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TMI Blog2017 (1) TMI 1339X X X X Extracts X X X X X X X X Extracts X X X X ..... brought to our notice that the expenses incurred with regard to the activity of making investment in shares have been debited to the capital account and have not been debited to P & L account. The P & L A/c prepared by the assessee is exclusively for the purpose of reflecting its transactions arising out of business activities i.e. comprising of business income and business expenses. Under these circumstances, there was heavy onus upon the shoulders of the AO to establish if any of the expenses debited in the P& L account did not pertain to its business activity but with any other activity say for earning income from capital gains. Unfortunately, no such exercise has been done by the AO before invoking the provisions of section 14A. It was all the more necessary in the light of the fact that expenses incurred on PMS brokerage fee and other incidental expenses for making investment into shares have not been debited in the P & L account by the assessee. These facts have also not been disputed by the Ld. DR before us. Thus the reasoning given by the Ld. CIT(A) for deleting the disallowance made by the AO is in accordance with law and facts of this case. - Decided in favour of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .82 lakhs respectively. Further, short term capital gains of ₹ 90.89 lacs and short term capital loss of ₹ 7.78 lacs was also shown in the return filed by the assessee. It was noted by the AO that assessee has been disclosing capital gain from sale of shares every year in past and that purchase/sale of shares and units of mutual funds was managed by Portfolio Managers such as Kotak securities and DSP Merril Lynch (herein after called as PMS). It was noted by him that assessee had engaged the services of Portfolio Managers to carry out the transactions of the sale-purchase of shares for which huge amount of PMS charges of ₹ 52 lacs were paid. According to the AO, it was not an ordinary thing for a normal investor. Further, he referred to the decision of Delhi Bench of ITAT in the case of M/s Radials International vs. ACIT and issued show cause notice to the assessee asking him to explain as to why profits on sale of shares/ unit should not be treated as business income of the assessee as against the capital gains as claimed by the assessee in the return of income. 6. In reply, the assessee submitted that major activity of the assessee was income from sports ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es carried out by him was as an investor, but constitutes adventure in the nature of trade. It was also observed that the manner of activity in the stock market, viz, large volume of purchase and sale of shares, multiplicity of transactions, regularity of the transaction from year to year, engagement of portfolio manager for systematic transaction of shares and earning from the sale of shares systematically, reinvesting for acquisition of shares on regular basis to make profit etc go to show the existence of intent on the part of the assessee to trade in stock as a business activity. Accordingly, AO assessed the income at ₹ 1,35,76,244/- earned by the assessee out of sale and purchase of shares under the head 'profits and gains of business'. However, while assessing the income under the head income from business the AO did not distinguish between the shares purchased and sold with the help of PMS or without it. 8. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) and made detailed submissions along with various evidences to justify its claim that the assessee had rightly disclosed gain arising on sale and purchase of shares as assessable under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me is far in excess of the capital gains (Dividend income is 125 times the capital gains) (Page No. 52). 7. Investment in shares held under PMS is 7.6% of total investment under PMS (Page No. 55). Income under the head capital gain is 2.34% of gross total income (Page No.51) 10. It was also submitted by him that the view which has finally emerged on the basis of judgments of various courts with regard to PMS issue is that merely because shares were purchased and sold with the help of Portfolio Managers, it would not become business income if otherwise an assessee is an investor and always held the shares as part of investment. The gain arising on purchase and sale of shares would be assessable under the head income from capital gains. The reliance was placed by him on the following Judgments: 1. Nalin Pravin Shah (1575/Mum/2012) Mumbai 2. Nalini Navin Bhagwat (53/Mum/20 10) Mumbai 3. Radha Birju Patel (5382/Mum/2009) Mumbai 4. ARA Trading (13 Taxrnann.com 20) Pune 5. Apoorva Patni (54 SOT 9) Pune 6. KRA Trading (46 SOT 19) Pune 7. Janak S Rangwala (11 SOT 627) Mumbai 11. We have gone through the orders passed by the lower authorities and subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9265237 6683623 902107 (3,229,528) 904,799 9,265,237 6,940,508 Direct Invest Ment 1,779,977 5039683 -. 2405326 91679801 4,185,303 3,359,882 - 7,545,185 Tota l 8,133,174 5042312 9265237 9088949 777631 955,775 4,264,681 9,265,237 14,485,693 7.2. Further, the analysis of short term capital gain furnished by the appellant is as follows: Particulars PMS Direct Total Equity (STT paid) 2270494 2405327 4675821 Mutual funds (STT Paid) 4413129 - 4413129 Total 6683623 2405327 9088950 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pel lant ₹ 6. 16 cr., out of which dividend income from investment in shares mutual fund is ₹ 4.71 cr., which is 76.49% of the total income and capital gain from investment in shares in mutual funds is ₹ 1.44 c which is 23.51% of the above income. (5) On analysis of investment of the appellant, it is seen that out of the tote investment of Rs, 155.17 Cr., investment in PMS is Rs-21.73 Cr. LC 14.01% of the total investment. (6) The appellant's major source of income during the year is from sport related activities including endorsements. (7) The appellant is not a trader in shares and the overall investment pattern shows that the investment in shares is to earn dividend an income from shares as and when opportunity arises. 7.3.2 Upon due consideration of the submissions of the appellant, I find that the short term capital gain has been accounted in the two schemes operated under the PMS. In so far as the income under the head capital gains arising under PMS is concerned, the issue as to whether it is 'business' or 'capita Gains' was decided in favour of the Revenue in the case of M/s. Radial International, relied upon by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave been shown at cost price only. The most important factor which has been ignored by the lower authorities is that there are no borrowed funds. The entire investments have come out of the corpus fund of the assessee. Therefore, the claim of revenue authorities that the assessee has indulged in business activities in the guise of share investment does not hold any water. Considering the facts ant the submission and the judicial decisions considered hereinabove, in over considerate view, the decision of the Ld. CIT(A) solely based of Ld. CIT(A) we have not hesitation to hold that considering the nature of transaction through Portfolio Management Services Providers in the l ight of the judicial pronouncement discussed hereinabove, the transactions have resulted into capital gains, STCG and LTCG as returned by the assessee. Therefore, the A.O. is directed to accept the capital gains as returned by the assessee. 7.3.3 In yet another recent decision dtd 13.11.20 13 in IT A No. 3159/ Mum/ 2012 in the case of Anusuya Suren Mirchandani, the ITAT held as follows: We have heard the rival submission and perused that material before us. We find that similar issue was decided by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The short term capital gain under 'Direct Investment' is ₹ 24.05 lac only and there is no evidence to show that the appellant has traded in shares to make profit. The criteria applied by the A.O., therefore, do not fit into the fact of the appellant's case. I, therefore, considering the facts discussed above and stated by the appellant vide letter dtd.24.02.2014, reproduced above, cancel the AO's order treating the Long Term and Short term capital gains declared by the appellant as business income . 12. We have carefully examined all the factual findings recorded by the Ld. CIT(A). It is noted by us that major income of the assessee is income from sports endorsement and other shares. In addition to that assessee had made investment into shares. The entire investment has been made by the assessee out of its own funds. No amount of shares has been invested from any borrowing. Huge amount of dividend income has been earned by the assessee which is roughly 3.25 times of the amount of capital gain. The investment in shares with Portfolio Manager is merely to the extent of 4.8% of the total investments. The assessee has disclosed the amounts invested in the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-in-trade (and therefore giving rise to business profits). The assessing officers are further advised 'that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade. 14. Our attention was also drawn on CBDT circular No.6 of 2016 dated 29-02-2016 wherein the Board gave further guidelines with regard to the treatment of profit as arising on sale / purchase of shares. It was inter-alia observed in the circular that the AO shall take into account the following guidelines in deciding whether the surplus generated from sale of listed shares or other securities would be treated as capital gains or business income :- a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer or such shares/securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inimize the burden of tax so long as no mala fide or bogus practices are followed and tax planning is done by the assessee strictly within the framework of law. 18. We have analysed this issue from another perspective also. The income arising on account of sale -purchase of shares if assessed under the head of capital would of course be taxable at relatively lower rate of tax and is also exempt in some cases, as compared to the business income which is taxable at relatively higher rate of tax. But, if such income is assessable under the head income from business then the assessee would be entitled for claim of set of expenses incurred in the normal course of business to earn such income and the tax would be payable only on the amount of net profit. Therefore, while drafting the provisions the legislature did not make any water tight rule for determination of nature of income arising from purchase and sale of shares to be assessed under the head of capital gains or business income. It has been left upon the wisdom of the assessee and facts and circumstances of the case. Under these circumstances, if assessee has chosen a particular course after deciding all the pros and cons of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement Scheme and by doing so, it would not mean that the assessee is carrying on the business of investment in shares. Profits from such investment, either directly or through professionally managed firm, would still remain as profits to be taxed as capital gains as the same will not change the nature of investment which is in shares, and the law permits it to be taxed as capital gains and not as business income 21. Thus, the reasoning given by the AO that the impugned income would be assessable under the head income from business merely because the assessee has availed the service of Portfolio Manager is not sustainable in view of the aforesaid judgments and facts of the case before us. 22. We have also analysed consistency part and noted that the assessee has right from beginning treated the amount held in shares as part of investment. In A.Y. 2005-06 the assessee kept the shares as part of investment and resultant gain was offered to tax as income assessable under the head income from capital gains. Few queries were raised by the AO in this regard. In response, proper replies were given by the assessee and thereafter AO accepted the same as income assessable under th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erves to be upheld. Therefore, after taking into all the facts and circumstances of the case and in view of the detailed discussion made by us in earlier part of our order, we find that the detailed findings recorded by Ld. CIT(A) for upholding the claim of the assessee by treating the income arising from purchase and sale of shares as assessable under the head of capital gains are well reasoned and do not require any interference from our side. Therefore, order passed by the Ld. CIT(A) on this issue is upheld and Ground No.1 raised by the Revenue is hereby dismissed. 25. Ground No.2: In this ground the Revenue is aggrieved that the action of Ld. CIT(A) in deleting the disallowance made by the AO u/s 14A read with Rule 8D for ₹ 76,55,841/-. 26. The brief background as culled out from the orders of the lower authorities is that the AO observed that the assessee received exempt income in the nature of dividend to the extent of ₹ 68,02,975/-, however, no expenditure has been disallowed for earning of the said income. Therefore, the assessee was asked to explain as to why disal lowance u/s14A should not be made. In response, the assessee vide i ts let ter dt. 22.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties which has been charged to capital account and therefore has not claimed any expenditure under the Act and therefore disallowance under section 14A is not warranted. 16. It is submitted that the assessee maintains separate income and expenditure account for its business income. The surplus in the said account is ₹ 19.61 crores (pg 32). The business income as per section 28-44 is arrived at ₹ 19.78 crores (pg 24) which has been accepted by the AO in his assessment order. Since the AO has accepted all the expenditure as allowable against business income and the assessee having not claimed any expenditure against exempt income, provisions of section 14A are not applicable. 17. In earlier years i.e. AY 2007-08 and 2008-09 there has been no disallowance on account of section 14A of the Act (pgs 59-78). 18.The share transaction charges and PMS management fees are debi ted to capi tal account (pg 33) and not claimed as expenditure except ₹ 9.09 lacs on proportionate basis against taxable capital gains (pg 24 and 26) which has been allowed in the assessment order. 19. Alternatively, the common expenses charged to Profit Loss account, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 771/- directly related to earning of exempt income has not been claimed in the P L Account, hence not applicable. Similarly, interest expenses being 'nil', the same will not be applicable. However, at the most and without prejudice to appellant's claim deemed expenses of ₹ 22,72,306/- can be considered as per the formula prescr ibed therein, i .e. 0.5% average investments which is coming to ₹ 67,46,392/-. However, the total direct expenses being ₹ 22,72,306/-, it cannot exceed the said amount. As far as the direct expenses of ₹ 9,09,449/taken by the appellant for disallowance u/s 14A of the Act is concerned, the same is relating to earning of capital gains, hence, cannot be considered under the above section. In this regard appellant's contention that A.O. has invoked Rule 8D r/w Sec. 14A of the Act, without recording in the order as to how in regard to the accounts, he was not satisfied with the correctness of the claim of the appellant in respect of such expenditure in relation to income which does not form part of the total income under the Act, as laid down in sub-section (2) of Section 14A of the Act, is found valid. 31. Thereaft ..... X X X X Extracts X X X X X X X X Extracts X X X X
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