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TMI Blog2011 (2) TMI 1484X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The facts related to this case, in brief, are that the assessee is a company registered under the Companies Act, 1956 and is deriving the income under the head 'Income from house property', 'profit and gains of business or profession' and 'capital gains'. For the year under consideration, the assessee filed the return of income on 29/11/2006 declaring an income of ₹ 80,84,581/- which was processed u/s 143(1) of the I.T. Act. Later on the case was selected for scrutiny. The assessee claimed a sum of ₹ 44,07,496/- which included a sum of ₹ 2,31,003/- being dividend and agricultural income and ₹ 41,76,493/- as long term capital gain. The Assessing Officer pointed out that the assessee did not make any corresponding disallowance voluntarily while computing its income. The Assessing Officer disallowed a sum of ₹ 6,37,288/- u/s 14A of the I.T. Act read with Rules 8D of the I.T. Rules, 1962 by following the decision of the ITAT Mumbai Bench in the case of ACIT vs. Citicorp Finance (India) Ltd. [2008] 300 ITR (AT) 398. 4. The assessee carried the matter to learned CIT(A) and submitted as under: "The appellant himself has added back the expenditures relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given reasons for confirming the disallowance/additions. It was stated that recently, the Hon'ble Bombay High Court of the Judicature at Mumbai held in the case of Godrej Boyace Mfg. Co. Ltd. vs. Dy.CIT. and another (2010) 328 ITR 81 held that - a) " ... .It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April, Consequently, rule 8D which has been notified on March 24, 2008, would apply with effect from assessment year 2008-09 ... " b) " ... .ITO V. DAGA CAPITAL MANAGEMENT P. LTD. [2009] 312 ITR (AT) 1 (Mumbai) [SB] impliedly disapproved on this point. .. " It was further stated that Rule 8D of Income Tax Rules 1962 was inserted by the I.T. (Fifth Amdt.) Rules 2008 with effect from 24.03.2008, hence the same was applicable only from Assessment Year 2008-2009 and not the earlier years." Reliance has also been placed on the following case laws: (i) Decision of the ITAT, Delhi Bench of the Income-tax Appellate Tribunal in the case of Impulse (India) Pvt. Ltd. vs.ACIT (2008) 22 SOT 368, (ii) Decision of the I.T.A.T., Mumbai Bench in the case of M/s. Godrej Agrovet Ltd. vs. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001." 8.1 From the above provisions it would be clear that the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee. This Section is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed. All expenditure incurred in relation to income which does not form part of the total income under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred in relation to such business as between the earning of taxable and non-taxable income. Sub-sec. (1) of s. 14A was inserted with retrospective effect from 1st April, 1962 to overcome the decisions of the Supreme Court. At the same time, as has been noticed by the Supreme Court in its decision in CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it has been observed that the words "expenditure incurred" in s. 14A refer to expenditure on rent, tax, salary, interest etc. in respect of which allowances are provided for. Thirdly, sub-ss. (2) and (3) were introduced by a legislative amendment brought about by the Finance Act of 2006. The Memorandum Explaining the Provisions of the Finance Bill of 2006 recognizes that the existing provisions of s. 14A did not provide a method of computing the expenditure incurred in relation to income which does not form part of the total income. Consequently, there was a considerable amount of dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterests of the assessee. Even in the absence of sub-ss. (2) and (3) of S. 14A and of r. 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-s. (1) of S. 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. The change which is brought about by the insertion of sub-ss (2) and (3) into S. 14A by the Finance Act of 2006 w.e.f. 1st April, 2007 is that in a situation where the AO is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the non-taxable income, the AO would have to follow the method which is prescribed by the rules. The amendment rules were notified to come into force on 24th March, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently, r. 8D which has been notified on 24th March, 2008 would apply with effect from asst. yr. 2008-09. The rule consequently cannot have application in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . That the order of Commissioner of Income Tax (Appeals-II, Kanpur being erroneous, in law and on facts deserves to be vacated and that the order of the Assessing Officer be restored; and 3. That the appellant craves leave to modify and of the grounds of appeal given above and/or add any fresh ground as and when it is considered necessary to do so." 10. The facts related to this case, in brief, are that in the computation of income the assessee had shown the income of ₹ 41,76,493/- as having been derived from long term capital gain and accordingly the exemption had been claimed there upon u/s 10(38) of the I.T.Act. The nature of this transactions was explained by the assessee vide letter dated 23/10/2008 as follows: "Apropos your query requiring explanation as to why the amount of ₹ 41,76,493/- claimed as exempt be not treated as normal business profit, it is submitted that the same has been claimed exempt u/s 10(38) in respect of Long Term Capital Asset, being Equity Shares or Units of an Equity Oriented Fund, the transaction of which has been chargeable to securities transaction tax. Your good self will appreciate that the period of holding of these Equity S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer is not justified in treating the part of transactions which were held for more than 12 months as not arising from long ¬term capital assets being equity shares while treating part of it which were held for a period of less than 12 months as arising from capital assets. 1.3 The learned assessing officer has denied the exemption inter alia on the following grounds: 1.4 The magnitude and frequency of the share transactions tilt the scale in favour of them being business activity. 1.5 The proportion of dividend earned with the profit earned from the sale of shares definitely indicates that the shares were not held as investment or capital asset to earn income accrued thereon. 1.6 Deployment of professional companies to handle the volume of the trade carried out through two parties go far to prove that the real nature of these transactions is business activity, not sale of property held as capital asset to Qualify for capital gain. 1.7 Memorandum of Association of the company carries the object clause that allows assessee to carry on share trading business. 1.8 Magnitude and Frequency The averment of the learned Assessing Officer that magnitude and frequency o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Assessing Officer in treating part of sale as 'business' and part as 'capital gain' is contrary to the facts and the provisions of law and by his own volition, he ought to have accepted the claim of the appellant in respect of scripts giving gain of ₹ 4176493.49 as exempt within the provisions of section 10(38) of the Act. 1.9 Proportion of dividend to profit earned 1.9.1 The averment of the learned Assessing Officer that the proportion of dividend earned with the profit earned from sale of shares definitely indicates that shares were not held as investment or capital asset to earn income accrued thereon is contrary to the facts, law and custom. Any investment, whether in shares, real estate or gold etc., is made with intent to make regular income by way of dividend, rent etc. or for reaping the benefit of appreciation. In the year of realization of investment, the profit on realization will generally be higher as compared to regular income and hence, will not change the character of investment to that of business. Hence, the view taken by the learned Assessing Officer is without any leg to stand. 1.10 Deployment of professional firms 1.10.1 The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port of its contention: a. CIT Vs. N.S.S. Investments P. Ltd 277 ITR 149 (Madras) b. Motilal Oswal Vs. Addl. CIT 8 SOT 771 (Trib Bom) c. Sarnath Infrastructure (P.) Ltd. Vs. ACIT 2009 (120) TTJ 216 (Trib Luc) d. CIT Vs. Gopal Purohit 228 CTR 582 (Bom) affirming the decision of Tribunal in 29 SOT 117 e. Shahla Investments & Financial Consultants (P.) Ltd. Vs. DCIT 2 SOT 371 (Trib Hyd) f. Bombay Gymkhana Ltd. Vs. ITO 115 TTJ 639 (Trib Bom) g. J. M. Share and Stock Brokers Limited Vs. JClT 2801/Mum/2000 h. Janak S. Rangwala Vs. ACIT 11 SOT 627 (Trib Bom) 1.13 In view of the facts stated above, acceptance of part of sale as arising from capital assets, and the case laws relied upon by the appellant, the learned assessing officer ought to have accepted the gain of ₹ 4176493/- arising from sale of shares entitled for exemption u/s 10(38) of the Income-tax Act, 1961." 11.1 The Learned CIT(A), after considering the submissions of the assessee, observed as under: (i) The assessee is maintaining its portfolio of shares and securities far several years and the same has always been accounted as Investments, (ii) The period of holding of shares is sufficiently long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions was business activity, not sale of property held as capital asset to qualify for capital gain. In the present case, it is noticed that the opening amount of investment by the assessee was at ₹ 2,59,73,155/- and during the year the assessee made the investment to the tune of ₹ 1,04,73,491/- and the closing amount of investment was at ₹ 3,18,23,385/-. The assessee made the investment in unquoted shares/securities. The opening balance was at ₹ 44,71,125/- which increased to ₹ 48,31,125/-. The detail of the investments by the assessee was as under: S.N. Particulars No. of scripts Amount (Rs.) 1. Opening Investment Quoted Investment Unquoted investment Mutual Funds Debentures Property 4 7 7 2 10242878.76 4471125.00 1609417.02 12722.00 9637012.41 Total Opening Investment 64 25973155.19 2. Purchase Quoted Investment Unquoted investment Mutual Fund Property 18 2 1 5888691.24 360000.00 1000000.00 3224800.00 3. Sales Quoted Investment Property 18 10296189.77 2425000.00 4. Closing Stock Quoted investment Unquoted investment Mutual Fund Debentures Property 56 9 2 2 12117783.70 48,31,125. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to treat the investments as the scripts for regular trade. On a similar issue, the Hon'ble Madras High Court in the case of Commissioner of Income-tax Vs N.S.S. Investments P. Ltd. (Mad) [2005] 277 ITR 149 (Mad) has held as under: "A company can hold some shares as stock-in-trade for the purpose of doing business of buying and sale of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earning dividend income. Here the shares in question were held as the assessee's capital and not as stock-intrade. Hence, there would be capital gain and not business income." 14.4 In the present case also the assessee although earned dividend along with the capital gain on the sale of the shares/securities but only on that basis it cannot be said that the assessee held the scripts as "stock in trade" particularly when the department had accepted in the earlier years the purchase of the shares/securities as "investment". Therefore, the Assessing Officer was not justified in treating the profit earned by the assessee on the said investments as business profit. As such, the learned CIT (A) was justified in directing the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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