TaxTMI 
TaxTMI 
TaxTMI 
2024 (1) TMI 761
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.... dated 08.12.2008. Significantly, the assessment order dated 08.12.2008 was framed under Section 143(3) of the Act, albeit after scrutiny. The CIT, however, took the view that the said assessment order was both erroneous and prejudicial to the interests of the revenue and, in this regard, flagged two issues. First, the gain made by the respondent/assessee on redemption of mutual funds should have been treated as business income, not short-term capital gain. Second, the capital contribution received by the respondent/assessee should be taxed in its hands as deemed dividend under the provisions of Section 2(22)(e) of the Act. 1.3 The conclusion arrived at by the CIT in his order passed under Section 263 of the Act was, as indicated above, taken in appeal to the Tribunal by the respondent/assessee. The Tribunal, while holding that the CIT had correctly flagged the two issues referred to hereinabove, allowed the appeal of the respondent/assessee on the ground that even where the CIT had rendered "specific finding on certain issues", he had directed the Assessing Officer (AO) to reframe the assessment order as per the correct provisions of law and after giving adequate opportunity of h....
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....had been rotated. The respondent/assessee had concluded only 23 redemption transactions concerning mutual funds, demonstrating that the respondent/assessee intended to invest in mutual funds and not engage in a business activity. (iv) The purchase and redemption of mutual funds was undertaken only vis-à-vis 15 mutual funds during the period in issue. The respondent/assessee did not repeatedly transact and redeem the same mutual funds. The mutual funds were, thus, not churned again and again by the respondent/assessee. (v) That a commercial motive was not established, as the respondent/assessee had invested in mutual funds to earn dividends and appreciation in value. This was evident as the respondent/assessee had not repeatedly invested in the same mutual funds. (vi) The mutual funds which were doing well were not on account of volatility in the market. The respondent/assessee did not enter the futures/index/intra-day (non-delivery) trading. Such transactions are executed when an investor seeks to reap the harvest of a volatile market. (vii) The respondent/assessee had acquired and redeemed mutual funds and not entered into sale transactions as they were not free....
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....). Accordingly, the deemed dividend of Rs.21,08,38,530/- is hereby deleted. Consequential relief shall be given by the AO. The AO may consider taking remedial action as per law in assessing the deemed dividend of Rs.21,08,38,530/- in relevant AY in the hands of registered & beneficial shareholders; Mr. Pradeep Wig and Mrs. Neera Wig. In view of the above finding, ground no. 4 succeeds and ground no. 5 fails." 4. Against this order, cross-appeals were preferred concerning the AY in issue, i.e., AY 2006-07. The Tribunal, in this round, i.e., the second round, dealt with not only the appeals instituted by the appellant/revenue and the respondent/assessee for AY 2006-07 but also adjudicated the appeal of the appellant/revenue concerning AY 2011-12. 5. Insofar as AY 2006-07 was concerned, the Tribunal adjudicated the two issues referred to hereinabove and an additional ground raised by the appellant/revenue pertaining to Section 150(1) of the Act. The appellant/revenue wanted the Tribunal to hold that the observation made by the CIT(A) in his order dated 27.01.2014 that the AO may consider remedial action, as per law, in assessing the deemed dividend amounting to Rs. 21,08,38,530/-, ....
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.... the period in issue, the respondent/assessee had earned a profit of Rs. 4,31,96,995/- and dividend amounting to Rs. 1,74,24,717/-. Thus, the motive was to earn profit on transactions. The dividend earned by the respondent/assessee was incidental to the trade in mutual funds carried out by it. (ii) Merely because mutual funds were shown as "investment" in the books of accounts, the gain made on its transfer, offered for tax as capital gain, would not change the nature of the income. (iii) If the transactions were examined bearing in mind the time when entry and exit were made qua a particular mutual fund, it would show that the respondent/assessee intended to maximize profit. Thus, after the profit had been booked as a dividend, the mutual fund (representing securities) was sold. (iv) The Tribunal failed to appreciate that although mutual funds (which are representative of securities) do not involve direct inter se trade between two persons through the stock exchange, such transactions are recognized as a business activity. Therefore, the volume of transactions and the quantum of investments should have led to the conclusion that the respondent/assessee was trading in mutu....
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....es of a company are held in the name of a firm's partner, since the firm cannot be registered as a shareholder, the partnership firm can be treated as a registered shareholder. Given this position, the transaction in question falls within the ambit of Section 2(22)(e) of the Act and, hence, was assessable in the hands of the respondent/assessee. 8.7 In support of the assertions above, reliance was placed on the following decisions: CIT vs. National Travel Services (2012) 347 ITR 305; National Travel Services vs. CIT (2018) 3 SCC 95 and Gopal & Sons (HUF) vs. CIT (2017) 3 SCC 574. 8.8 Lastly, the Tribunal failed to appreciate that it had the power to treat the observation made by CIT(A), that the capital contribution could be treated as deemed dividend in the hands of Mr Pradeep Wig and Mrs Neera Wig, as a direction under Section 150(1) of the Act. A plain reading of the said provision would show that any authority could issue this direction in a proceeding carried out under the Act. 9. In rebuttal, Mr S Ganesh submitted that no interference with the impugned order was required. According to Mr Ganesh, both the CIT(A) and the Tribunal had returned findings of fact. In....
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....de as against investment. The courts have enunciated this principle in several decisions, including Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal, [1969] 73 ITR 652 (SC); P.M. Mohammed Meerakhan v. Commissioner of Income-tax, Kerala, 73 ITR 735 (SC); Commissioner of Income Tax v NSS Investments Ltd 2007 (277) ITR 149 (Mad); Commissioner Of Income Tax vs Rewashanker A. Kothari (2006) 201 CTR Guj 510 and CIT vs Amit Jain 2015:DHC:2076-DB. 12. The CIT(A) and the Tribunal, after appreciating the material on record, have concluded that the transactions concerning mutual funds were in the nature of investment and not motivated by trade. In this context, the CIT(A) and the Tribunal, among other things, looked at the transactions from the following prism: quantum of trade, value, purpose, the period for which mutual funds were held, and how disclosure had been made in the books of accounts/financial statements. For the sake of brevity, we are not setting forth the findings returned on the said aspects by these statutory authorities once again. Reference in this regard has been made in the paragraphs above. None of these findings have been assailed before us as being perverse.....
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....res. It is on this account that the AO held that Rs.21,08,38,530/- should be taxed as deemed dividend in the hands of the respondent/assessee. 17. It is also not disputed that apart from KPFSE and KICIPL, the other two partners, Pradeep Wig (HUF) and Mrs Neera Wig, had not made any capital contribution to the respondent/assessee. What also comes to the fore is that even though Pradeep Wig (HUF) and Mrs Neera Wig had 20% and 10% shares, respectively, in the profit of the respondent/assessee, they did not have to bear the burden of any loss; the loss, if any, had to be borne by the partner companies, i.e., KPFSE and KICIPL. What has clearly emerged from the facts found by the Tribunal is that Mr Pradeep Wig and Mrs Neera Wig had substantial equity stakes in KPFSE and KICIPL. In KPFSE, Mr Pradeep Wig and Mrs Neera Wig cumulatively held 83.34% of the shares. In their individual capacity, Mr Pradeep Wig and his wife, Mrs Neera Wig, held 41.67% of the share capital. Insofar as KICIPL was concerned, as on 31.03.2006, Mr Pradeep Wig and Mrs Neera Wig together held 99.92% of the total shareholding. Individually, Mr Pradeep Wig held 46.99%, while Ms Neera Wig had an equity stake of 52.93%. ....
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.... shown as shareholders in the register of members maintained by JPL. It is in this context that the provisions of Section 2(22)(e) of the Act were invoked. However, as would be apparent from the facts, in the instant case, the two companies, i.e., KPFSE and KICIPL, had made capital contributions to the respondent/assessee. Since no money had been loaned or advanced to the respondent/assessee, both the CIT(A) and the Tribunal came to a conclusion, as noticed above, that if at all, the additions could be made only in the hands of the individual partners, after affording them an opportunity of hearing. The capital contribution on a plain reading of the section cannot be treated as a 'loan' or 'advance'. 20.2 The judgment rendered by the Supreme Court in Gopal & Sons (HUF) vs. CIT is also distinguishable on facts. This was a case where the assessee was an HUF. During the relevant AY, the assessee HUF had received advances from a company named GS Fertilizers Private Ltd. (GSFL). The Karta of the assessee HUF was entitled to 37.12% of the shareholding in GSFL. This case is also distinguishable as the assessee HUF had received monies from GSFL in the form of 'advances....