TaxTMI 
TaxTMI 
2017 (1) TMI 1339
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....n account of sale of shares and Mutual funds is Long Term Capital Gain or Short Term Capital Gain and not Business income." 2. "On the facts and in the circumstances of the case and in law, the Learned CIT(A) erred in deleting the disallowance u/s 14A r. w. Rule 8D of Rs. 76,55,8411- by holding that the Assessing Officer (A.O.) has not recorded in the order as to how in regard to the accounts, the A.O. was satisfied with the correctness of the claim of the assessee in order to prove that the expenses 3. "The appellant prays that the order of the CIT(A) on the above ground be set aside and that of the AO be restored." 4. "The appellant craves leave to amend or alter any ground or add a new ground which may be necessary." 4. Ground No.1: In this ground, the Revenue is aggrieved with the action of Ld. CIT(A) in reversing the action of AO in treating the gain arising on sale of shares as 'business income' which was shown by the assessee as assessable under the head income from 'capital gains'. 5. The brief background and facts of the case as culled out from the orders of the lower authorities are that during the course of assessment proceedings it was noted by the AO tha....
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....es of the Portfolio Manager for better administration and maximization of his wealth held in the form of shares, it would not mean that the assessee was engaged in the business of sale-purchase of shares. It was also submitted on without prejudice basis that profit arising on sale of shares through PMS was merely to the extent of Rs. 14,31,330/- and in case it was to be treated as income from business, the expenditure relating to profit earned on sale of shares i.e. Management Fee of Rs. 18,33,258/- was eligible for deduction, and only net amount of profit/loss could be assessed as part of taxable income. If it is so done, there would arise a loss of Rs. 4,01,928/- from the transactions entered done through PMS, and thus nothing would be taxable on this account. 7. But, the AO rejected all the submissions of the assessee as well as judgments relied upon by the assessee by mentioning that facts involved in these cases were not identical to the case of the assessee. He also referred to the guidelines laid down by the CBDT in its Circular No.4/2007 dtd. 15.06.07 to determine whether the share transactions carried out by the Assessee fall under the head of 'business' or '....
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....IT(A) and also submitted that income from sale of shares has always been disclosed assessable under the head of capital gain, consistently by the assessee since last many years and accepted as such by the Revenue always. In some of the years, orders were passed u/s 143(3). It was in nutshell submitted by him that following facts and figures can be verified from the evidences brought on record by the assessee before the lower authorities as well as before the Tribunal:- 1. Income from business and other sources is more than 97.5% of capital gains (Page No. 51) 2. The investment are made out of own funds earned by the Appellant from his regular business activity and not from borrowings (Page No. 31). 3. The income from investments in shares / Mutual Funds has been assessed as Capital Gains in all the earlier years vide orders passed under section 143(3) and that there are no charge in the facts and circumstances of the case during the year under consideration. 4. The Appellant has disclosed the amounts invested under the category "Investment" and has not revalued the same in the books to adjust the reduction in market value, if any (Page No.36). 5. The investment in sh....
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....ors of the AO in all of the past years. Ld. CIT(A) made proper analysis of facts before deciding this issue and recorded detailed findings before holding that the gain earned by the assessee on sale and purchase of shares was assessable under the head income from capital gains. The relevant part of findings of Ld. CIT(A) is reproduced hereunder: "I have duly considered the above submissions of the appel lant. In para 8 of the order, the AO has mentioned that the profit on sale of shares shown by the appellant is Rs. 1,44,85,693/- (Rs.85,56,188 + 83,11,319 - 23,81,814) which he has treated as income from business. 7.1. During the course of appellate proceedings, detailed break up of above profits has been furnished. The same being as follows: As per income tax Long term Capital gains Short Term Capital Gains Total Capital Gains M.F. Particular s Shares M.F. Deb /funds Shares/ MF(STT) M.F. Shares M.F. Deb/ Funds Total PM S 9,913,151 2,629 9265237 6683623 902107 (3,229,528) 904,799 9,265,237 6,940,508 Direct Invest Ment 1,779,977 5039683 -. 2405326 91679801 4,185,303 3,35....
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.... Sources' constitutes 30% of the gross tot, income. (4) The total of dividend and capital gain declared by the appel lant Rs. 6. 16 cr., out of which dividend income from investment in shares mutual fund is Rs. 4.71 cr., which is 76.49% of the total income and capital gain from investment in shares in mutual funds is Rs. 1.44 c which is 23.51% of the above income. (5) On analysis of investment of the appellant, it is seen that out of the tote investment of Rs, 155.17 Cr., investment in PMS is Rs-21.73 Cr. LC 14.01% of the total investment. (6) The appellant's major source of income during the year is from sport related activities including endorsements. (7) The appellant is not a trader in shares and the overall investment pattern shows that the investment in shares is to earn dividend an income from shares as and when opportunity arises. 7.3.2 Upon due consideration of the submissions of the appellant, I find that the short term capital gain has been accounted in the two schemes operated under the PMS. In so far as the income under the head capital gains arising under PMS is concerned, the issue as to whether it is 'business' or 'capita Gains'....
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....s not so. The assessee has not adopted the prevalent method rather the investments have been shown at cost price only. The most important factor which has been ignored by the lower authorities is that there are no borrowed funds. The entire investments have come out of the corpus fund of the assessee. Therefore, the claim of revenue authorities that the assessee has indulged in business activities in the guise of share investment does not hold any water. Considering the facts ant the submission and the judicial decisions considered hereinabove, in over considerate view, the decision of the Ld. CIT(A) solely based of Ld. CIT(A) we have not hesitation to hold that considering the nature of transaction through Portfolio Management Services Providers in the l ight of the judicial pronouncement discussed hereinabove, the transactions have resulted into capital gains, STCG and LTCG as returned by the assessee. Therefore, the A.O. is directed to accept the capital gains as returned by the assessee." 7.3.3 In yet another recent decision dtd 13.11.20 13 in IT A No. 3159/ Mum/ 2012 in the case of Anusuya Suren Mirchandani, the ITAT held as follows: "We have heard the rival submission a....
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....mstances be considered business income of the appellant. The short term capital gain under 'Direct Investment' is Rs. 24.05 lac only and there is no evidence to show that the appellant has traded in shares to make profit. The criteria applied by the A.O., therefore, do not fit into the fact of the appellant's case. I, therefore, considering the facts discussed above and stated by the appellant vide letter dtd.24.02.2014, reproduced above, cancel the AO's order treating the Long Term and Short term capital gains declared by the appellant as 'business income'. 12. We have carefully examined all the factual findings recorded by the Ld. CIT(A). It is noted by us that major income of the assessee is income from sports endorsement and other shares. In addition to that assessee had made investment into shares. The entire investment has been made by the assessee out of its own funds. No amount of shares has been invested from any borrowing. Huge amount of dividend income has been earned by the assessee which is roughly 3.25 times of the amount of capital gain. The investment in shares with Portfolio Manager is merely to the extent of 4.8% of the total investments. The as....
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....gains as well as business income. 11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised 'that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade." 14. Our attention was also drawn on CBDT circular No.6 of 2016 dated 29-02-2016 wherein the Board gave further guidelines with regard to the treatment of profit as arising on sale / purchase of shares. It was inter-alia observed in the circular that the AO shall take into account the following guidelines in deciding whether the surplus generated from sale of listed shares or other securities would be treated as capital gains or business income :- "a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arisi....
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....rs in such a manner so as to minimize the burden of tax so long as no mala fide or bogus practices are followed and tax planning is done by the assessee strictly within the framework of law. 18. We have analysed this issue from another perspective also. The income arising on account of sale -purchase of shares if assessed under the head of capital would of course be taxable at relatively lower rate of tax and is also exempt in some cases, as compared to the business income which is taxable at relatively higher rate of tax. But, if such income is assessable under the head income from business then the assessee would be entitled for claim of set of expenses incurred in the normal course of business to earn such income and the tax would be payable only on the amount of net profit. Therefore, while drafting the provisions the legislature did not make any water tight rule for determination of nature of income arising from purchase and sale of shares to be assessed under the head of capital gains or business income. It has been left upon the wisdom of the assessee and facts and circumstances of the case. Under these circumstances, if assessee has chosen a particular course after decid....
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....sionally managed Portfolio Management Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment which is in shares, and the law permits it to be taxed as capital gains and not as business income" 21. Thus, the reasoning given by the AO that the impugned income would be assessable under the head income from business merely because the assessee has availed the service of Portfolio Manager is not sustainable in view of the aforesaid judgments and facts of the case before us. 22. We have also analysed consistency part and noted that the assessee has right from beginning treated the amount held in shares as part of investment. In A.Y. 2005-06 the assessee kept the shares as part of investment and resultant gain was offered to tax as income assessable under the head income from capital gains. Few queries were raised by the AO in this regard. In response, proper replies were given by the assessee and thereafter AO accepted the same as....
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....aim of the assessee deserves to be upheld. Therefore, after taking into all the facts and circumstances of the case and in view of the detailed discussion made by us in earlier part of our order, we find that the detailed findings recorded by Ld. CIT(A) for upholding the claim of the assessee by treating the income arising from purchase and sale of shares as assessable under the head of 'capital gains' are well reasoned and do not require any interference from our side. Therefore, order passed by the Ld. CIT(A) on this issue is upheld and Ground No.1 raised by the Revenue is hereby dismissed. 25. Ground No.2: In this ground the Revenue is aggrieved that the action of Ld. CIT(A) in deleting the disallowance made by the AO u/s 14A read with Rule 8D for Rs. 76,55,841/-. 26. The brief background as culled out from the orders of the lower authorities is that the AO observed that the assessee received exempt income in the nature of dividend to the extent of Rs. 68,02,975/-, however, no expenditure has been disallowed for earning of the said income. Therefore, the assessee was asked to explain as to why disal lowance u/s14A should not be made. In response, the assessee vide i ts let....
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....een charged to capital account and therefore has not claimed any expenditure under the Act and therefore disallowance under section 14A is not warranted. 16. It is submitted that the assessee maintains separate income and expenditure account for its business income. The surplus in the said account is Rs. 19.61 crores (pg 32). The business income as per section 28-44 is arrived at Rs. 19.78 crores (pg 24) which has been accepted by the AO in his assessment order. Since the AO has accepted all the expenditure as allowable against business income and the assessee having not claimed any expenditure against exempt income, provisions of section 14A are not applicable. 17. In earlier years i.e. AY 2007-08 and 2008-09 there has been no disallowance on account of section 14A of the Act (pgs 59-78). 18.The share transaction charges and PMS management fees are debi ted to capi tal account (pg 33) and not claimed as expenditure except Rs. 9.09 lacs on proportionate basis against taxable capital gains (pg 24 and 26) which has been allowed in the assessment order. 19. Alternatively, the common expenses charged to Profit & Loss account, if any, is only to the extent of Rs. 22 lacs (pg....
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....t, hence not applicable. Similarly, interest expenses being 'nil', the same will not be applicable. However, at the most and without prejudice to appellant's claim deemed expenses of Rs. 22,72,306/- can be considered as per the formula prescr ibed therein, i .e. 0.5% average investments which is coming to Rs. 67,46,392/-. However, the total direct expenses being Rs. 22,72,306/-, it cannot exceed the said amount. As far as the direct expenses of Rs. 9,09,449/taken by the appellant for disallowance & u/s 14A of the Act is concerned, the same is relating to earning of capital gains, hence, cannot be considered under the above section. In this regard appellant's contention that A.O. has invoked Rule 8D r/w Sec. 14A of the Act, without recording in the order as to how in regard to the accounts, he was not satisfied with the correctness of the claim of the appellant in respect of such expenditure in relation to income which does not form part of the total income under the Act, as laid down in sub-section (2) of Section 14A of the Act, is found valid." 31. Thereafter, Ld. CIT(A) considered the decision of Pune Bench of Tribunal in the case of Kalyani Steels Ltd. in ITA ....