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2009 (9) TMI 950 - AT - Income TaxDisallowance u/s.14A - investments in shares and mutual funds - interest free funds - the assessee is engaged in the business of manufacturing of washing powder, detergent cakes, tooth paste, etc. in the name of Hipolin . It was explained to the AO that the assessee has made investment in shares out of the huge interest-free funds available in the form of paid up share capital and accumulated reserves. The total investment in shares is less than 1% of the said interest-free funds. AO disallowed proportionate expenses which amounted to ₹ 53,027/- which included interest of ₹ 9,403/- and administrative expenses of ₹ 43,624/-. the Ld CIT(A) deleted the addition. HELD THAT - the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that it has to be first presumed that the investment were made out of interest-free funds available with the assessee. Therefore, no disallowance is called for. It is an undisputed fact that the assessee has substantiate share capital and reserves. Therefore, it cannot be said that investments in shares were made out of interest-bearing funds. After hearing the parties, we decline to interfere with the order of the Learned CIT(Appeals), which is confirmed. Hence, this ground of Revenue is dismissed. Taxability of Income - purchasing and selling shares - Long term capital gains or business income - issued a show-cause notice - AO treated a sum of ₹ 15,80,202 (Rs.7,85,405 7,94,796) as business income and taxed it accordingly. the Ld CIT(A) deleted the addition by holding that the scale of activities is not substantial and the assessee has shown the shares as investments in this balance-sheet. Dealing in shares is not a principal object of the appellant as can be seen from Memorandum of Association. HELD THAT - The assessee then referred to the decision of the ITAT Ahmedabad Bench A in the case(s) of ACIT vs. Himanshu J.Shah Others in ITA wherein reliance was placed on the decision of ITAT Lucknow Bench in the case of Sarnath Infrastructure (P) Ltd. Vs. ACIT 2007 (12) TMI 261 - ITAT LUCKNOW-B , wherein it was held that if shares are transferred in the name of the assessee, then presumption is that the assessee does not intend to deal in shares. After considering above rulings we cull out following principles, which can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes we find that - (1) the assessees did not have dealings in large number of scripts or large frequency of transactions which would warrant interference that it is trader. (2) in the books of accounts the assessees has never treated the shares as stock in trade. Return of income have been filed prior to the search showing them as investments and profit there from as capital gains; (3) the assessees have retained the shares for enjoying appreciation in value and not for the purpose of realization of profit. There is apparently no commercial motive which is an essential ingredient to be a trader. It is clearly shown by them in the returns of income filed that they are enjoying dividend income from holding shares as investment; (4) It is not shown by the Revenue that stock of shares have been valued at cost or market price whichever is low but they have been valued at cost while computing the capital gains; (5) the assessees have apparently discharged the primary onus by keeping record of investment showing holdings only as investment and not stock in trade. The primary onus has not been rebutted by the Revenue. The case of the Revenue is thus based merely on suspicion and on number of transactions carried in one or two years though which are not frequent if we spread them on monthly basis as observed by us above; (6) assessees have always taken the delivery of shares and made them registered. It has been held in Sarnath Infrastructure (P) Ltd v. ACIT 2007 (12) TMI 261 - ITAT LUCKNOW-B that once shares are registered in the name of the assessee, intention is clear that it is an investment and not a trade; (7) There is no material on record to suggest that the assessee has fulfilled the legal requirement for dealing as a trader in shares. These decision has been followed by the Mumbai Bench in the case of Gopal Purohit v. JCIT 2009 (2) TMI 233 - ITAT BOMBAY-G and CBDT in Circular No.4/2007 dt.15.6.2007 has laid down the principles for holding as to when profits earned from transactions in share should be held as business or should be treated as investment. Thus, the perception of the Department is that the nature of transactions in shares is trading in the case of the assessee on the ground of re-shuffling its portfolio is misplaced because once the assessee got the shares registered in its name, it has discharged the primary onus and it is now with the Revenue to show that in spite of shares being transferred/registered in the name of the assessee, the assessee could still be dealing in shares. This could be done by showing that frequency transaction is quite high or it is complying with the legal requirements of being a trader in shares. Having not collected adequate material, we are of the view that the assessee cannot be treated as trader in shares particularly when its main business is in manufacturing and trading of detergent. It is also not correct to say that Memorandum and Articles of Association has not authorized the assessee to make investment in shares and securities. Accordingly, we hold that the Learned CIT(Appeals) was justified in treating the gain in shares as capital gain and not as business income . In the result, appeal filed by the Revenue is dismissed.
Issues Involved:
1. Disallowance under Section 14A. 2. Classification of gains from shares as capital gains versus business income. 3. Confirmation of disallowance of interest pertaining to an advance given to Wonderwave Enterprises (P) Ltd. Detailed Analysis: 1. Disallowance under Section 14A: The Revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 53,027 made under Section 14A. The Assessing Officer (AO) had disallowed proportionate expenses, including interest and administrative expenses, arguing that the investments generating exempt income were funded from interest-bearing funds. However, the CIT(A) found that the investments were made from the company's substantial interest-free funds. The AO failed to prove a nexus between the investments and interest-bearing funds. The ITAT upheld the CIT(A)'s decision, referencing the Bombay High Court ruling in CIT vs. Reliance Utilities Power Ltd., which presumes investments are made from interest-free funds if available. Consequently, the ITAT dismissed the Revenue's appeal on this ground. 2. Classification of Gains from Shares: The AO treated the gains from shares as business income, citing criteria like the intention behind purchases, the scale of activity, and the frequency of transactions. The assessee argued that the investments were made from surplus funds and were shown as investments in the balance sheet, not as stock-in-trade. The CIT(A) agreed with the assessee, noting that the primary business was manufacturing, not trading in shares, and the shares were held as investments. The ITAT referred to multiple judicial precedents and CBDT Circular No. 4/2007, which distinguish between trading and investment activities. The ITAT concluded that the assessee's transactions did not exhibit the frequency or characteristics of trading and upheld the CIT(A)'s decision to treat the gains as capital gains. 3. Disallowance of Interest Pertaining to Advance: In the cross-objection, the assessee challenged the CIT(A)'s confirmation of the disallowance of Rs. 27,590 in interest related to an advance given to Wonderwave Enterprises (P) Ltd. However, this ground was not pressed by the assessee during the hearing, leading to its dismissal by the ITAT. Conclusion: The ITAT dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all counts. The gains from shares were correctly classified as capital gains, and the disallowance under Section 14A was rightly deleted. The assessee's cross-objection concerning the disallowance of interest was dismissed as it was not pursued. The judgment emphasizes the importance of the nature and intent of transactions in determining their tax treatment and the necessity for the AO to substantiate claims with evidence.
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