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TMI Blog2016 (6) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed by the revenue or income under the head ‘capital gain’ as contended by the assessee? - Held that:- The income in question has to be assessed under the head “Short Term Capital Gain” as declared by the Assessee Disallowance u/s 14A - Held that:- As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore no disallowance of interest expenses ought to have been made. A perusal of Balance sheet of the Assessee as on 31.3.2008 will show that the Assessee had own funds of 34.84 Crores and investment were acquired at cost of 27.97 Crores. Therefore the disallowance of interest expenses of 16,04,669/- is directed to be deleted. As far as disallowance of other expenses under Rule 8D(2)(iii) of the Rules i.e., disallowance of other expenses is concerned income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The Assessee had not claimed any expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8,815.00 1140,79,607.00 211,43,027.00 ADD DEPRECIATION(AS PER ACCO 11,47,217.00 Expenses disallowed u/s 14A 825,00,965.00 Dividend Stripping u/s 94(7) 37,924.00 15,14,479.00 BUSINESS INCOME 226,57,496.00 CAPITAL GAINS TOTAL CAPITAL GAINS 1089,05,015.00 LONG TERM CAPITAL GAINS (EXEMPT U/s 10) 825,00,965.00 SHORT TERM CAPITAL GAINS 264,04,050.00 TAXABLE AT SPECIAL RATE @ 10% U/S 111A 264,04,050.00 TAXABLE INCOME 490,61,546.00" 4. The AO analyzed the transaction which gave rise to long term capital gain and short term capital gain declared by the assessee in the return of income. He analysed the duration of holding, frequency of transactions and conduct of the assessee and came to the following conclusions. :- "The above transactions are summarized in table-1 and table-2. In table-1, all the transactions which have been claimed by the assessee as Short Term Capital Gains have been summarized. In table-2, all the transactions which were claimed as Long Term Capital Gains by the assessee have been summarized. Table -1 Name of the scrip No.of shares Purchase consideration Sale consideration Profit Bank Rajas 15000 5,72,290/- 12,98,6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1438 29,796/- 1,53,147/- 1,23,350/- Grand Total 335415 4,09,99,926/- 12,35,00,890/- 8,25,00,963/- In addition to the above, the trading result as disclosed by the assessee is summarized as under :- Table -3 Sale of Shares Rs.14,29,53,662/- Add: Increase in stocks ₹ 2,72,01,653/- Rs.17,01,54,227/- Less : Purchase of shares Rs.16,76,21,660/- ₹ 25,33,615/- The total expenses debited in the account is about 2.19 crores. If the table-I, table-2 and table-3 are compared, it is observed that the assessee company has misclassified the profit out of purchase and sale of shares to reduce its tax liability. In table-I, the assessee has misclassified the profit of ₹ 2,64,04,050/- as Short Term Capital Gain to get the benefit u/s.111 A relating to Special Rate of Taxes. In table-2, the assessee has misclassified the profit as Long Term Capital Gain to get the benefit of tax exemption. The Table-S reveals that the sales and purchases of shares without any substantial profits have been classified as trading activities. The assessee has also manipulated its accounts so that Explanation below Section 73 is not attracted in its case. " 5. Based on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me reasons given for concluding that gains on sale of shares described in Table-I as giving raise to income from business, the AO held that income from purchase and sale of shares described in Table-2 is also income from business. The AO thus held that the profit of ₹ 2,64,04,050/- as shown in Table-I and the profit of ₹ 8,25,00,963/- as shown in Table-2 were to be treated as the business income of the Assessee. 6. Aggrieved by the order of the AO, the assessee preferred appeal before CIT(A). The contention of the assessee before CIT(A) was that (a) that the assessee over a number of years was carrying on business of dealing in shares and securities and was also making investments of its surplus capital in shares and securities for the purpose of earning dividend and deriving capital gain. (b) the assesse had in its books of accounts given a distinct accounting treatment in respect of shares held as investments and the shares held as stock in trade of business (c) that in the past the assessments completed on similar set of facts, the revenue has accepted that the income on sale of shares held as investments gave rise to capital gain. (d) the assessee relied on the rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the asses sees did not even hold on to at least some part of the huge purchases and had engaged in the same scrips frequently; the intention of the assessees in buying shares was not to derive income by way of dividend on such shares, but to earn profits on the sale of the shares; the asses sees had indulged in multiple transactions of different quantities with very high periodicity. These periodic transactions, selecting the time of entry and exit in each scrip, called for regular direction and management which would indicate that it was in the nature of trade; repeated transactions, coupled with the subsequent conduct of the assessees to re-enter the same scrip or some other scrip, in order to take advantage of market fluctuations lent the flavour of trade to such transactions; the assessee was purchasing and selling the same scrips repeatedly, and was switching from one scrip to another; the dominant impression left on the mind was that the ssessee had not invested in shares; mere classification of these share transactions as investment in the assessee's books of accounts is not conclusive; the intention of the assessee at the time of purchase was only to sell the shares imm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain. As per appellant the short term capital gain amounts to ₹ 2,64,04,051/-. The Assessing Officer will treat the same i.e. amounting to ₹ 2,64,04,051/-. as business income after due verification and ₹ 8,25,00,964/- as long term capital gain. These grounds of appeal are accordingly decided. The appeal on issue of short term capital gain to be treated as short term capital gain instead of business income is dismissed. 23. The Hon'ble appellate Courts have determined the issue on the facts of each case giving the various points/issues considered for coming to a conclusion regarding the head of income under which the share profit is to be taxed. The long term capital gain amounting to ₹ 8,25,00,964/- is held to be long term capital gain exempted u/s 10(38) of the Income-tax Act, 1961. The amount of ₹ 2,64,04,051/- is held to business income instead of short term capital gain. These 5 (five) grounds of appeal are accordingly decided and the order of the Assessing Officer is upheld on this issue." 8. Aggrieved by the order of CIT(A) holding that gains on sale of shares declared by the assessee as short term capital gain gives rise to income fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es as on 31 st March 2008 as Investment for A.Y. 2008-09 and the subsequent years since such Investments were accounted in the books "at cost" and not on the principle of "lower of the cost or market value". 9. Aggrieved by the order of CIT(A) in coming to the conclusion that the gain on sale of shares held for more than 12 months by the assessee give rise to long term capital gain the revenue has raised ground no.1 before this Tribunal which read as follows :- "1. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in holding the business income from sale of shares to be treated as long term capital gain and get exemption u/s 10(38) of the I.T.Act,1961." 10. We have heard the submissions of the learned counsel for the assessee, who reiterated the submissions as were made before CIT(A). The learned counsel also drew our attention to the Circular of CBDT dated 29.02.2016 i.e. No. 6/16 whereby CBDT dated 29.02.2016 has clearly laid down that the shares and securities held for a period of 12 months, the gain on sale of those shares if claimed by the assessee, as long term capital gain should not be disputed by the AO. According to him th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess, the reasoning given by the AO in this regard was making a reference to the fact that the activity of making investment had been carried out by the Assessee in a systematic and organized manner and over a number of years and therefore would constitute business. In this regard, we find that this controversy as to whether income on sale of shares ought to be regarded as income under the head "capital gain" or "Business Income" created lots of dispute and with a view to clarify the position the CBDT had come out with a Circular No.6/2016. The relevant portion of the circular as far as the present appeal of the revenue is concerned, is as follows: "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; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be a case of business profits and not capital gain. CIT Vs. Motilal Hirabhai Spg. And Wvg. Co. Ltd., 113 ITR 173 (Guj); Raja Bahadur Viswshwara Singh Vs. CIT, 41 ITR 685 (SC). (d) Purchase without an intention to resell where they are sold under changed circumstances would be capital gains. CIT Vs. PKN, 60 ITR 65 (SC). Purchase with an intention to resell would render the gain profit on sale business profit depending on the circumstances of the case like nature and quantity of article purchased, nature of the operation involved. Saroj Kumar Mazumdar Vs. CIT, 37 ITR 242 (SC). (e) No single fact has any decisive significance and the question must depend upon the collective effect of all the relevant materials brought on record. Janki Ram Bahadur Ram Vs. CIT, 57 ITR 21 (SC). 15. The above tests have again been reiterated by the CBDT in its Circular referred to by the learned DR before us. Keeping in mind, the above broad principles, we shall now examine the case of the assessee. The factors which go in favour of the Assessee that the income in question is short term capital gain (STCG) are as follows: 1. The fact that in the earlier AYs i.e., AY 06-07 & 07-08 in assessment com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position, that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question." 18. The above decision of the Hon'ble Bombay High Court is clearly applicable in this case. As we have already seen that the AO in AYs 2006-07 & 2007-08 the AO accepted the plea of the Assessee and assessed income declared on purchase and sale of shares as giving raise to STCG in assessment comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the assessee in arriving at its income from business. The assessee on his own had computed the disallowance u/s 14A of the Act added a sum of ₹ 3,29,313/- and had also given the basis of such disallowance in its submission dated 7.10.2010 filed before the AO. The said disallowance comprised of direct expenditure in nature of demat charges, transaction charges and salary of one employee and 10% of Director's salary involved in the investment & broking division. The AO however was of the view that the aforesaid disallowances was not proper and he computed the disallowance u/s 14A of the Act by applying Rule 8-D of the Income Tax Rules, 1962 (Rules), which was as follows :- "The assessee has computed the disallowance of ₹ 3,29,338/- u/s 14A vide its submission dated 7-10-2010. Since it is not computed as per Rule 8D, it is not accepted. The assessee company had earned exempt income i.e. dividend of ₹ 4238860/- during this financial year relevant to the assessment year 2008-09. The disallowance u/s 14A read with rule 8D is calculated as under :- 1)Depository charges Rs.351494/- Opening Value of investments Rs.222733496/- Closing Value of investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or carrying on different business activities in different segments of capital markets. The expenses and overheads relate to such common business establishment relate to incomes derived from all business sources and segments. It is practically impossible to segregate common business overheads and correlate the same with any particular source of income at present proceedings. Section 14A was introduced in the I.T. Act, 1961 which clarified the legislative intent that where exemption is to be allowed then the exemption should be allowed in respect of net income and not in respect of gross receipts after deducting expenses pertaining to exempted income. The expenses which are debited in the taxable income reduce it thereby showing a lesser income and thereby less amount of taxes. The expenditure incurred for earning exempted income is debited to reduce the taxable income. Rule 8D has a legislative sanction and it is to be applied in all cases where it is not possible to determine exactly the expenses incurred in relation to earning of tax free income and the appellant has also not able to, show the exact expenditure incurred for earning exempted .income. In a given case, like the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments much higher i.e. almost 4 times of the stock-in-trade and involving 80% of capital & free reserves. The appellant has establishment and other expenses amounting to ₹ 1,86,55,302/- and depreciation of ₹ 11,47,217/-. The income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The appellant has not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. I am satisfied that the expenditure disallowed by the appellant of ₹ 3,29,338/- is far less than the actual expenditure incurred for earning income which does not form part of business Income. …….. 35. The expenditure as per Section 14A read with Rule 8D is to be determined on the basis of the "investment" calculated in this order. The opening value of investments will be reduced by thy' amount of short term investments sold during the year which is included in the' opening inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned. In this regard our attention was drawn to the order of CIT(A) for A.Y.2007-08 in appeal No.1018/CIT(A)-VI/2009-10 dated 31.10.2011 wherein a specific finding has been given that investments in that year were made out of assessee's own funds. It was further brought to our notice that the aforesaid finding of the CIT(A) has attained finality and the order of ITAT in ITA NO.582/Kol/2011 and 607/Kol/2011 dated 05.11.2015 of ITAT, Kolkata was filed before us. The ld. Counsel submitted that during the previous year there were investments made to the tune of ₹ 5.50 crores and that was funded out of the profits derived by the assessee during the previous year. In this regard our attention was also drawn to the fact that the income from sale of shares, brokerage, portfolio management & advisory fees etc derived by the assessee during the previous year was more than ₹ 18 crores. It was also submitted that the funds available with the assessee as per the balance sheet as on 31.03.2008 was much more than the investments made during the previous year. The ld. Counsel for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in the case of HDFC Bank Limit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and depreciation of ₹ 11,47,217/-. The income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The Assessee had not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. It cannot therefore be said that the revenue authorities were not justified in disregarding the disallowance made by the Assessee on its own by pointing out specific infirmity in the Assessee's working of the amount disallowable under Section 14A of the Act. Keeping in mind the above findings of the CIT(A), we are of the view that the disallowance of other expenses as sustained by the CIT(A) of ₹ 11,42,424 under rule 8D(2)(iii) of the Rules is proper and calls for no interference. We however clarify that the amount already disallowed by the Assessee in the computation of total income should again not be added. In other words, the disallowance u/s.14A of the Act shall be only ₹ 11,42,424/-. We hol ..... X X X X Extracts X X X X X X X X Extracts X X X X
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