TaxTMI 
TaxTMI 
TaxTMI 
2020 (10) TMI 252
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....so far as Tax Appeal No.81 of 2020 (A.Y. 2005-06) is concerned :- Tax Appeal no.81 of 2020 (a) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in holding that surplus arising from sale of shares and securities constituted capital gain instead of business income? (b) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in deleting the addition made under Section 14A merely on the basis that the relevant investments are out of assessee's old and own interest free funds, which exceeded tax free investments even though no material was placed on record by the assessee to establish that the said funds were available for investment at the relevant point of time? (c) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in deleting the disallowance made u/s.14A of the Act of Rs. 1,11,47,727/-, without appreciating that the assessee was maintaining mixed funds and failed to established that it has its own surplus funds for investment in shares/securities? 5. The Assessing Officer has noted in the assessment order that the assessee....
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....ime to time with the assessee. The CIT(A) held that the Assessing Officer was not justified in treating Rs. 16,59,53,272/- as income from business and the assessee was entitled to Long Term or Short Term Capital Gain as disclosed in the return of income. 8. The CIT(A) with regard to the alternate protective addition of disallowance under Section 14A out of professional fees and on account of interest expenses, confirmed the disallowance of professional fees and so far as the disallowance on account of interest was concerned, the CIT(A) relying upon his decision for the A.Y. 2004-05 confirmed the disallowance of Rs. 19,858/- worked-out on the basis of direct nexus pertaining to investment utilizing borrowed fund out of the total disallowance made by assessing officer on account of the interest expenses claimed by the assessee. 9. Being aggrieved by the order of the CIT(A), the assessee as well as the revenue preferred appeals before the Tribunal. The Tribunal confirmed the order passed by the CIT(A) after taking into consideration that CIT(A) for the A.Y. 2008-09 had taken a contrary view holding that investment in shares as trading activity and the gains/loss was assessed as busi....
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....directions, the ld. counsel for the assessee filed such details in tabular form. The details are also on the record scattered in different orders of the Revenue authorities. They are also available in seven volumes of the paper book filed by the ld. counsel for the assessee. For the facility of reference, and taking into consideration the relevant details in more scientific manner, we have directed the assessee to submit such details in tabular forms. It is also pertinent to note that the facts on all vital points are common except variation in quantum. We will be taking up the facts mainly from the Asstt. Year 2005-06 and 2008-09 because order of the ld. CIT(A) in the Asstt. Year 2005-06 on this issue is in favour of the assessee, which has been followed upto the Asstt. Year 2007-08. However, in the Asstt. Year 2008-09, the ld. CIT(A) did not concur with his predecessor and given a different finding. Therefore, it is imperative upon us to look his point of view of reasoning before forming a consolidated opinion on this activity for all these years. At the time of hearing, the ld. CIT-DR pointed out that written note was submitted by the then CIT-DR, Shri Ravindra I Patel vide lett....
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....ar as frequency of purchase and sale of securities are concerned, it is submitted that the following details demonstrate bifurcation of total investment, purchase and sales in respect of shares and mutual funds etc. in the respective assessment years. Asst -Year Investments in Total Investments Purchase of Total Purchase Sales of Total Sales Mutual Funds bonds Strategic investments Shares Mutual Funds and Bonds Shares Strategic Purchase Mutual Fund Bonds Strategics Investments Shares 2005-06 124.79 76.91 23.01 224.71 507.03 45.31 552.35 551.35 5.19 51.2 608.48 2006-07 164.15 78.01 45.53 287.69 494.33 80.45 574.78 448.07 66.71 66.66 581.44 2007-08 333.98 84.99 111.56 530.53 950.97 180.80 29.81 1161.58 79.99 22.83 141.05 955.87 2008-09 166.52 139.33 240.63 546.48 583.75 444.38 62.75 1090.88 752.03 7.12 364.15 1123.31 2009-10 151.21 150.25 204.27 505.73 822.14 20.89 33.25 876.28 589.40 9.44 45.4 914.24 2010-11 395.75 204.49 148.44 748.67 1308.84 18.08 54.24 1381.16 1070.46 Nil 52.29 1122.75 2011-12 249.25 195.16 126.43 570.84 821.80 1.73 3.65 827.18 1005.65 17.51 24....
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....67 38.12 2008-09 11.87 (including LTG Rs. 7.64) 48.04 59.91 2009-10 During the year, the company has incurred loss of Rs. 7.33 crores on scale of investments. 2010-11 6.29 (including LTG Rs. 6.29) (-) 6.01 Capital loss 0.28 2011-12 37.37 (including LTG Rs. 32.59) - 5.67 43.04 27. The ld.counsel for the assessee submitted that in the books of accounts, the assessee has valued the shares/securities at cost and not at lower of cost or market value. It is submitted that the main objects of the memorandum of association do not authorise the assessee to undertake business of purchase and sale of shares/securities unless the main objection of MOA permits, the company cannot do trading in shares and securities as business, being a listed company. Subsequently also MOA was amended from time to time but above clause was not made in object clause. However, Article No.9 and 32 of the Memorandum, being Ancillary Objects of the company, permit the assessee to invest in or acquire shares, stock, debenture and other security from time to time. The assessee has passed resolution u/s.372A of the Companies Act authorizing the investment in sh....
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....assessee has pointed out that in the books of accounts, it has treated these shares in the investment account. It has not valued the shares at the end of the year at cost or market value whichever is less, rather it has valued them at the cost of acquisition. This treatment in the account is being given when the shares are being purchased in investment account. The assessee has also pointed out that provisions made for diminution in value of investment has been added back in the computation of income. While taking note of the assessee's submissions submitted in tabular form, we have specifically noted the figures. While differing with the conclusions of the CIT(A) in the Asstt. Years 2005-06 to 2007-08, the ld. CIT(A) in the Asstt. Year 2008-09 recorded that fact of recording transaction in the books of accounts etc. in a particular manner by the appellant was to justify the nature of transaction to be "investment". Merely because the assessee has given a particular treatment to the share transaction in its books of accounts, does not prove the nature of transaction to be a particular kind, and overall conduct of the assessee has to be seen. It appears that CIT(A) failed to appreci....
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....und as of fact that assessee purchased shares out of borrowed fund and did not make sale on account of any pressing necessity Whether on facts dominant intention of assessee being to make profit by resale of shares and not to make investment. Tribunal was correct in holding that transaction was adventure in nature of trade Held, yes. (3). Smt. Harsha N. Mehta Vs. DCIT 43 SOT 332 (Mumbai)|Section 28(1), read with section 45, of the Income tax Act, 1061 Business income Chargeable as Assessment year 2005-06 - During relevant assessment year, assessee filed her return showing income from sale and purchase of shares under head 'Capital Gains' Assessing Officer did not agree with treatment given by assessee and treated said income as business income On appeal, Commissioner (Appeals) partly accepted assessee's claim On instant appeal, it was seen that during relevant period assessee had made 37 transactions in 35 scripts It was also noticed that shares were held for a few days and in very few cases for a femur months but in no case period of holding was exceeding 200 days Whether activity of frequent buying and selling of shares over a short span of period had to be treated....
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....ow the assessee dealt with the subject matter of transaction during the time the asset was with the assessee. Has it been treated as stock intrade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant is not conclusive. [d] The fourth test is as to how the assessee himself has returned the income from such activities and how the department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in absence of any satisfactory explanation. [e] The fifth test, normally applied in cases of partnership firms and companies, is whether the Deed of Partnership or the Memorandum of Association, as the case may be, authorises such an activity. [f] The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable propor....
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....e are concurrent findings of fact arrived at by the CIT(A) and the Tribunal. Mr. Soparkar would submit that the CIT(A) has considered the facts of the case with regard to the intention of the assessee, borrowed funds of the assessee, frequency of transactions, retention and appreciation in the value of shares and securities, treatment in the balance-sheet given by the assessee, authorization for transactions in sales and securities in the memorandum of association and articles of association of the assessee company in detail. It was further submitted that the Tribunal has confirmed the order of the CIT(A) in view of the test laid down in the decisions in case of Sadhana Infrastructure (2009) TTJ 226 and Rewashanker. The Tribunal has also considered that the intention of the assessee at the time of purchase of share and security was not to trade into shares but to invest in the same and the assessee has treated the same as investment and not stock in trade. It was further pointed-out that the sale and purchase is not routed through profit and loss account, but only net gain on sale is reflected therein. Mr. Soparkar invited the attention to the findings given by the Tribunal that th....
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....rs issued by the CBDT." 18. From the above instructions of CBDT, it was submitted that in the facts of the case as the assessee has treated the income arising from the transfer of sale and security as capital gain, the Assessing Officer could not have disputed the same as the assessee consistently followed such practice. 19. Mr. Soparkar, further relied upon the decision of Delhi High Court in case of Yama Finance Ltd. Vs. Assistant Commissioner of Income Tax, (2014) 46 Taxmann.com 349, wherein Delhi High Court has held as under:- "9. One often underlined and widely used test is the "volume, frequency, continuity and regularity" of the transactions test. This is in addition to other indicia such as maintenance of separate portfolios in the same set of books of account for "investments" or maintenance of separate books of account for the two activities, and whether borrowed capital was used. 10. Having regard to these and the further fact that the assessee had kept these amounts separately in an investment account and held these mutual funds for about two years, this Court is of the opinion that the Tribunal clearly fell into error in holding that the amount of Rs. 58,71,144....
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....n funds and therefore, there is no involvement of borrowed funds for transaction in shares and securities carried-out by the assessee. 24. As against the observation made by the Assessing Officer with regard to the volume of trade frequency etc. of the transaction in shares and securities, it is found by the CIT(A) as well as the Tribunal that the majority investment was made in the mutual funds and bonds and in shares of group companies of strategic investment and only 23.01 Crore were invested in the shares of other companies out of total investment in shares and securities amounting to Rs. 224.70 Crore. In such circumstances, the purchase and sale of units in mutual funds cannot be said to be constituted as trading in shares as the same cannot be sold in open market. Moreover, the memorandum of association of the assessee company clearly shows that the business of purchase and shares and securities is not the main object of the company. The assessee has also maintained distinction between trading assets and non-trading assets in the books of accounts and only net surplus or loss arising out of the shares and securities is reflected in the profit and loss account. The assessee h....
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....hese were in the nature of investment was a question of law. This was a mixed question of law and fact." 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers: 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles "(i) Where a company purchases and sells shares, il must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit would result in the transaction being in the nature of trade/adventure in the nature of trade: but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the ....
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...., the shares are held by the assessee as investment and therefore giving 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. 12. These instructions shall supplement the earlier Instruction No. 1827, dated August 31, 1989." 26. Similarly, in Circular No.6 of 2016 dated 29.02.2016,the CBDT in order to reduce the litigation has given instructions as under :- CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-II] SECTION 45, READ WITH SECTION 28(), OF THE INCOME TAX ACT, 1961 CAPITAL GAINS, CHARGEABLE AS ISSUE OF TAXABILITY OF SURPLUS ON SALE OF SHARES AND SECURITIES - CAPITAL GAINS OR BUSINESS INCOME - INSTRUCTIONS IN ORDER TO REDUCE LITIGATION CIRCULAR NO.6/2016 [F.NO.225/12/2016-ITA-II), DATED 29-2-2016 1. Subsection (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 busin....
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....lar 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 (ie. 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." 27. The CIT(A) and the Tribunal both have come to the conclusion that the assessee has continuously treated the transaction in shares a....
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.....AO has worked out the disallowance at Rs. 1,11,47,727/-. He worked out this disallowance with help of the following formula: Investment ----------------- x Interest paid = Total Assets Rs. 224,70,48,357 -----------------x 2,13,03,954 = 1,11,47,727 Rs. 42942,39,902 38. The ld.CIT(A) has re-appreciated this aspect and observed that the assessee was having sufficient amount of share capital, reserves & surplus. It has earned profit at Rs. 45 crores. Hence, no direct interest expenditure was required to be disallowed. The ld.CIT(A) confirmed the addition at Rs. 19,83,858/- on the ground that these interest expenditure has a direct nexus with investment. 39. With the assistance of the ld. representatives, we have gone through the record. We find that the ld.AO has worked out disallowance on the basis of a formula. He failed to note that interest free funds available with the assessee were far more than the gross investment. Gross investment in Asstt.Year 200506 was Rs. 28,769 lakhs, whereas share capital, reserves & surplus available with the assessee was of Rs. 49,379 lakhs. This fund is far more than the investment. It can safely be harboured that interest bearing f....
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....l Commissioner of Income Tax, Vadodara1 Vs. Gujarat State Fertilizers and Chemicals Ltd.]. The very same argument, which is sought to be canvassed by Mr. Patel in the present tax appeal, was canvassed in the Tax Appeal No.100 of 2019. We would like to quote the relevant observations made by us including the submissions, which were canvassed by Mr.Patel and noted by us. "5. Mr. Patel submitted that the Assessing Officer rightly made the disallowance under Section 14A of the Act. He submitted that in a recent decision in the case of Maxopp Investment Limited (supra), the Supreme Court has reiterated that the purpose behind Section 14A of the Act is not to permit deduction of the expenditure incurred in relation to the income which does not form part of the total income. It is to ensure that the assessee does not get double benefit. 6. He further submitted that this Court, in the case of PCIT-II v. Shreno Limited, (2018)409 ITR 401 (Gujarat), has referred to the decision of the Supreme Court in the case of S.A.Builders Limited v. CIT,(288) ITR 1 and observed that the exposition of law made by the Supreme Court in the case of S. A. Builders Limited (supra) and the observations ma....
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....nvestment Limited(supra), the question before the Supreme Court was, whether the disallowance of expenditure under Section14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control over the said company and incidentally tax free dividend income was generated. He would submit that such an issue does not arise in the present case so as to make the dictum of Maxopp Investment Limited (supra) applicable to the case on hand. He submitted that Maxopp Investment Limited (supra) should not be understood as laying down a proposition of law that the requirement of sub rule (1) of Rule-8D of the satisfaction to be arrived at by the Assessing Officer before applying the formula given in subrule (2) of Rule 8D is done away. He submitted that the decision of the Supreme Court in Maxopp Investment Limited (supra) does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds, i.e. interest free as well as interest bearing funds, and utilized them for making investments into securities earning tax free income and the rest applicability of Section 14A read with Rule 8D would be a....
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....tified. This issue does not arise in the present case. However, it is true that while disposing of bunch of appeals by the said judgment the Supreme Court also considered the correctness of the view of the Punjab & Haryana High Court in case of Avon Cycles Ltd. It was the case in which the Assessing Officer had invoked Section 14A read with Rule 8D and apportion the expenditure between investments made for earning tax free income and the rest. The CIT(Appeals) had deleted the entire disallowance upon which in the appeal filed by the Revenue the Tribunal restored portion of the disallowance observing that the funds utilized by the assessee being mixed funds, the disallowance is confirmed in view of the provisions under Rule 8D(2) of the Rules. This decision of the Tribunal was challenged before the High Court. The Court held that the funds utilized by the assessee were mixed funds and the interest paid by the assessee is also an interest on the investments made, was the finding of fact and therefore, no substantial question of law arises. This judgment was carried in appeal by the assessee. The Supreme Court dismissed the appeal confirming the decision of the High Court. 17. We d....