TaxTMI 
TaxTMI 
2020 (10) TMI 252
X X X X Extracts X X X X
X X X X Extracts X X X X
....evenue has proposed the following questions of law for consideration of this Court 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 investme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ofit but the same were entered into with a view to have better utilization of surplus funds available from time 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 tak....
X X X X Extracts X X X X
X X X X Extracts X X X X
....whether activities of purchase and sales of shares is to be treated as business activity or simplicitor as investment. On our 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....without having recourse to borrowed funds. The entire funding for shares/securities has been made out of capital reserves and surplus available from time to time. 23. So far 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tual funds, strategic investment and equity shares etc. Bifurcation of such capital gain is as under: Asstt. Year Gain from Mutual Fund Gain/Loss from Strategic investment Gain from Equity Shares Total capital gain 2005-06 24.32 (including LTG Rs. 10.17) 7.61 2.98 19.69 2006-07 3.47 (including LTG Rs. 1.22) 52.81 8.07 64.63 2007-08 11.46 (including LTG Rs. 2.73) 26.67 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 tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sudhan Reddy Vs. ITO, 39 taxmann.com 157 (ITAT, Hyderabad) ix) DCIT Vs. UMIL Share & Stock Broking Services Ltd., 96 taxmann.com 168 (KolTrib.) x) PCIT Vs. Bhanuprasad D. Trivedi, HUF, 87 taxmann.com 137 (Gujarat) xi) PCIT Vs. Bhhanuprasad D. Trivedi HUF, 94 taxmann.com 114 (SC) He has placed on record copies of the above decision. 30. We have duly gone through all these details. In the first test i.e. how to find out intention of the assessee that it has purchased shares for investment purpose, the 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 con....
X X X X Extracts X X X X
X X X X Extracts X X X X
....order of Tribunal that income arising from sale of shares was assessable as business income Whether special leave petition filed against impugned order was to be dismissed - Held, yes in favour of revenue. (2). CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. [100 ITR 706 (Supreme Court) Section 2(13) of the Income tax Act, 961 Business Adventure in nature of trade Assessment year 1956-57 Assessee company purchased shares and sold part of it Assessee claimed that shares were purchased by way of investment and profit amount to capital gains Tribunal found 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 he....
X X X X Extracts X X X X
X X X X Extracts X X X X
....be carrying on business. [a] The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. [b] The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. [c] The third test, which is frequently applied, is as to how 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o appreciate that borrowed funds on which interest was paid during the year and the surplus business funds were mixed-up and it cannot be accepted that the funds deployed for earning tax free income were entirely out of interest free funds, moreover, the assessee did not maintain separate account for source of funds utilized for the investment activities. In such circumstances, it was submitted that, the disallowance made by the Assessing Officer under Section 14A of the Act, 1961 was required to be upheld. 15. On the other hand, Mr. B. S. Soparkar, learned advocate appearing for the respondent assessee submitted that there 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 T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ediately preceding the date of its transfer, if the assessee desires to treat the 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." 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:- ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrived at by the CIT(A) and the Tribunal and more particularly when the CIT(A) has treated the surplus on sale of shares and securities as capital gain instead of business income by giving cogent reasons with regard to (i) the intention of the assessee, (ii) showing purchase of shares and security under the head of investment in the balance-sheet and not as stock in trade, (iii) the assessee has valued its investment and shares and securities not lower of cost or market value but at cost only,(iv) the assessee has not claimed any deduction under Section 88E of the Act, 1961 for security transaction tax paid during the year,(v) the assessee has made investment from its own 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....reme Court observed that: "Whether a particular holding of shares is by way of investment or forms part of the stock in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment." 6. In the case of Commissioner of Income-tax, Bombay v. H. Holck Larsen 1986160 ITR 67 the Supreme Court observed : "The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were riding transactions or whether these 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 s....
X X X X Extracts X X X X
X X X X Extracts X X X X
..../adventure in the nature of trade, where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits. 10. CBDT also wishes to emphasise that it is possible for a taxpayer to have two portfolios. Les an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, Le capital 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 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-i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....her instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following -- (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 arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the 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 (ie. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A) while rejecting the ground of appeal taken by the Revenue in the above discussion. Therefore, we are required to adjudicate what amount ought to be disallowed under section 14A of the Act. A perusal of the record would indicate that the ld.AO has made disallowance under two heads; (a) out of professional fees, and (b) out of interest expenses. As far as out of professional fee of Rs. 62,56,732/- is concerned, this disallowance has been confirmed by the ld.CIT(A) at Rs. 60 lakhs. It has been challenged by the assessee in ground no.4 of ITA No.1379/Ahd/2009. We have discussed this issue while dealing with the issue, whether the assessee was indulged in share trading or its activities were of investments. We have confirmed this disallowance, after taking note of the submissions made by the ld.counsel for the assessee. Out of interest expenditure, the ld.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(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A). In view of the above discussion, we are of the view that this disallowance is not discernible. Consequently, ground of appeal raised by the Revenue is rejected, whereas ground of appeal raised by the assessee is allowed. The disallowance of Rs. 19,83,858/- stands deleted. No other ground remained in the appeal of the Revenue for the Asstt.Year 2005-06. Therefore, ITA No.1661/Ahd/2009 stands dismissed." 29. The aforesaid findings arrived at by the Tribunal are in consonance with the decision of this Court in case of the assessee in Tax Appeal no.11 of 2019 with Tax Appeal no.28 of 2019 (supra) as well as the decision in case of Gujarat State Fertilizers and Chemicals (supra), wherein the Court has held as under :- 14. We had the occasion to consider the provision of Section14A of the Act as well as Rule8D of the Rules in the Tax Appeal No.100 of 2019 decided on 18/06/2019 [Principal 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Supreme Court in the case of Maxopp Investment Limited (supra), more particularly para-42 regarding the case of M/s. Avon Cycles Limited, would be applicable for disallowance under Section 14A and such disallowance is required to be assessed as per the provisions of Rule 8D only. The decision of this Court in the case of Shreno Limited, which is based on the prior decision of the Supreme Court in the case of S.A.Builders Limited (supra) is, therefore, not applicable to the cases of mixed funds. 9. On the other hand, this Tax Appeal has been vehemently opposed by Mr. Manish Shah, the learned counsel appearing for the respondent assessee. Mr. Shah submitted that the decision of the Supreme Court in the case of Maxopp Investment Limited(supra) should not be understood as clinching the issue with regard to the interpretation of Section14A of the Act and Rule 8D of the Rules. He submitted that in the case of Maxopp Investment 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... case of Principal Commissioner of Income Tax v. Shreno Limited, reported in (2018) 409 ITR 401 (Gujarat), more particularly paragraphs 16 and 17, which read thus : "16. The primary question which the Supreme Court considered in case of Maxopp Investment Ltd., (Supra) was whether disallowance of expenditure under Section 14A 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. The assessee had contended that the dominant intention for purchasing the shares was not for earning the dividend but to gain control over the business in the company in which the shares were purchased. The Supreme Court held that the purpose for which the shares were purchased was inconsequential. As long as such investment generated tax free income, disallowance of expenditure for making such investment would be justified. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the understanding and interpretation of Section14A and Rule 8D. It went on to hold that the judgment of the Supreme Court does not lay down the proposition that, the requirement of subrule (1)of Rule 8D of recording the satisfaction by the Assessing Officer before applying the formula given in sub rule (2) of Rule 8D is done away with. It clarifies that the judgment in the case of Maxopp Investment Limited does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds and utilized them for making investment into securities earning tax free income, Section 14A read with Rule 8D would be attracted automatically. The assessee has further relied on the judgment in the case of Principal Commissioner of Income Tax v. Gujarat State Financial Services Limited in the Tax Appeals Nos.1252, 1253 and 1255 of 2018 decided on 15th August 2018, which has followed the decision in the case of Shreno Limited (supra) dealing with the same issue and also an identical argument taken by the department. 18. The language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the Assessing Officer is obliged to indicate that having ....