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TMI Blog2020 (6) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in the case of Maxopp Investment Ltd Vs CIT [ 2018 (3) TMI 805 - SUPREME COURT] where shares are held as investment in the investee company, may be for the purpose of having controlling interest therein. On that reasoning, appeals of Maxopp Investment Limited as well as similar cases where shares were purchased by the assessees to have controlling interest in the investee companies have to fail and are, therefore, dismissed - contention of the assessee investment made for acquiring controlling interest in Dabur India Ltd should not be subject to disallowance under section 14A is rejected. Whether no dissatisfaction was recorded by the AO on the claim of the assessee of expenses toward earning exempt income? - We agree with the finding of the Ld. CIT(A), that when the assessee itself as computed the disallowance in terms of rule 8D and thereafter reducing the expenses corresponding to earning dividend income from shares of M/s Dabur India Ltd. was not justified. The Assessing Officer in para 4.3 to 4.5 of the assessment order has duly rejected the action of the assessee of reducing the expenses related to earning of the dividend income from the shares of M/s. Dabur I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed by the assessee. a. That the Ld. CIT(A) and AO failed to establish why the rule 8D should be invoked especially when the assessee himself has disallowed ₹ 10,82,334 and which were the expenses that connection with tax free earnings. 3. That both the CIT(A) and AO erred in disallowing in ad-hoc and arbitrary manner business expenses of ₹ 15,48,318 incurred for genuine business activities. 4. The Assessee prays to add, alter or modify any grounds of appeal which is necessary in the interest of justice. 2. Briefly stated facts of the case are that the assessee company is engaged in the business of sale and purchase of the shares in mutual funds. For the year under consideration, the assessee filed return of income on 29/09/2013, declaring total income of ₹13,15,55,690/-. The return of income filed by the assessee was selected for scrutiny assessment and notice under section 143(2) of the Income-tax Act, 1961 (in short the Act ) was issued and complied with. In the scrutiny assessment completed under section 143(3) of the Act on 14/01/2016, the Assessing Officer made certain additions/disallowances and assessed the total income at ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble ITAT in their decisions in ITA No. 1118/942 943 dated 31.01.2012. In the said order, the findings of the Ld. CIT(Appeals) have been reversed and the order of the AO stands restored. The Hon ble ITAT in the order has held as under: 8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the assessee s intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005- 06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the ld. AR did not place any material, other than resolution dated 22.04.2005, before us while the auditor reports and facts for the years under consideration reflecting intention of the assessing, lead us to the conclusion that the assessee is continuing its activities as in earlier years of a trader in shares. As observed in Sutlej Cotton Mills Supply Agency Ltd. (supra), it is a matter of first impression w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t so many years. The Tribunal in assessee s own case for assessment years 2005-06 to 2007-08 (ITA No.1118, 942 and 943/Del./2010 order dated 31/03/2012) held the activity of purchase and sale of the shares as business income. The relevant finding of the Tribunal is reproduced as under: 8. We are of the opinion that the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen. Habitual dealing in a particular item and that too since inception is indicative of the assessee's intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005-06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the ld. AR did not place any material, other than resolution dated 22.4.2005, before us while the auditor reports and facts for the years under consideration ,reflecting intention of the assessee, lead us to the conclusion that the assessee is continuing its activities as in earlier years of a trader in shares. .As observed in Sutlej Cotton Mills Supply Agency Ltd. (sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 15,41,96,869/- which has been classified as business income by the Assessing Officer which income has been offered to tax by the assessee under the head capital gain is to be assessed as business income or capital gain. The Assessing Officer has summarized the following income shown under the head Capital Gain as business income: Long Term Capital gain ₹ 32,39,427 (Except Dabur India Ltd.) Long Term Capital Gain ₹ 10,13,29,232 (without indexation) Long Term Capital Gain ₹ 2,93,99,990 (with indexation after removing Indexation) Short Term Capital Gain ₹ 1,85,41,338 Short Term Capital Gain With PMS (Net) ₹ 16,86,882 Total ₹ 15,41,96,869/- The assessee company is a NBFC, which was also in the business of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness income by the Assessing Officer. Shares of Punjab Tractors were acquired in the years 2005 and 2006 and since the date of purchase it was shown under the head investment , because these shares were acquired by the assessee for having controlling stake/interest in the said company. Later on, these shares were sold to Mahindra Mahindra as a part of takeover deal which is evident from sale purchase agreement dated 08.05.2007. Thereafter Mahindra Mahindra has given a letter of offer for purchase of equity shares from public at large after the acquisition of the shares of Punjab Tractors from the assessee in accordance with SEBI rules. In so far as Long-Term Capital Gain shown on the sale of the Punjab Tractors Ltd., it cannot be disputed that it was never a part of stockin- trade, prior to 1.4.2004, because, firstly, they were acquired much later to this date; and secondly, it was acquired for the purpose of acquiring controlling stake/interest. Hence such an acquisition cannot be held to be for trading purpose. The transfer of such shares on a takeover of Punjab Tractors Ltd. by Mahindra Mahindra also goes to prove that this was an investment held by the assessee. Sim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee s intention of trading. Merely for taking benefit of provisions of sec. 111A of the Act applicable from the AY 2005-06, the assessee cannot be categorized as an investor, especially when the aforesaid facts speak otherwise and the Id. AR did not place any material, other than resolution dated 22.4.2005, before us while the auditor reports and facts for the years under consideration reflecting intention of the assessee, lead us to the conclusion that the assessee is continuing its activities as in earlier years of a trader in shares. As observed in Sutlej Cotton Mills Supply Agency Ltd (supra), it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not., it is not even the assessee s case that they had held all the shares for a long duration. The facts and circumstances of the case before us, when viewed in the light of principles laid down in the various decisions referred to above, lead us to the conclusion that the voluminous share transactions were in the ordinary line of the assessee s business; purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e than 365 days 81 to 364 days 91 to 180 days 60 to 90 days 30 to 59 days Less than 30 days Quantity of shares 1,33,65,009 53,003 1,01,571 43,971 78,813 67,802 Percentage to Total Quality 97.48% 03.8% 0.74% 0.32% 0.57% 0.49% Gain or loss 1,19,85,50,369 86,05,051 20,57,841 21,45,605 22,70,962 19,21,580 Percentage of Capital gain to 98.34% 0.70% 0.16% 017% 0.18% 0.15% Total capital gain *inclusive of shares of Dabur India Ltd., Punjab Tractors Ltd. and ABN Amro Securities Pvt. Ltd. Total Capital Rs. Long Te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the followinga) 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 of such shares/securities would be treated as its business income, b) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 approach. 3. It is, however, clarified that the above would not be necessarily applied in the situations where: i. the genuineness of transactions in unlisted shares itself is questionable; or ii. the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or iii. the transfer of unlisted shares is made along with the control and management of underlying business; and the Assessing Officer would take appropriate view in such situations. 4. The above may be brought to the notice of all the necessary compliance. 17.2 Now this circular has been approved and upheld in many judgments including that of Hon'ble Gujarat High Court in the case of PCIT vs. Ramniwas Ramjivan Kasat, reported in 248 Taxman 484. (Guj). Following the above two circulars, the Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the rival contentions and also perused the orders of the lower authorities. The assessee is Non Banking Financial Company and income from capital gains were investment made in equities are sold. The assessee treated long term capital gain from sale of equities held for more than 12 months exempt u/s 10(38) of the Act. The Assessing Officer treated it as business income, Now, the above issue is squarely covered in favour of the assessee by Circular No. 6 dated 29.02.2016 issued by CBDT. The above circulars peaks that if shares are held for more than 12 months, if assessee shows it as LTCG, same should be accepted. 7. In view of above facts we are of the opinion that when the assessee himself has treated the income arising from sale of securities held for more than 12 months as capital gains, there is no reason to dispute it by Assessing Officer. 8. In view of this ground No. 2 of the appeal of the assessee is allowed holding that long term gain from listed securities of ₹ 25,13,359 is chargeable to tax under the head capital gain and not business income. Ground no. 2 of the appeal is allowed. 2.10 In view of the consistent finding of the Tribunal sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) .. (ii) .. (iii) an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assessee, on the first day and the last day of the previous year. 5.4 The computation made by the appellant company is as per Rule 8D(2)(iii) which does not provide for any percentage to be applied on the dividend income, to arrive at the disallowance. As the factum of exempt income claimed is not denied and computation is also as per the governing Rule i.e. Rule 8D(2)(iii), the disallowance has to be as per the letter of the Rule. In view therefore, the plea of the Ld. AR that since 83% of the dividend income is from Dabur India Ltd., the disallowance is to be worked out on percentage basis, is not in order. The Ld. AR s reliance on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oter. In this regard, the Hon ble Supreme Court in the case of Maxopp Investment Ltd Vs CIT in 402 ITR 640 has recently held that: 34. Having clarified the aforesaid position, the first and foremost issue that falls for consideration is as to whether the dominant purpose test, which is pressed into service by the assessees would apply while interpreting Section 14A of the Act or we have to go by the theory of apportionment. We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure. Keeping this objective behind Section14A of the Act in mind, the said provision has to be interpreted, particularly, the word in relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring controlling interest in Dabur India Ltd should not be subject to disallowance under section 14A is rejected. 3.9 Regarding the second contention of the assessee that no dissatisfaction was recorded by the Assessing Officer on the claim of the assessee of expenses toward earning exempt income, we agree with the finding of the Ld. CIT(A), that when the assessee itself as computed the disallowance in terms of rule 8D and thereafter reducing the expenses corresponding to earning dividend income from shares of M/s Dabur India Ltd. was not justified. The Assessing Officer in para 4.3 to 4.5 of the assessment order has duly rejected the action of the assessee of reducing the expenses related to earning of the dividend income from the shares of M/s. Dabur India Ltd. Accordingly, we reject the contention of the assessee and upheld the finding of the Learned CIT(A) on the issue in dispute. The ground No. 2 of the appeal of the assessee is accordingly dismissed. 4. Third ground is regarding disallowance of ₹ 15,48,318/-out of business expenditure. 4.1 The brief facts qua the issue in dispute are that the Assessing Officer asked the assessee to provide details of business p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out in the claim under the head business promotion, no interference is called for. The disallowance of ₹ 15,48,318/- made by the AO, is confirmed. This ground of appeal is ruled against the appellant. 4.3 Before us, the learned Counsel submitted that disallowance has been made on the ad-hoc basis, without identifying the expenses towards non-business purpose and thus disallowance need to be deleted. 4.4 On the contrary, the Learned DR relied on the order of the lower authorities. 4.5 We have heard rival submission of the parties on the issue in dispute. It is undisputed that 10 percentile disallowance was agreed by the Authorized Representative of the assessee before the Assessing Officer and therefore the Assessing Officer did not identify the individual expenditure not related to the business purpose. In view of the admission of the Authorized Representative of the assessee for disallowance of 10% of the expenses as incurred for non-business purpose, we do not find any infirmity in the order of the Ld. CIT(A) on the issue in dispute and accordingly uphold the same. The ground No.3 of the appeal of the assessee is accordingly dismissed. 4. In the result, appea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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