. 4 of 2007 dated 15.6.2007 envisages the practice of assessee's maintaining dual portfolios. We also find that the dec....
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....ccording to the general common sense view of those who deal with those matters in the particular circumstances. The most excruciating factor to be looked into at this juncture is the conduct of the assessee. 5.3.4. Frequency of transactions The next point to be addressed in this issue is whether the frequency of transactions would alone indicate the trading activity. In this regard, we find the co-ordinate bench of Mumbai Tribunal had an occasion to consider the same in the case of Janak S. Rangawalla vs ACIT reported in (2007) 11 SOT 627 (Mum), wherein it was held that : "It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years have been held to be income from capital gains both on long term and short term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as short term capital gains. There is no basis fo....
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.... brokers could not have any decisive value. The Commissioner (Appeals) and the Tribunal had concurrently held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter ." 5.3.4.2. We also find that the Hon'ble Calcutta High Court in the case of CIT vs H K Financiers (P) Ltd reported in (2015) 61 taxmann.com 175 (Cal) for the Asst Year 2007-08 had held as below:- 3. The Assessing Officer has laid stress on motive. To begin with motive is something, which is locked in the mind of the person. No direct evidence as regards motive is possible. Motive can be inferred from the conduct of the person concerned but that is bound to remain an inference, which may or may not be correct. We have today dictated a judgment in the case of CIT v. Merlin Holding (P.) Ltd [IT Appeal No. 101 of 2011, dated 12-5- 2015] wherein the following views have been expressed by us: ....
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....the Asst Year 2005-06, the assessee had made short term borrowings from its director for a period of seven months only in order to meet its working capital requirements and the said loan was also squared up during the year. Similarly in Asst Year 2006-07, the assessee had made borrowings of Rs. 3 crores and utilized the same for investment as well as for trading activity. The Learned CIT(A) also found that the assessee has got a share capital of Rs. 10,00,000/- and reserves and surplus as on 31.3.2005 at Rs. 1,73,98,009/- in addition to generation of own funds in the form of sale of shares held as investments. This goes to prove that the own funds along with borrowed funds have been utilised for both investment and trading activities of the assessee. He accordingly held that the finding of the Learned AO that borrowed funds were utilized for investments to be factually incorrect. This finding given by the Learned CIT(A) is not refuted by the Learned DR before us for both the asst years under appeal. We find that the Hon'ble Calcutta High Court in the case of JCIT vs Bajranglal Chowdhury reported in (2015) 58 taxmann.com 204 (Cal) had held as below:- l. The appeal is dir....
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....th borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with the borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend was correct. We cannot say that this was not a relevant circumstances for the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business." 5. It would appear from the aforesaid finding that the apex court was of the opinion that the view formed by the Tribunal was a possible view in the facts and circumstances of the case. The judgment is not, however, an authority for the proposition that since purchase was made by borrowed funds, it is bound to become a business tra....
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....f DCIT vs Reliance Trading Enterprises Ltd in ITA No. 944/Kol/2008 dated 3.1.2008 wherein it was held that : "We have heard both the parties and perused the records as well as the documents contained in the paper book filed before us. There is no denying the fact that as per the account maintained the asssessee had acted both as a trader as well as investor in shares as per the Memorandum and Articles of Association. Accounts were maintained for trading / business shares which are held as stock in trade and separately for investment shares which are held and shown in balance sheet under the head investment representing capital assets. The decisions used to be taken by the assessee at the time of purchase itself based on different factors whether any share and security was to be held as investment or trading. When the shares are accounted for in the books as investment shares, the volume of transaction of such shares cannot alter its status from investment to trading. Profit on sale of such investment shares held, as capital assets are assessable under the head capital gain. Period of holding of such assets cannot determine its status or change it from investment (capital) ....
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.... 4.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR before us. We find that the assessee has been engaging himself in the share transactions both as an investor and as well as trader. It is seen that the assessee had clearly bifurcated the investment and trading transactions including speculative share transactions in his books of accounts and it is also seen that the average period of holding of shares range from one month to more than one year and accordingly short term or long term capital gains are duly offered to tax by the assessee depending upon the period of holding the shares. It is also seen that the Learned AO had also accepted the stand of the assessee in the immediately succeeding assessment year as investment transactions under scrutiny proceedings vide 143(3) order dated 12.10.2009. We find that the frequency of transactions does not really matter and what is to be seen is the intention of the assessee whether he wants to penetrate into the capital market for the purpose of investment or for making speculative gains by doing day trading and dealing in futures and options. It is als....
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....lved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received there from should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law. In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1. of its judgment that ....