TaxTMI 
TaxTMI 
2020 (6) TMI 75
X X X X Extracts X X X X
X X X X Extracts X X X X
.... respect of mutual fund under the fixed maturity plans; c. That the Long Capital loss of Rs. 55,64.762 should also been treated as capital loss entitled offset with the long-term income and that it cannot be treated as income from business. 2. That Both CIT(A) and AO has erred in notionally disallowing expenses u/s 14A read with Rule 8D of Rs. 53,16,568 without appreciating that there is no further ground to disallow any further sum other than Rs. 10,82,334 already disallowed by the assessee. a. That the Ld. CIT(A) and AO failed to establish why the rule 8D should be invoked especially when the assessee himself has disallowed Rs. 10,82,334 and which were the expenses that connection with tax free earnings. 3. That both the CIT(A) and AO erred in disallowing in ad-hoc and arbitrary manner business expenses of Rs. 15,48,318 incurred for genuine business activities. 4. The Assessee prays to add, alter or modify any grounds of appeal which is necessary in the interest of justice. 2. Briefly stated facts of the case are that the assessee company is engaged in the business of sale and purchase of the shares in mutual funds. For the year under consideration, the assessee filed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the past several years treated the capital gains disclosed by the appellant as business income. The AO has also stated that the departmental stand is affirmed by the Hon'ble ITAT in their decisions in ITA No. 1118/942 & 943 dated 31.01.2012. In the said order, the findings of the Ld. CIT(Appeals) have been reversed and the order of the AO stands restored. The Hon'ble ITAT in the order has held as under: "8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the assessee's intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005- 06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the ld. AR did not place any material, other than resolution dated 22.04.2005, before us while the auditor reports and facts for the years under consideration reflecting intention of the assessing, lead us to the conclusion that the assessee is continuin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pute. The issue in dispute of treating long-term capital gain shown by the assessee as business income has been raised in the case of the assessee for last so many years. The Tribunal in assessee's own case for assessment years 2005-06 to 2007-08 (ITA No.1118, 942 and 943/Del./2010 order dated 31/03/2012) held the activity of purchase and sale of the shares as business income. The relevant finding of the Tribunal is reproduced as under: "8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the assessee's intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005-06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the ld. AR did not place any material, other than resolution dated 22.4.2005, before us while the auditor reports and facts for the years under consideration ,reflecting intention of the assessee, lead us to the conclusi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he relevant findings given in the impugned orders as well as matter referred to before us. The core issue before us is, whether the amount of Rs. 15,41,96,869/- which has been classified as business income by the Assessing Officer which income has been offered to tax by the assessee under the head 'capital gain' is to be assessed as business income or capital gain. The Assessing Officer has summarized the following income shown under the head 'Capital Gain' as business income: Long Term Capital gain Rs. 32,39,427 (Except Dabur India Ltd.) Long Term Capital Gain Rs. 10,13,29,232 (without indexation) Long Term Capital Gain Rs. 2,93,99,990 (with indexation after removing Indexation) Short Term Capital Gain Rs. 1,85,41,338 Short Term Capital Gain With PMS (Net) Rs. 16,86,882 Total Rs. 15,41,96,869/- The assessee company is a NBFC, which was also in the business of sale and purchase of shares and mutual fund. In so far as transactions in mutual funds are concerned, the same has been offered under the head 'Profits and Gains of Business and Profession'. However, various shares which has been held under the investment portfolio on wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t large after the acquisition of the shares of Punjab Tractors from the assessee in accordance with SEBI rules. In so far as Long-Term Capital Gain shown on the sale of the Punjab Tractors Ltd., it cannot be disputed that it was never a part of stockin- trade, prior to 1.4.2004, because, firstly, they were acquired much later to this date; and secondly, it was acquired for the purpose of acquiring controlling stake/interest. Hence such an acquisition cannot be held to be for trading purpose. The transfer of such shares on a takeover of Punjab Tractors Ltd. by Mahindra & Mahindra also goes to prove that this was an investment held by the assessee. Similarly, in the case of ABN Amro Bank they were always held as investment and since the stock was not a tradeable in the stock market, therefore it could have been held as stock for the purpose of trade. Thus, the shares of ABN Amro Bank can never be treated as acquired for trading purpose. Hence any gain arising from sake of these two shares has to be assessed as 'capital gain'. 16. Further, from the perusal of details shown under LTCG of other scrips also, we find that the same have been acquired in the years 2005, 2006 and 2007 an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....served in Sutlej Cotton Mills Supply Agency Ltd' (supra), it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not., it is not even the assessee's case that they had held all the shares for a long duration. The facts and circumstances of the case before us, when viewed in the light of principles laid down in the various decisions referred to above, lead us to the conclusion that the voluminous share transactions were in the ordinary line of the assessee's business; purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of "trade"; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. In the light of view taken in the aforesaid decisio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in claimed exempt u/s. 10(38) 1,06,78,21,147 Long Term Capital Gain on sale of shares of Punjab Tractors Ltd. 10,13,29,232 Long Term Capital Gain on sale of shares of ABN Amro Securities Pvt. Ltd. 2,93,99,990 Short Term Capital Gain 2,02,28,140 Total 1,21,87,78,509 17. Now, it has been well settled that if the shares which has been acquired and treated as investment from day one and held for more than a year, then sale of such shares has to be taxed under the head 'Long Term Capital Gain'. This has been clarified by the CBDT in its following two circulars: - "Circular No.6/2016; dated 29/02/2016 Sub: Issue of taxability of surplus on sale of shares and securities - Capital Gains or Business Income - Instructions in order to reduce litigation - reg.- Sub-section (14) of Section 2 of the Income-tax Act, 1961 (Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ trading as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ture of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities." 17.1 Later on CBDT again clarified in the following manner:- F. No. 225/12/2016/ITA.II Government of India Ministry of Finance Department of Revenue (CBDT) North Block, New Delhi, dated the 2nd of May, 2016 To Principal Chief-Commissioners of Income-tax/ Principal Directors General of Income-tax Subject: - Consistency in taxability of income/l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t if the shares have been held under the portfolio of investment which is separate from the shares then same cannot be brought to tax under the head capital gain. Some of the judgments are as under: - 1. CIT vs. Gopal Purohit, 336 ITR 287 (Bom.) [Also confirmed by Hon'ble Supreme Court] 2. CIT vs. Vinay Mittal, 208 taxman 106 (Del. HC) 3. ITO vs. Rohit Anand, (2009) 34 SOT 42 (Del.) 4. CIT vs. Amit Jain, 374 ITR 550 (Del.) 5. CIT vs. Sahara India Housing Corporation Ltd., ITA No.740/2009 (Del.) 18. In the light of the catena of decision Hon'ble Jurisdictional High Court and also some of the judgment affirmed by the Hon'ble Supreme Court and the facts as discussed above, the earlier years Tribunal order cannot be held to have any binding precedence and accordingly, we hold that in so far as transaction in sale of shares shown under the head 'Long Term Capital Gain' same cannot be taxed under the head business income especially in the light of the categorical clarification by the CBDT. 3.8 Further, the Tribunal in the assessee's own case for assessment year 2010-11 (ITA No. 701/2015 in order dated 02/01/2019) following the order of the Tribunal for assessment y....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Rs. 53,16,568/- under section 14A read with rule 8D of Income Tax Rules, 1962. The assessee disclosed income of Rs. 28.3 crores and made disallowance of Rs. 10,82,334/-, under section 14A of the Act as under: 3.1 The action of the assessee of reducing Rs.53,16,568/-claiming to be expenses on account of the income on which no activity was done in the previous year, was not accepted by the Assessing Officer and the explanation of the assessee that no expenses were incurred toward earning of dividend income shares of Dabur India Ltd, which was a strategic investment, was also rejected. The Assessing Officer, accordingly made the addition of Rs. 53,16,568/-. 3.2 The Ld. CIT(A) has also upheld the action of the Assessing Officer observing as under: "5.3 It is evident from the above that the appellant has chosen to reduce a sum of Rs. 53,16,568/- by excluding the dividend received from M/s. Dabur India Ltd. at Rs. 26,48,96,800/- consulting 83% of the total dividend received and claimed as exempt income. Accordingly, 83% of the disallowance computed as per Rule 8D(2)(iii) i.e. 0.5% of average value of investment is excluded and a net disallowance of Rs. 10,82,334/- is computed as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 63,98,602/- and after reducing the disallowance computed by the appellant company at Rs. 10,82,334/-, additional disallowance of Rs. 53,16,568/- is made. As the computation is, as per section 14A of the Act read with Rule 8D(2)(iii) of the I.T. Rules, no interference is called for and the action of the AO is upheld. Disallowance of Rs. 53,16,568/- is, accordingly, confirmed. This ground of appeal is ruled against the appellant." 3.3 Before us, the Learned Counsel of the assessee referred to page 122 of the paper book containing details of dividend income earned from various shares/mutual funds etc. According to the details, dividend income of Rs. 26,53,52,190/-was earned from shares of 'Dabur India Ltd' and balance dividend was earned from investment in shares and mutual funds. The contention of the assessee that investment in the shares of 'Dabur India Ltd' has been made as promoter of the company and no expenditure was incurred for earning dividend income from said investment. 3.4 The learned Counsel further submitted that the Assessing Officer has not recorded any dissatisfaction on the claim of the assessee of expenses incurred toward earning of exempt income, and thus i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion to income which does not form part of total income under the Act". It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A.. xxxxxxxxx The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14 A." 35. The Delhi High Court, therefore, correctly observed that prior to introduction of Section 14A of the Act, the law was that when an assessee had a composite and indivisible business which had elements of both taxable and non-taxable income, the entire expenditure in respect of said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. The principle of apportionment was made available only where the business was divisible. It is to find a cure to the aforesaid problem that the Legislature has not only inserted Section 14A by the Finance (Amendment) Act, 2001 but also made it retrospective, i.e., 1962 when the Income Tax Act itself came into force. The aforesaid intent was expressed loudly and clearly in the Memorandum explaining....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e business promotion expenses as it was noted during assessment proceedings that there were several expenses of expenditure which appeared to have not been incurred for business purposes. The Ld. AR admitted that it was not possible to filter out expenditure which may have been incurred for nonbusiness purpose and accordingly offered 10% to the total expenditure claimed under business promotion expenses as disallowance. It is clear therefore, that the said disallowance was made on agreed basis and the appellant admitted that there was an element of non business expenditure claimed under this head. The appellant is now in appeal against the agreed addition. The Ld. AR has contended that the said expenditure is incurred for business purposes and allowable u/s 37(1). The Ld. AR has not furnished any details of the impugned expenditure or any justification for the same. The disallowance was made on agreed basis. This has not been controverted by the Ld. AR. The Hon'ble Punjab & Haryana High Court in the case of Banta Singh Kartar Singh Vs. CIT, 125 ITR 239 had observed " An order based on an agreement cannot give rise to grievance and the same cannot be agitated in appeal". The Hon'ble....