TaxTMI 
TaxTMI 
2016 (6) TMI 483
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....ase and sale of shares held in stock in trade, was declared under the head from business and that the gain on sale of shares held as investments was declared under the head 'capital gains'. 3. The assessee filed return of income for A.Y.2008-09 declaring total income as follows :- BUSINESS INCOME NET PROFIT AS PER PROFIT & LOSS A/C INCOME TO BE CONSIDERED SEPARATELY 1352,22,624.00 LESS DIVIDEND (EXEMPT) 42,38,860.00 Interest recd. in this year for Last year considered in last Year return 2,36,917.00 CAPITAL GAINS 1089,05,015.00 DEPRECIATION (AS PER IT) 6,98,815.00 1140,79,607.00 211,43,027.00 ADD DEPRECIATION(AS PER ACCO 11,47,217.00 Expenses disallowed u/s 14A 825,00,965.00 Dividend Stripping u/s 94(7) 37,924.00 15,14,479.00 BUSINESS INCOME 226,57,496.00 CAPITAL GAINS TOTAL CAPITAL GAINS 1089,05,015.00 LONG TERM CAPITAL GAINS (EXEMPT U/s 10) 825,00,965.00 SHORT TERM CAPITAL GAINS 264,04,050.00 TAXABLE AT SPECIAL RATE @ 10% U/S 111A 264,04,050.00 TAXABLE INCOME 490,61,546.00" 4. The AO analyzed the transaction which gave rise to long term capita....
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....sp; the scrip Total No.of shares Total Purchase value Total sale value Profit L&T 1750 14,83,000/- 42,77,554/- 27,94,553/- MTNL 4000 3,96,200/- 6,40,000/- 2,43,800/- Mukund Ltd. 2399 23,990/- 3,06,975/- 2,82,985/- Pentaloon R. 32370 94,844/- 1,66,93,403/- 1,65,98,559/- Punji Lloyd 6000 8,98,800/- 28,51,897/- 11,83,957/- Skumarsynf 26000 20,05,249/- 34,16,761/- 14,11,511/- Tata Steel 1650 6,48,202/- 14,17,325/- 7,69,123/- Tata Tea 500 96,225/- 3,83,911/- 2,87,686/- TCI 46515 3,96,951/- 61,48,659/- 57,51,707/- UTUSOF 15459 23,59,558/- 62,71,679/- 39,12,120/- AVAYAGCL 14971 35,27,353/- 36,02,095/- 7....
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....Rs. 2,64,04,050/- and Long Term Capital Gain of Rs. 8,25,00,965/- should be treated as business profit. The assessee submitted before the AO that it had maintained distinct portfolio of shares held as investments and that held as stock-in-trade and therefore the head of income under which it had declared gain on sale of shares viz., short term and long term capital gain should be accepted. The AO however held that the contention of the assessee cannot be accepted in view of the discussion made by the AO on the pattern of purchase of sale of shares held by the Assessee as investments. The AO also observed that the main business of the assessee was purchase and sale of shares and the classification of the shares as investments and stock-in-trade was merely a device to reduce tax liability. The AO further observed that examination of Table-I given above would reveal that (i) the assessee has purchased 857549 shares, (ii) the total purchase consideration is Rs. 6,43,84,147/-, (iii) the total sale consideration is sRs.9,07,88,198/-,(iv) the average holding period is less than six months, (v) the profit is Rs. 2,64,04,0501- The assessee has made a series of transactions regularly and the....
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.... in trade would be more material in coming to the occlusion whether the gain sale of shares would give rise to business income or income under the head capital gain. (e) the assessee pointed out that gains arising from sale on long term capital asset cannot by any stretch of imagination be treated as income from business and disregard to the contention of the CIT(A) that long term capital asset and short term capital asset as defined in section 2(29A) and 2(42A) of the Income Tax Act, 1961 (Act). (f) the assessee relied on several judicial pronouncements in support of its claim that income from sale of shares held as investment can give rise only to income under the head 'capital gain' and that the assessee can be both a dealer in shares holding shares as stock in trade and also holding shares as investments and that the entries in the books of account in this regard will decide the head of income under which the gains on sale of shares will be assessed. 7. The CIT(A) on consideration of the above submissions and the judicial pronouncements came to the following conclusion : "20. On the analysis of the various decisions relied upon by the appellant and the Assessing Off....
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....iming benefit of lower rate of tax, under Section 111 A of the Act, that they had claimed certain shares to be investment, though these transactions were only in the nature of trade. The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case. 22. The investments has been accepted by the Assessing Officer in his assessment order passed u/s 143(3) dated 31.12.2009 for the Assessment Year 2007-08 amounting to Rs. 222,733,497/- as closing balance as on 31st March 2007. The Assessing Officer has also accepted the amount of Rs. 4,55,57,618/- as closing balance which has been subsequently calculated to be investments for short term capital gain by the Assessing officer. There are peculiar facts and circumstances where in the earlier assessment year 2007-08 the investments shown by the appellant have been upheld as investments by the Assessing Officer but in the subsequent year the same figure has been treated as stock in trade for denying the benefit of capital gain on sale of shares. As per the various facts & circumstances mentioned in Para 9 and after con....
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....umstances of the case, the CIT CA) erred on facts and in law in directing the AO to assess the gains realized on sale of investment shares; held for period less than 12 months; under the head "profits & gains of business" as opposed to "short term capital gains" claimed by the appellant. 2) For that on the facts and in the circumstances of the case, the lower authorities failed to appreciate that the appellant in it's books had maintained clear distinction between the trading stock of shares & Investments and followed different and distinct methods of accounting in relation thereto and therefore the ClT (A) was unjustified in upholding the assessment of only short term capital gains under the head "profits & gains of business". 3) For that on the facts and in the circumstances of the case, the lower authorities not having disputed the genuineness of the audited accounts nor having proved any infirmity in the accounts nor having invoked provisions of Sec. 145 of the Act, the CIT CA) was grossly unjustified in holding Para-25 of the Appellate Order that the Investment in shares disclosed in the Balance-sheet as on 31 st March 2008; should not be accepted to be I....
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....ssessee besides reiterating submissions as were made before CIT(A) also submitted that in the assessments completed for A.Yrs. 2006-07 and 2007-08, similar type of transactions were carried out by the assessee and gain on sale of shares held as investment were declared as short term capital gain and the same were accepted by the revenue in the assessments completed u/s 143(3) of the Act. He placed reliance on the decision of Hon'ble Bombay High Court in the case of CIT vs Gopal Purohit 336 ITR 287 wherein the Hon'ble Bombay High Court held that though the principle of res judicata is not applicable to the assessment proceedings there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. It was also a case of a person who declared gain on sale of shares held as investments as capital gain and the revenue had treated the said gain as giving raise to income from business. He also brought to our notice that SLP preferred against the aforesaid decision of the Hon'ble Bombay High Court has been dismissed by the Hon'ble Supreme Court. Besides the above our attention was also drawn to the fact that in assessment completed for A.Yrs. 2010-11 to ....
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....ved that the Assessee has been consistently maintaining two portfolio of shares one held as investments and the other held as stock-in-trade of business of dealing in shares. As far as the income on sale of shares held as investments is concerned, the Assessee has always been declaring such income under the head "Capital Gain" and the same has been accepted by the revenue in the past assessments. We therefore uphold the order of the CIT(A) in this regard and dismiss Ground No.1 raised by the Revenue. 13. As far as the appeal of the Assessee is concerned, the first issue to be decided is as to whether the STCG on transaction of purchase and sale of shares undertaken by the assessee during the previous year is to be assessed under the head 'income from business' as claimed by the revenue or income under the head 'capital gain' as contended by the assessee. If it is held that STCG declared by the Assessee has to be accepted under that head of income, then the other grounds of appeal regarding valuation of closing stock of shares etc., become academic and need no adjudication. 14. Before we deal with the facts of the case of the assessee, we will briefly narrate the principles ap....
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....le of shares is STCG and not business income. The same position continued in assessment for AY 2010-11 & 2011-12 also. A chart is annexed to this order as annexure-1 which gives the comparative component of capital gain (Short term/Long term and income from share trading. A reading of the said chart would show that the volume of gain under the head STCG has been consistent and no adverse inference can be drawn against the Assessee in this regard. 2. A chart showing the average holding period of investments sold during the previous year by the Assessee indicating the average holding period is given as annexure-2 to this order. A perusal of the same would show that the holding period has been substantially high in respect of shares which gave raise to STCG. 3. The shares which were sold and which gave raise to STCG were held by the Assessee as investments in its books of accounts. The treatment in the books of accounts is thus as investments and this will be one of the important criteria which will support the plea of the Assessee that the income in question is STCG. 4. No borrowed funds had been utilized for making investments. 5. There is no bar ....
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....sent AY and the AYs referred to above were identical. Though the rule of res judicata is not applicable but the principle of consistency will definitely apply and on that basis the claim of the Assessee should be held to be proper. 19. The Hon'ble ITAT Mumbai Bench decision in the case of Janak S.Rangwala Vs. ACIT 11 SOT 627 (Mum) has been held that magnitude of the transaction does not alter the nature of the transaction. Therefore magnitude of transactions carried out by the Assessee, in our view, should not be very material in coming to the conclusion that income in question is income from business. 20. On a consideration of the facts and circumstances of the present case and in the light of the principles laid in judicial pronouncement referred to above, we are of the view that the income in question has to be assessed under the head "Short Term Capital Gain" as declared by the Assessee. Gr.No.1 & 2 raised by the Assessee are accordingly allowed. In view of the decision on ground No.1 & 2, we are of the view that the other connected grounds of appeal No.3 to 6 are either consequential or do not call for any adjudication. 21. Ground No.7 raised by the assessee and groun....
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....alue Rs.251263510/-.....[B] Opening Value of total assets Rs.268186865/- Closing Value of total assets Rs.423659800/- Total Rs.691846665/- Average Value Rs.345923332/-.....[C] Interest Rs. 2429451/-......[A] 2)A x B = 2429451 x 251263510 = Rs.1764646/- C 345923332 3) ½% of average value of investment Rs. 251263510/- comes to Rs. 12,56,318/- Therefore total amount [1+2+3] [351494/- + 1764646/- + 12,56,318/-] inadmissible u/s 14A read with Rule 8D comes to Rs. 33,72,458/-." 23. On appeal by the assessee the CIT(A) confirmed the order of AO. "26. I have considered the submissions of the Authorised Representative and have perused the audited accounts of the appellant for the AY 2008-09. It is the plea of the appellant that it carries on business activities through multiple divisions though underlying transactions conducted' by these divisions involves purchase and sale of shares and securities. It is the assessee's plea that it maintains separate accounts for each of the division which inter alia include investment division from which the assessee derives income by way of capital gains a....
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....intains one single business establishment which caters to needs of all segments, there cannot be any certainty about the correlation between any particular head of expenditure and earning of income from different sources. It is for the simple reason that there cannot be direct and proportional relation between earning of income and incurring of administrative expenses. Similarly when all business transactions; and business funds are routed through a common bank account individual identity of the funds is lost and therefore it is impossible to ascertain to what extent borrowed and owned funds get used in acquiring investments which produce dividend income .. 28. In the present case the assessee has not been able to establish with sufficient material that the manner of calculating the amount disallowable for earning the exempted income (i.e. income not forming part of total income), as per his working was the correct method and that no other expenses were incurred in relation to earning of tax free income. I am satisfied that the claim of expenditure incurred and shown by the appellant with regard to the accounts is not correct. Once the assessee has failed to establish his ....
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....lue of investments is as follows: Opening Investments as per Balance Sheet 22,27,33,496 Less: Short Term Investments 4,55,57,618 Net Opening Investments 17,71,75,878 The calculation for the disallowance on the basis of the above working as ' submitted by the appellant is as follows: Particulars Amount (Rs.) (i) Expenditure directly attributable to earning exempt income 3,51,494. (ii) Interest not directly attributable-to any particular income= Interest expenditure X Average value of investmentsAverage of total assets 22,84,84,701 = 24,29,451 X 34,59,23,333 16,04,669 (iii) Amount equal to 0.50% of the average value of investments = 0.50% X 22,84,84,701 11,42,424 Expenditure in relation to income not includible in total Income 30,98,586 Less: Expenditure already disallowed by appellant (3,29,338) Expenditure to be disallowed 27,69,248 36. Therefore the disallowance under Section 14A read with Rule 8D is calculated at Rs:30,98,586/-. The appellant itself has disallowed an amount of Rs. 3,29,338/- and thereby the net disallowance is determined at Rs. 27,69,248/-. The figure....
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....se of HDFC Bank Limited (2014) 49 Taxman.com 335 (Mum) wherein the context of disallowance u/s 14A of the Act the Hon'ble Bombay High Court took a view that where the assessee's own funds and other non interest bearing funds were more than the investments in tax free securities no disallowance of interest u/s 14A of the Act can be made. The Hon'ble Bombay High Court in this regard placed reliance on the decision in the case of CIT vs Reliance and Power Ltd. 313 ITR 340 (B). The ld. Counsel for the assesse further submitted that the disallowance u/s 14A of the Act cannot be made on a notional basis and in this regard referred to certain judicial pronouncements. The ld. DR relied on the order of AO. 26. We have given a very careful consideration to the rival submissions. As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore no disallowance of interest expenses ought to have been made. A perusal of Balance sheet of the Assessee as on 31.3.2008 will show that the Assessee had own funds of 34.84 Crores ....