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2018 (10) TMI 1179 - AT - Income TaxRedemption of units of mutual funds - capital gain or business income - period of holding - number of transactions - Held that - Here it is not a case where the mutual funds have been rotated again and again to purchase and sell the same which is a typical feature in a business, albeit here in this case as pointed out earlier, only 15 transactions have been undertaken for redemption of mutual funds and investment in the same mutual funds have not been made and redeemed again and again. The purchase of mutual funds has been classified as investment in the books of account and in the balance sheets and such a treatment is continuing in the subsequent periods also and at no point of time, they have been treated as stock in trade in the books of accounts. Thus, the intention of the assessee right from the day one was to make investment in the form of mutual fund and not for the trading. This is also fortified by the fact that no borrowed funds have been utilised in such an investment. The computation and the details of short-term capital shows that mutual funds were held and redeemed mainly on maturity date which again indicates that the intention for purchase of mutual funds was only for the purpose of investment and held for benefits accruing thereon. Further on perusal of the profit and loss account it is seen that there is no expenditure debited which can be said to be incidental for the business purpose. Though here in this case redemption of mutual funds are for a period less than 12 months, but it is quite clear from the CBDT circular that intention of the assessee and the treatment given by the assessee in the books has been given paramount importance. CIT (A) has rightly held that redemption of units of mutual funds is to be taxed as capital gains and not as business. - Decided against revenue. Deemed dividend addition u/s 2(22)(e) - CIT(A) has deleted the said deemed dividend in the hands of the assessee firm on the ground that firstly, such a capital contribution is not a loan or advance, because no one gets right to share the profit of the firm merely by giving loan and advance; and secondly, the assessee firm not being the registered or beneficial shareholders in these two companies, therefore, provision of deemed dividend cannot be attracted - Held that - Such a conclusion of CIT-A is based on well settled proposition of law, therefore, same is affirmed. However, CIT(A) has given direction to the AO to examine the issue of deemed dividend in the hands of individual persons. In so far as the direction of the Ld. CIT(A) to delete the addition of deemed dividend in the hands of the firm the same is affirmed, but in so far as direction given to the AO, we are not interfering in such a direction, because that issue if at all could be examined if only any such action is taken in the hands of the individuals and not otherwise. Accordingly, the grounds raised by the revenue on this score are dismissed.
Issues Involved:
1. Classification of income from sale of shares/mutual funds as 'capital gain' or 'business income'. 2. Taxation of deemed dividend under section 2(22)(e) in the hands of the assessee firm. 3. Additional ground regarding the CIT(A)'s directions under section 150(1) of the Income Tax Act, 1961. Detailed Analysis: Issue 1: Classification of Income from Sale of Shares/Mutual Funds The Revenue's appeal for the assessment year 2006-07 contended that the CIT(A) erred in directing the AO to treat the profit from the sale of shares/mutual funds under the head 'capital gain' instead of 'business income'. The AO argued that the assessee's core activity was investing in mutual funds, which should be treated as business income. The assessee firm, formed with the intent to invest in equity and debt funds, showed a gain of ?4,88,00,000 on redemption of mutual funds as short-term capital gain. The AO, relying on the volume and frequency of transactions, classified the income as business income. However, the CIT(A) noted that the transactions were not frequent and the investments were made out of own funds, classified as 'investment' and not 'stock-in-trade'. The CIT(A) concluded that the intention was to invest, not trade, and thus, the gains should be treated as capital gains. Upon review, the Tribunal upheld the CIT(A)'s decision, emphasizing that the transactions were limited and the investments were held as 'investment' in the books, not as 'stock-in-trade'. The Tribunal also noted the lack of borrowed funds and the classification of mutual funds as investments. Consequently, the Tribunal dismissed the Revenue's appeal, affirming that the gains from the redemption of mutual funds should be taxed as capital gains. Issue 2: Taxation of Deemed Dividend under Section 2(22)(e) The AO added ?21,08,38,530 as deemed dividend under section 2(22)(e), arguing that the assessee firm benefited from funds provided by its partner companies through capital contributions. The CIT(A) found that the assessee firm had four partners, including two companies, and noted that the firm had not taken any loans from these companies. The CIT(A) concluded that the capital contributions by the partner companies were not loans or advances but investments for sharing profits, and thus, not taxable as deemed dividends in the hands of the firm. However, the CIT(A) directed the AO to consider remedial action in the hands of the individual shareholders, Shri Pradeep Wig and Mrs. Neera Wig. The Tribunal upheld the CIT(A)'s decision, stating that the capital contributions were commercial transactions and did not fall within the ambit of deemed dividends under section 2(22)(e). The Tribunal affirmed the deletion of the addition in the hands of the firm but did not interfere with the CIT(A)'s direction to the AO regarding individual shareholders. Issue 3: Additional Ground Regarding CIT(A)'s Directions under Section 150(1) The Revenue raised an additional ground, arguing that the CIT(A) should have explicitly mentioned that his directions were under section 150(1) of the Income Tax Act, 1961. The Tribunal found no substance in this ground, stating that the power to give such directions lies with the CIT(A), and the Tribunal cannot modify such directions to be read in a particular manner. Thus, the additional ground raised by the Revenue was dismissed. Cross Objection by the Assessee The assessee's cross objection argued that no action should be taken by the AO in the hands of the shareholders based on the CIT(A)'s directions. The Tribunal found no merit in this plea, noting that the CIT(A) had merely suggested that the AO may consider remedial action as per law. Therefore, the cross objection by the assessee was dismissed. Revenue's Appeal for Assessment Year 2011-12 The Revenue's appeal for the assessment year 2011-12 involved a similar issue of classifying income from the sale of shares/mutual funds as 'capital gains' instead of 'business income'. The Tribunal applied the same reasoning as in the earlier appeal, affirming that the gains from mutual funds and long-term shares should be taxed as capital gains. Consequently, the appeal for the assessment year 2011-12 was also dismissed. Conclusion In conclusion, the Tribunal dismissed both the appeals of the Revenue and the cross objection of the assessee, affirming the CIT(A)'s decisions regarding the classification of income from mutual funds as capital gains and the non-applicability of deemed dividend provisions under section 2(22)(e) in the hands of the assessee firm. The Tribunal also upheld the CIT(A)'s directions regarding potential remedial action for individual shareholders.
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