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TMI Blog2018 (8) TMI 1961X X X X Extracts X X X X X X X X Extracts X X X X ..... nd short-term capital gain as business income. 2. That on the facts and circumstances of the case and in law, the Ld. CIT (A) erred in restricting the addition made u/s. 14A from Rs. 57.64 lacs to Rs. 32.14 lacs. Ld. CIT (A) erred in giving relief to the assessee on the fact that the assessee has earned interest income and therefore he is entitled for set off. 3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that section 14A read with Rule 8D, takes into account only the interest component which can be attributed towards the income and not forming part of total income. It has nothing to do with the earning of interest income. 4. The Appellant craves to the allowed to amend, delete or add any other grounds of appeal during the course of hearing of this appeal" 3. The facts in brief qua the issue are that, assesseecompany has been stated to be in the business of sale and purchase of shares and mutual funds. During the year, the assessee had shown income from business and also income from Long Term and Short-Term Capital Gains in the following manner: - Heads of Income Rs. Capital gains i) Long ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has segregated the income under the head 'Capital Gain and Business Income'. Out of the total transaction undertaken by the assessee under the head 'capital gain', the Assessing Officer held that in so far as shares invested in Dabur India Ltd. is concerned which was invested in the share capital of the group company, was has held as investment since beginning, therefore, tax on sale transaction on such shares i.e., Dabur India Ltd. can be held to be taxable under the head 'Long term Capital Gain. After excluding the share of Dabur India Ltd, he has combined the entire transaction of shares and mutual funds, both under the head 'business' and 'capital gain' in the following manner: - Opening Stock a. Mutual Fund (shown as stock in trade) = Rs. 30.24 crore b. Shares (shown as investment) (Excluding Dabur India Ltd. Stock of Rs. 60,054/- = Rs. 39.92 crore Total= Rs. 70.16 crore Closing Stock c. Mutual Fund (shown as stock in trade) = Rs. 53.35 crore d. Shares (shown as investment) (Excluding Dabur India Ltd. Stock of Rs. 41,774/-) = Rs. 88.62 crore Total Turnover = Rs. 141.97 crore e. Mutual Fund (shown as stock in trade) = Rs. 907.91 crore f. Shares (sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 1 : 145. This clearly and strongly indicate that the motive is to earn profit in regular and systematic manner. v) Holding period of securities bought and sold and frequency of transactions. Analysis of statement of capital gains filed by the assessee shows that the period of holding varies from few days to few months. Transactions have been carried out throughout the year almost on daily basis. It will not be out of place to mention even at the cost of repetition that taxability of transactions will not depend on presentation of accounts or by showing the shares as investment. It will depend on the facts of the case. The volume, frequency and regularity of share transactions done in organized manner indicate business activity [CIT vs. Motilal Hirabhai Spg. & Svg. Co. Ltd. (1978) 113 ITR 173 (guj)]." 6. Thereafter, he again referred to various decisions as discussed from pages 15 to 22 of his order including CBDT Circular No.4 of 2007 dated 15th June, 2007 and concluded that assessee was dealing in sale and purchase of shares for earning profit and tax them under the head 'business income' in the following manner: Long Term Capital gain: (Except Dabur India Ltd.) Rs. 32,3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, there is huge turnover of Rs. 945.69 crore and average holding of Rs. 106.06 crore which is clearly the case of high transaction and low holding, which in turn indicates trading activity. (xiii) The ratio of dividend to profit is 1: 145. This clearly and strongly indicate that the motive is to earn profit in regular and systematic manner. (xiv) From the volume, frequency, continuity and regularity of transactions of purchase and sales in shares it can be inferred that these transactions must have been entered into by the assessee with a profit motive. (xv) Tests laid down under various judicial pronouncements confirms that the assessee has entered into share transaction with profit motive." 8. Before the ld. CIT (A), the assessee submitted that it has maintained two portfolios for the shares in the balance-sheet; one as an 'investment' and other as 'stock' for trading activities. Such an investment in shares have been classified since Assessment Year 2005-06 and in all the years separate schedule of investment have been shown right from 31st March, 2005 to 31st March, 2008. The intention of the assessee for making investment in shares is also borne out from the resolu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the intention of the assessee was to do business. But conversion of stock into investment was done way back in the financial year 2004-05 and if one looks to the schedule of investment, appearing at pages 63 to 67 of the paper book which is scrip-wise detail, then it could be seen that none of the scrips which has been sold during the year were part of such conversion of stock. He had also filed a detail of transaction of shares undertaken under the head 'Long Term Capital Gain' and 'Short Term Capital Gain' and pointed out that all the shares which were held as investment have been acquired in the financial years 2005-06, 2006-07 and 2007-08. Only the shares of Dabur India Ltd. were purchased in the year 1987 which Assessing Officer himself has held that it was always held as investment and he has excluded it from the computation of business income. From these details, he again pointed out that there was one scrip of 'Punjab Tractors Ltd.' which was purchased in the Assessment Years 2005-06 and 2006-07, was always held as investment and was never part of stock-in-trade. Out of total gain of Long Term Capital Gain of Rs. 15,41,96,869/- gain on the shares of Punjab Tractors Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court vide order dated 4th May, 2018, reported in (2018) 256 taxmann.com 66. Regarding balance sale of shares other than Punjab Tractor Ltd. and ABN Amro Securities Ltd., he submitted that looking to the transaction in the shares which was held for more than 365 days which constituted 98.34%, then it is clear that assessee's intention was always to treat the share as investment. He further pointed out that in the Assessment Year 2012-13, the Tribunal in the case of the assessee has held that transaction of shares held under the head 'investment' is to be taxed as capital gain and in support, he filed a copy of ITAT order dated 26.03.2018 passed in ITA No.4711/Del/2016. Thus, he submitted that now in the wake of various decisions of Hon'ble High Court and Hon'ble Supreme Court which has been rendered after the earlier Tribunal order and looking to the fact that the major transaction is into Punjab Tractor Ltd. and ABN Amro Securities Ltd. which has held as investment from day one, the ratio laid down by the earlier order would not be applicable. 13. By way of rejoinder, ld. CIT-DR vehemently opposed the contention of the Ld. Counsel with regard to the nature of ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Short-Term Capital Gain as per the details incorporated above. The income earned by the assessee from various sources was as under: - Particulars Asset Type Amount Income from Business (A) a)Trading in units of Mutual Funds; b) Income from Interest; c) Incentive and Miscellaneous Income 360,77,965 Income from Capital Gains (B) Income from Capital Assets - Investment in Equities LTCG- 11,48,78,740 (85%) STCG- 2,02,28,220 (15%) 13,51,06,960 Income from other Sources (C) Dividend earned from investment in equities 8,19,14,172 15. One of the main contentions of the Revenue which has been strongly harped by the Tribunal in the earlier years is that, assessee prior to 31st March, 2004 was holding shares as 'stock in trade', hence intention was to do business only and mere classification in books as investment by making entries is not decisive factor. It was on 01.04.2004 the shares were converted into investment portfolio and since A.Y. 2005-06; assessee has segregated the income under the head 'Capital Gains' and 'Business Income'. Apart from that, Assessing Officer has noted that magnitude of the transaction and the volume shows that assessee was into sale and purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re ranging from 372 days to 828 days. These shares were not converted from stock as on 01.04.2004, because they have been acquired in the later years and from the date of acquisition, always been kept as investment in the books and later on sold after more than a year on which gain has been shown under the head 'Long Term Capital Gain'. Nowhere it has been laid down that the assessee who is dealing in shares cannot maintain two separate portfolios, one for the trading purpose and other for the investment purpose and there is no provision that shares held in investment portfolio have to be treated as part of stock. The most paramount factor which needs to be examined in such cases is, whether the intention of the assessee while acquiring shares was for investment purpose or for trading in future for profit. However, we find that in the earlier years the Tribunal has taken a different view and held that even if the shares have been held under investment portfolio also, it can be taxed as business income. One of the core reasoning for arriving to this conclusion was that the assessee has been trading in shares and the audit report also suggest that the assessee is dealer in shares and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Id. DR, we are of the opinion that the Id. CIT(A) was not justified in accepting the claim of the assessee as investor in shares especially when the nature of transactions in the years under consideration was similar to what the assessee had undertaken hither to and turnover of the the findings of the Ld. CIT (A) and restore the order of the AO. Therefore, ground no.1 in these appeals is allowed." If the aforesaid ratio and principle of the Tribunal is to be followed as it is, then as observed in the earlier part of the order, in so far as the transaction of shares of Punjab Tractors Ltd. and ABN Amro are concerned, right from day one it was acquired as a part of investment only and was classified as such in books right from the day of acquisition and it is not the case that these shares were earlier part of stock-in-trade which has been converted into investment after 01.04.2004. We have already held that the shares of Punjab Tractors Ltd. were acquired for controlling interest and ABN Amro shares are not tradeable in stock market and if one goes by the intention part, then these two scrips could never be held to be intended for trading purposes. Thus, the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature of a capital asset or stock-in- trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past. 2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stockin-trade. The Central Board of Direct Taxes ('CBDT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations. 3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of income from transactions in listed shares and securities, Central Board of Direct Taxes ('CBDT) had issued a clarificatory Circular no. 6/2016 dated 29th February, 2016, wherein with a view to reduce litigation and maintain consistency in approach in assessments, it was instructed that income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head 'Capital Gain' unless the tax-payer itself treats these as its stock- in-trade and transfer thereof as its business income. It was further stated that in other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject. 2. Similarly, for determining the tax-treatment of income arising from transfer of unlisted shares for which no formal market exists for trading, a need has been felt to have a consistent view in assessments pertaining to such income. It has, accordingly, been decided that the income arising from transfer of unlisted shares would be considered under the head 'Capital Gain', irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n most of the cases period of holding was more than six months and there is no repetitive transaction. The volume and frequency may be one of the factors to gauge, whether the shares acquired were for trading purpose or for were for investment, but that alone is not a final test, because the shares may be acquired for a short period and whenever the assessee feels that either the scrip is giving immediate gain or there going to be a loss, then such shares are sold/transferred either to maximize the gain or to mitigate the loss. Simply because the assessee has held the shares for less than period of 12 months it does not straight away put in the bracket of trading activity, especially when there is no repetitive transaction of the shares. However in so far as detail of Short Term Capital Gain is concerned, the assessee has filed voluminous detail which has been neither examined or looked upon by the Assessing Officer or by the ld. CIT(A), therefore, we deem it proper that in so far as transaction of shares shown under the head 'Short Term Capital Gain', matter should be restored back to the file of the Assessing Officer to examine, whether there is any repetitive transaction; or whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under Rule 8D(2)(ii) and Rule 8D(2)(iii) of Rs. 32,14,000/- since the assessee had suo-moto disallowed Rs. 37,74,438/-, he made further disallowance of Rs. 57,64,562/-. 22. Before the ld. CIT (A), assessee submitted that it had earned interest income of Rs. 395.23 lacs and made interest payment of Rs. 156.86 lacs which resulted into net income of interest of Rs. 328.37, which has been offered for tax for the year under consideration. Thus, the disallowance of interest by taking the total interest payment of Rs. 156.86 lacs as per Rule 8D is not justified as assessee has already offered huge interest income of Rs. 238.37 lacs for tax. The ld. CIT (A) has deleted the said disallowance of interest after observing and holding as under: "3.1. I have carefully considered the submissions of the Ld. AR and perused the assessment order passed by the AO. I agree with the submission of Id. A.R. that the appellant is a Non-Banking Financial Company and also engaged in financing activities. The appellant is registered with Reserve Bank of India as Non-banking Financial Company and earning interest income. To earn the interest income of Rs. 395.23 lakhs it has paid interest of Rs. 156.86 lak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... offered more than what is disallowable under the formula given under Rule 8D2(iii). The Assessing Officer has imputed the disallowance of interest without even analyzing the nature of accounts and the fact that assessee has a huge net surplus of interest income which has been offered for tax. The assessee is a NHBC and has earned interest income of Rs. 395.23 lacs on loan advances to the parties. It has made total interest payment of Rs. 156.86 lac on loans taken and net income interest of Rs. 238.37 lac has been offered to tax. Since the interest payment has been adjusted with the interest received, this itself goes to show that assessee is maintaining a separate finance activity and the interest payment is directly relating to such financial activities. Nowhere the Assessing Officer has brought out that such an interest payment has any co-relation with the loan funds for the purpose of making the investment. On the other hand, we find that the assessee has huge surplus funds in its reserve which is around Rs. 19,200 lacs. Under these circumstances, it could be easily presumed that, investments have been made from interest free surplus funds and no portion of interest expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same as has been discussed in the earlier part of the order and even the ld. CIT (A) has followed the earlier years. Since we have already held that the transaction of the shares held by the assessee in the investment portfolio is assessable under the head 'capital gain' and therefore, the loss of Rs. 34,78,378/- has to be treated as Long Term Capital Loss. In so far as amount of Rs. 57,05,498/- treated as business income as against Short Term Capital Gain claimed by the assessee, we have already given the direction to the Assessing Officer in the earlier year, therefore, same finding will apply mutatis mutandis in this year also. 29. Now coming to the issue of disallowance u/s.14 of Rs. 25,57,020/-, it is seen that the disallowance consists of interest component made under Rule 8D(2)(ii) by the Assessing Officer. The assessee has already disallowed sum of Rs. 28,42,651/- for the purpose of disallowance u/s.14A which has been computed in accordance with formula given in Rule 8D2(iii). However, the Assessing Officer has imputed the interest disallowance without even examining the nature of accounts and also whether any interest-bearing funds have been invested in the purchase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly, he deleted the disallowance made u/s. 40(a)(ia) made by the Assessing Officer. 32. After hearing both the parties and on perusal of the relevant finding given in the impugned order, we find that the only reason for disallowing the payment of DEMAT charges of Rs. 66,998/- by the Assessing Officer is that the CBDT Notification No.56/2012 has come into effect from 01.01.2013 and therefore, for the earlier period TDS is required to be deducted u/s.194H. Such a reasoning for disallowance cannot be sustained, because if CBDT has clarified that no TDS is required to be deducted on DEMAT charges, then such a clarification brought to remove the rigors and the hardship to the assessee, has to be given retrospective effect, because the reason given by the CBDT to bring the circular was to reduce the hardship and the compliance cost and it is causing great hardship to the deductee. Such a clarification brought by CBDT to remove the hardship, cannot be held that prior to 01.01.2013 such a hardship should be imposed. Accordingly, the order of the ld. CIT(A) for deleting the said disallowance is affirmed. In the result, the appeal of the Revenue is partly allowed for statist ..... X X X X Extracts X X X X X X X X Extracts X X X X
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