TaxTMI 
TaxTMI 
2020 (6) TMI 75
X X X X Extracts X X X X
X X X X Extracts X X X X
....e circulars No. 6 of 2015 dated 9 April 2015 on Capital Gains in 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
...."4.2 I have carefully considered the assessment order and written submissions filed by the Ld. AR. The AO following the Departmental stand 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 3.5 The learned DR, on the other hand, relied on the order of the lower authorities. 3.6 We have heard rival submission of the parties on the issue in dispute. 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 reso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ong-term capital gain and not business income. The detailed finding of the Tribunal is reproduced as under: "14. We have heard the rival submission and also perused the 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....any. Later on, these shares were sold to Mahindra & Mahindra as a part of takeover deal which is evident from sale purchase agreement dated 08.05.2007. Thereafter Mahindra & Mahindra has given a letter of offer for purchase of equity shares from public at 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 tradi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al, 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 conclusion that the assessee is continuing its activities as in earlier years of a trader in shares. As observed 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1,19,85,50,369 86,05,051 20,57,841 21,45,605 22,70,962 19,21,580 Percentage of Capital gain to 98.34% 0.70% 0.16% 017% 0.18% 0.15% Total capital gain *inclusive of shares of Dabur India Ltd., Punjab Tractors Ltd. and ABN Amro Securities Pvt. Ltd. Total Capital Rs. Long Term Capital Gain 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; c) In all other cases, the nature 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 tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....has been approved and upheld in many judgments including that of Hon'ble Gujarat High Court in the case of PCIT vs. Ramniwas Ramjivan Kasat, reported in 248 Taxman 484. (Guj). Following the above two circulars, the Tribunal in assessee's own case in the A.Y. 2011-12 has decided the issue in favour. Apart from that, there are many judgments now including that of Hon'ble Jurisdictional High Court rendered after the judgment of Tribunal order for the earlier years (supra), wherein it has been consistently held that 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 affirm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e assessee is allowed holding that long term gain from listed securities of Rs. 25,13,359 is chargeable to tax under the head capital gain and not business income. Ground no. 2 of the appeal is allowed." 2.10 In view of the consistent finding of the Tribunal since assessment year 2008-09, respectfully following the finding of the Tribunal for assessment year 2008-09 to 2012-13, we set aside the order of the lower authorities and hold the activity of purchase and sale of shares in question as investment activity to be assessed under the head capital gain. 3. The ground No.2 relates to disallowance of 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ii), the disallowance has to be as per the letter of the Rule. In view therefore, the plea of the Ld. AR that since 83% of the dividend income is from Dabur India Ltd., the disallowance is to be worked out on percentage basis, is not in order. The Ld. AR's reliance on the decision of the Hon'ble Delhi High Court in the case of CIT Vs. Holcim India (P) Ltd. is misplaced as the appellant has dividend income of Rs. 28.38 crores on the investments. It is not the case that no exempt income is earned, as was the case in the referred judgment. In view thereof, the computation of disallowance is to be as per Rule 8D(2)(iii) of the I.T. Rules which has been correctly worked by the AO at Rs. 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ch is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word 'in relation to the income' that does not form part of total income. Considered in this hue, the principle of apportionment of expenses comes into play as that is the principle which is engrained in Section 14A of the Act. This is so held in Walfort Share and Stock Brokers P Ltd., relevant passage whereof is already reproduced above, for the sake of continuity of discussion, we would like to quote the following few lines therefrom. "The next phrase is, "in relation 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the assessee is accordingly dismissed. 4. Third ground is regarding disallowance of Rs. 15,48,318/-out of business expenditure. 4.1 The brief facts qua the issue in dispute are that the Assessing Officer asked the assessee to provide details of business promotion expenses of Rs. 1,54,83,180/-, but the Authorised Representative of the assessee before the Assessing Officer admitted that certain expenses had not been incurred for the business purpose and he was unable to offer any expenditure in respect thereof and the assessee offered 10% of the total expenditure of Rs. 15,48,318/- for disallowance. 4.2 The Ld. CIT(A) has also upheld the disallowance observing as under: "6.2 The AO disallowed Rs. 15,48,318/- @ 10% of Rs. 1,54,83,180/- out of the 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 ....