9911796707
TMI Blog2014 (1) TMI 1534X X X X Extracts X X X X X X X X Extracts X X X X ..... (8) TMI 77 - BOMBAY HIGH COURT] - Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective - Since the assessment year involved is 2007-08 therefore I hold that Rule 8D will not apply - In certain recent decisions Hon'ble ITAT Kolkata it has been held that expenses to the tune of 1% of the exempt income can be disallowed u/s. 14A - Decided against Revenue. Disallowance of interest payment u/s 14A - Held that:- The payment of interest amounting to ₹ 92,69,529/- has direct nexus and is directly attributable to a particular income, i.e., business income on shares sold held as stock-in-trade - The provisions of Rule 8D(2)(ií) are very clear that the expenditure on account of payment of interest would be covered in the said Rule only if it ís not directly attributable to any particular income or receipt - The interest payment cannot be considered under Rule 8D(2)(ii) - The CIT(A) has rightly deleted the addition - Decided against Revenue. - I.T.A No. 1180/Kol/2011, C. O. No. 07/Kol/2012, I.T.A No. 1281/Kol/2010, I.T.A No. 1246/Kol/2010, I.T.A No. 1217/Kol/2009, I.T.A No. 1139/Kol/2009 - - - Dated:- 27- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in schedule 11 of the P L Account. Out of these other incomes, the profit consists of sale of investment mainly which was declared by assessee as short term capital gain, the AO during the course of assessment proceedings was of the view that due to frequency of transactions in shares and the nature of transactions amounted to trading rather than investment. According to AO, the intention of the assessee is clear that the profit earning from selling of shares is the motive and according to him, this is business income. Even the frequency and timing of collection of shares, according to him, suggests that transactions are in the nature of adventure in the trade. Accordingly, he assessed the income as business under the head share trading. Aggrieved against the order of AO, assessee preferred appeal before CIT(A), who after considering evidences and submissions of the assessee decided the issue in favour of assessee by observing as under: "(5) I have considered the submission of the appellant and the reasoning given by the A.O. in the assessment order. I have also gone through the assessment record and judicial pronouncements relied upon by the A O and the appe1ait During the rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ips namely Birla Corporation Ltd, Birla Eriction Optical Ltd and Gateway Distriparks Ltd., which were purchased by the appellant during the Financial year 2004-05 and as on 31-03-2005, these shares were shown as investment in the balance-sheet. In my opinion, there is no reason to treat the shares accepted as "investment" in preceding year as "stock in trade" in the subsequent year. Further, the A.O. is not correct in his observations that the appellant's intention was only to earn profit on sale of shares and not to earn the dividend. The financial statement of the appellant show that he has also earned the dividend of Rs.13,14,439/- during the relevant previous year. (1) The Supreme Court in the case of C.I.T. vs. Madan Gopal Radheylal (73 ITR 652) held that there cannot be a presumption that every acquisition by a dealer in a particular commodity is an acquisition for the purpose of his business. In each case the intention is to be gathered from the facts of the case and from the conduct of the assessee acquiring the commodity and his dealings with the same. As per the ratio laid down in this decision of the Supreme Court, there cannot be presumption that where an assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment purpose. The intention of the appellant is apparent from the financial statements and books of account. A number of shares were obtained through IPO and similarly there were shares which were carried forward from the investment Account of preceding years. (5.4) The decision of the Authority for Advanced Ruling (AAR) in 288 ITR 641 also advances the appellant's claim. In that case the applications were filed for advance rulings by number of foreign institutional investors (FII) who had invested in shares and securities in large number of Indian companies. The investments were made after obtaining permissions from Reserve Bank of India under FEMA and it was in conformity with SEBI regulations. On scrutiny of applications filed by various applicants the Authority noted that non-resident entities from the jurisdiction where capital gains was exempt from taxes, claimed the gains from transaction of sale and purchase of securities on Indian Stock market as capital gains. While in respect of identical transactions some other institutions treated the income arising from such transaction as business profit. These entities further claimed that they did not have permanent establishmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted their entire resources to the earning of income by way of trading in securities and it was so done after the study and research in a business like manner and merely because some securities were held by the applicants for relatively longer periods, the income from transactions in securities could not be considered as capital gains. The AR considered these submissions of the FIIs but ultimately held that the FIIs had made purchase and sale of securities of Indian companies as per SEBI regulation for investment purposes. AAR held that as per the scheme of the Govt. FIIs had acquired shares and securities as investments and not as stock in trade. The authority noted that the books of accounts of the applicants were not produced and examination of entries in books of account of the applicant was relevant in considering whether the securities were held as stock in trade or investments. The Authority particularly observed that they had no clue about the maintenance of the accounts of the applicant and if these were produced; then from the accounts Authority would have been in a position to ascertain whether the shares were entered in the books of account as stock in trade or capital a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re is regularity of transaction and the volumes are large in both the cases. In particular in the appellant's case the evidence on record established that clear distinction was always maintained between the trading stock, if any and investment. In the circumstances, applying the ratio laid by AAR in 228 ITR 641 I hold that the gains derived on transfer of investments was assessable as capital gains and not as business profit. (5 .6) I also find that the view taken by me in the present case is supported by the decision of the I.T.A.T., Kolkata in the case of DCIT, Central Circle-27, Kolkata vs. Reliance Trading Enterprises Ltd. in I.T.A. No.944 (KOL) of 2008 dated 03.10.2008. In this case the assessee company was a trader as well as an investor in shares. For the year under consideration the assessee has shown short term and long term capital gain aggregating to Rs.74,89,622/- being the profit on sale of investment shares. However, the A.O. had converted the income shown under the head capital gain to business income. In the first appeal, the claim of the assessee was allowed by the C.I.T.(A). On further appeal by the Revenue in the ITAT, Kolkata, the order of the C.I.T. (A) was u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions of l.T.A.T., Mumbai Delhi Benches as well as decision of Madras High Court in the case of C.I.T. vs. Ramaamirtham (2008) 217 CTR 206. In the said decisions, on which the appellant has placed reliance, the assessees were all reputed stock brokers who regularly carried on broking and share dealing business but simultaneously held shares by way of investments. On transfer of investments the assessee earned capital gains which were assessed as business income. Considering differentiation maintained in the books of accounts between the trading stock and investment, the High Court and Tribunal Benches held that profit derived on transfer of investment was assessable as capital gain. (5.8) In the case of JCIT Vs. Dinesh Kumar Gupta reported in (2005)2 SOT 126 (Delhi), the assessee derived business income through his proprietary concern which dealt with motor parts and also did share business. He also derived income from buying and selling of shares in his individual capacity, which he declared as capital gain. The AO held that since those shares had been purchased with a profit motive, same were in nature of trade. In the first appeal, it was held by the CIT(A), that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nitial Public issue of the Company and were even not purchased from the market. b) That short term capital gain amounting to Rs.41,85,025/28 in following three shares was out of shares brought forward from last year which have been accepted as investment by the Department Birla Corporation Ltd. Rs. 7,601/- Birla Eriction Optical Ltd. Rs. 2,058/- Gateway Distriparks Ltd. Rs.41,75,366/28 Rs.41,85,025/28" In the immediate preceding year, these shares were held by assessee as investment and revenue has accepted the same. In the facts of the present case the assessee was holding these shares as investment and the same was shown by the assessee in his books of account as investment in earlier years and this stand of the assessee was accepted by the Department and in that year the department has not disputed that these are investments. If the purchases of shares are accepted as investments, at the time of sale thereof, income arising on sale has to be accepted as capital gains and it cannot be assessed as business income merely for the reason that quantum is high or number of transaction are high. As regards to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue has accepted the similar transactions in the hands of the assessee being taxed as short-term capital gains also goes in favour of the assessee especially in view of the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang referred to supra. In the above circumstances, we are of the view that the finding of the ld. CIT(Appeals) on this issue is on right footing and does not call for any interference." 6. We find that this issue is squarely covered from the earlier years in assessee's own case wherein revenue has accepted the transactions from sale of shares and income arising from the transactions as capital gains. Hence, in view of the above facts and circumstances and legal position, we confirm the order of CIT(A). This issue of revenue's appeal is dismissed. 7. Now coming to the same issue of whether income from the share transactions is business income or capital gains, this issue is raised by revenue in ITA No. 1281/Kol/2010 for AY 2007-08 as under: "The assessee disclosed a profit of Rs.1,28,02,982/- derived by the assessee from sale and purchase of shares and credited the same in the profit of loss a/c. However in the computation sheet this pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee preferred appeal before CIT(A), who allowed the claim of the assessee vide para 7 of his appellate order as under: "7. I have considered the submission of appellant and perused the order framed by the AO. During the relevant previous year, the appellant has earned interest income of Rs.39,97,029/-. He has also paid interest of Rs.8,79,841/-. As per the AO the income earned by way interest is to be taxed u/s. 56 of the Act under the head "Income from other sources", and not u/s. 28 of the Act as claimed by the appellant. On perusal of Profit Loss A/c for the year ended on 31.03.2006, it was observed that besides the profit on sale of investment, the main source of income of the appellant was "Interest income". In the immediately preceding year also i.e. A.Y.2005-06, the interest income was the main receipt of the appellant and he had credited the interest of Rs.50,46,193/- for the said year. For the year ended on 31-03-2005, the appellant had given the Loans and advances of Rs.6,94,84,922/- while as on 31-03-2006, the said amount was Rs . 7,00,43,619/-. During the course of appellate proceedings, the appellant has filed copies of assessment orders for A.Y.2003-04, 2004-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 12 of the Income-tax Act of 1961". The Hon'ble Delhi High Court in the case of Director of Income-tax (Exemption) vs. Escorts Cerdiac Diseases Hospital Society reported in 300 ITR 75, following the decision of Supreme Court in 193 ITR 321 (Supra) has held as follows: "Learned counsel for the Revenue submits that the principle of res judicata would not apply and that each assessment order has to be considered on its own merits. We are in agreement with this but when there is absolutely no change in facts, mere change of opinion will not entitle the Revenue to pick up and choose the assessment year in which an appeal should be filed. The principle of consistency, which was propounded by the Supreme Court in Radhasoami Satsang vs. CIT [1992] 193 ITR 321 has been followed by this Court in several cases. Since there is no change in the facts and circumstances from assessment year 1988-89 till 1997- 1998, we are of the view that the Revenue must1follow a consistent pattern and when it has granted the benefit of exemption under sections 10(22A) and 11 of the Act, it cannot be permitted to change its opinion mere1y on the whims and fancies of the Assessing Officer without any notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts of the case. In my opinion, on perusal of the financial statements of the appellant for the relevant year as well as for earlier years it could be inferred that the appellant has carried out an organized activity to earn the interest income. The manner and the conduct of the appellant is similar to the activities carried out in the business of the money lending. The appellant has shown substantial amount of turnover in this activity and year after year, the appellant has earned a big amount of interest form such activity. The books of account maintained for the interest earning activities has been audited u/s.44AB of the Act. Moreover, the appellant has correctly relied on the assessments completed by the A.O for the earlier years wherein the interest income was accepted and assessed as business income. In view of above facts and the decisions of Hon'ble Supreme Court and High Court(Supra), it is held that the interest income earned by the appellant is taxable u/s.28 of the Act as Income from business. The ground nos. 6 and 7 are allowed." Aggrieved, revenue came in second appeal before tribunal. 12. We have heard rival submissions and gone through facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed during the course of assessment proceedings that it has claimed expenditure qua this exempted income, hence applying the provisions of section 14A read with Rule 8D made a disallowance to the extent of Rs.5,76,407/-. Aggrieved assessee preferred appeal before CIT(A), who following the decision of Special Bench of ITAT, Mumbai in the case of Daga Capital Management Pvt. Ltd. in ITA No. 8057/Mum/2003 confirmed the addition. Aggrieved, now assessee is in appeal before us for both the years. 15. We find that this issue is squarely covered in favour of assessee and against revenue for both the years. We find that the relevant assessment year involved is 2006-07 and 2007-08 and Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT [2010] 328 ITR 81 (Bom.), wherein it is held that Rule 8D of the Rules as inserted by the I. T (Fifth Amendment) Rules, 2008 w.e.f. 24.3.2008 is prospective and not retrospective. The CIT(A) restricted the disallowance at 1% of the exempted income u/s. 14A of the Act by observing as under: "I find that the decision of Daga Capital has been reversed by Hon'ble Bombay High Court in their above mentioned order dtd. 12.08.2010. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act and the disallowance as made in accordance with Rule 8D(2)(iii) of the Income Tax Rules is beyond and in excess of the provisions of Section 14A of the Act and as such is liable to be deleted." 17. Briefly stated facts are that the assessee claimed exempted income at Rs.32,41,335/-, from the following sources: "A. Dividend - Rs.28,10,418/- B. Interest on PPF - Rs. 3,34,867/- C. Tax Free Bond - Rs. 96,050/-" The AO noticed that the assessee has suo motu disallowed a sum of Rs.32,452/-, expenditure in relation to exempted income. The AO was of the view that in view of the provisions of section 14A of the Act relates to disallowance of expenditure incurred in relation to income not includible in total income are attracted in the assessee's case as a result of exempted income. He computed disallowance by invoking Rule 8D of the Rules. The first disallowance was made under Rule 8D(2) i.e. the expenditure directly related to exempted income at Rs.1,721/-. The second disallowance under Rule 8D(2)(ii) of the Rules at Rs.55,47,700/- i.e. interest expenditure. The third disallowance being average value of investment under Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, i.e., business income. On careful consideration of the facts and in law, I find force in the submission of the appellant. On perusal of assessment records, it is observed that the appellant has filed a letter dt. 13/12/2010 before the A.O. wherein he submitted a statement showing utilization of borrowed funds to substantiate his claim that funds were utilized in applying the shares in IPO which were in trading portfolio and part of them were sold during the year attracting tax at normal rate. The copy of said letter and the statement were also filed during the course of appellate proceedings. It is observed that the appellant had applied for shares of Jyothy Laboratories Ltd. in IPO and 8115 shares were allotted to him. After allotment, 4115 shares were sold by the appellant and 4000 shares were taken in stock-in-trade. The appellant earned profit of Rs.8,68,709/- as business profit. In the IPO of Mundra Port Sez Ltd., 3727 shares were allotted out of which 2140 shares were sold leaving stock-in-trade of 1587 shares. The business profit earned by the appellant was Rs.11,00,953/-. In the case of Omaxe Ltd., 12562 shares were allotted and the entire shares were sold by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14A read with Rule 8D works out to Rs.6,94,748/-, i.e. (Rs.1,721 + Rs.2,58,282 + Rs.4,34,745). The A.O. is directed to restrict the disallowance u/s. 14A at Rs.6,94,748/-. The ground no. 1 is partly allowed." Aggrieved, against restriction of addition at Rs. 6,94,748/-, revenue came in appeal before us and assessee filed cross objection. 18. We have heard rival contentions and gone through facts and circumstances of the case. First the issue of revenue's appeal is that the CIT(A) has wrongly deleted the disallowance made by AO under Rule 8D(2)(ii) of the Rules at Rs.55,47,700/-. Here the assessee before the lower authorities and even before us explained that out of the total interest payment of Rs.97,22,656/-, the interest aggregating to Rs. 92,69,529/- was paid to Brila Global Finance Co. Ltd., DSP Merill Lynch Capital Ltd. and J.M. Financial Products Pvt. Ltd. is relating to loans taken for IPOs shares, which were business transaction and taken in stocks. To prove this point the assessee explained that the shares which were allotted in these IPOs were sold during the year under appeal and profit arising out of the same at Rs.87,42,284/- was disclosed as business profit. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
