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TMI Blog2022 (9) TMI 1569X X X X Extracts X X X X X X X X Extracts X X X X ..... s, we allow the appeal of the assessee and direct the AO to treat the income earned by the assessee on share/mutual funds transactions under the head capital gains by considering the assessee as an investor, whether short-term or long-term capital gains, depending upon the period of holdings of the relevant shares/mutual fund units. In the result, grounds taken on this issue by the assessee are allowed and those by the revenue are dismissed. Disallowance u/s 14A - assessee submitted that it should be restricted to the extent of considering only those investments which yielded exempt income for which a detailed working is placed on record - HELD THAT:- We find it proper to remit the matter back to the file of AO for the limited purpose of verification of the calculations made by the assessee reproduced and accordingly consider the disallowance u/s 14A of the Act. X X X X Extracts X X X X X X X X Extracts X X X X ..... i Suraj Khandelwal in ITA No. 1069/Kol/2015, are reproduced as under:- "2. (a) THAT the Ld. CIT(A) erred in not giving decision fully in respect of amended ground No. 1(C) reads as "FOR that the Ld. JCIT erred in law as well as on facts in treating the Short Term Capital Gain of Rs. 65,60,181/- arising on sale of shares held as investment as business income. He failed to notice that out of Rs. 65,60,181/- the gain from sale of NIFTYBEES of Rs. 43,47,480/- was Long Term Capital Gain as the same was held for more than 12 months". (b) THAT the Ld. CIT(A) was wrong in confirming the Long Term Capital Gain from sale of NIFTYBEES of Rs. 43,47,480/- in spite of the fact that the same was held for more than 12 months. 3. THAT the Ld. CT(A) was wrong and incorrect in confirming the addition of Rs. 9,76,951/- in respect of interest. The Ld. CIT(A) confirmed the addition without considering the submissions made before him. 4. FOR that the Ld. CIT(A) erred in law as well as on facts in holding that the disallowance u/s.14A read with Rule-8D is to be made on the shares which were held more than three months, in spite of the fact that the Short Term Capital Gain is taxable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reliance on certain decisions of the Hon'ble Supreme Court and came to a conclusion that transactions in shares were in the nature of trade and assessed the same as income from business. Ld. Assessing officer also made certain observations in respect of purchases which were made from borrowed funds and noted that approximately 80% of the funds were applied in share transactions as per the balance sheet, 99.5% of the sundry creditors were brokers and managers, 62% of the interest paid was allotted to share transactions. Further, ld. Assessing Officer made a disallowance u/s 14A of the Act, in respect of the exempt income earned by the assessee. He resorted to the method of calculation under Rule 8D and arrived at an amount of Rs. 77,08,745/- under Rule 8D(ii) and of Rs. 7,12,222/- under Rule 8(2)(iii), totaling to Rs. 84,20,968/-. 6.2 Aggrieved, assessee went on appeal before the ld. CIT(A). 7. Contention of the assessee was that she had been into both the activities i.e, investment of shares/mutual funds and doing derivative business. In addition to this, she had also undertaken intra-day transactions (same day purchase and same day sale) as speculation business income. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that all the transaction in shares which were delivery-based have been treated as capital gains and the transactions which were non delivery-based have been treated as business income. 7.3 Certain statistics were also furnished before the ld. CIT(A) which included minimum average length of holding of shares as 23 days, maximum average length of holding of shares as 633 days and total average length of holding of shares as 328 days. The average length of holding of shares which is shown as short-term capital gains is 141 days. Reference was also made to the assessment completed for assessment year 2009-10 wherein, loss in sale of shares was reported as short-term capital loss and was carry forward to the next year and the long-term capital loss was also reported which was accepted. Reference to the assessment made u/s 143(3) for Assessment Year 2006-07 was also made, wherein transactions for shares were accepted as capital gains. A chart was referred in respect of twelve assessment years starting from 2006-07 to 2017-18, placed at page 96 of the paper book, to demonstrate how the transactions of shares have been reported and accepted by the Department. The same is reproduced as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noted that the borrowings by the assessee were from Portfolio managers/finance companies to finance the short-term purchases. Considering the volume of sales and purchases over a few weeks of holding which is more than 8 to 10 times the stock of shares as on the first date of the relevant financial year, the ld. CIT(A) observed that the intention of the assessee is to maximise profit and thus, held the assessee as a trader in the current year in respect of shares sold in days or weeks or a few months. 10. Contrary to the above observation, ld. CIT(A) also observed that while following the rule of consistency and having regard to the acceptance by the ld. Assessing officer in the earlier years of trading, the assessee is an investor. He noted that the assessee may be treated as "not a trader" in respect of shares sold for holding period of more than a few months or few year. Thus, he marked upon a reasonable timeline of three months i.e, 90 days of holding period based on which he bifurcated the share transactions for their treatment into capital gains versus business income. He thus, finally held that gains on sale of shares held for up to 3 months be treated as business income an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the ld. Assessing Officer and upheld by the ld. CIT(A). It was also contended that reference made by the ld. Counsel for the assessee for the past and subsequent years, are all relating to processing of returns u/s 143(1) of the Act and the one which was completed u/s 143(3) of the Act for Assessment Year 2014-15, is a case of loss. Ld. Sr. D/R placed strong reliance on the findings given by both, the ld. Assessing Officer and the ld. CIT(A) and submitted that the appeal of the assessee be dismissed on this issue and appeals of the revenue be allowed. 15. We have heard the rival contentions and perused the material available on record. The moot point before us relates to treatment of income earned by the assessee on share/mutual funds transactions as capital gains or as business income. Before marching ahead, we draw attention to certain relevant aspects of the issue in hand to address it in proper perspective under the given facts and circumstances. 15.1 The co-ordinate bench of ITAT Rajkot in the case of Nemish Jaikishor Mehta vs. ACIT in ITA No. 15/Rjt/2013 dated 03.11.2017 has lucidly dealt with this issue of whether gain from sale of shares is to be assessed as a busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation its value? Former will indicate intention of trades and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject-matter of transaction during the time the asset was the assessee. Has it been treated as stock-in- trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. (d) The fourth test is as to how the assessee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation. (e) The fifth test, normally applied in case of partnership firms and companies, is whether the deed of partnership or the memorandum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 143(1) of the Act and no question with regard to the head of income was raised by the authorities below, except for the impugned year and Assessment Year 2012-13 for which matter is pending before the ld. CIT(A). In respect of Assessment Year 2014-15, assessment was completed under section 143(3) of the Act vide order dated 28/12/2016 and from the computation of assessed income, it is noted that short-term capital loss on sale of shares/listed securities has been accepted which has been allowed to be carried forward by the ld. Assessing Officer. 16.2 We also refer to the two CBDT circulars vide Circular Nos. 6/2016 dt. 29/02/2016 and CBDT Circular No. 4/2007 dt. 15/06/2007. In the first circular No. 06/2016, it is noted that determination of character of a principal investment in shares or other securities, where the sum is in the nature of a capital asset or stock in trade, is essentially a fact specific recognition and with a view to reduce litigation and uncertainty in the matter, in partial modification to Circular No. 4 of 2007, further instructions have been issued to the Assessing Officers to take into account the following- "a) Where the assessee itself, irrespective of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id down by the Supreme Court in the above two cases afford adequate guidance to the assessing officers. 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- "(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; (ii) the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; (iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt". 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter--and, if there was no change, it was in support of the assessee--we do not think the question should have been reopened and contrary to what had been decided by the CIT/ in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961." In the assessee's case under consideration, the Department has been accepting the stand of the assessee, during the previous year as well as in subsequent years to disclose the income on account of sale of investments under the head 'short term capital gain'. Moreover, the assessee`s intention is to be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal has observed in its judgment that the assessee has followed a consistent 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 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. There cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. Tribunal having entered a pure finding of fact that the assessee is engaged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ger and the employment of the portfolio manager implies that the assessee was serious in earning income through strategic/planned transactions of specific shares and thus indulged in business? 2. Whether the Tribunal was justified, on the facts and in the circumstances of the assessee's case, in holding that no interference was warranted in the order of the Commissioner of Income Tax (A) without appreciating the fact that the assessee itself had admitted dealing in derivatives and mutual funds as business income in the previous assessment years and therefore, the assessee's generation of profits by purchase and sale of shares after availing loan of Rs. 60 lakhs for dealing in shares during the year should also be treated as part of the trading activity?" 17.5.1 On the second substantial question of law for deployment of borrowed funds, Hon'ble High Court expressed its view that the Act does not prohibit the assessee from making investments in capital asset after using borrowed funds. The relevant finding is reproduced from para 12 as under:- "12. As regards the second question of the assessee having taken loan and having invested borrowed funds in purchase of shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed and those by the revenue are dismissed. 19. Findings given above in respect of ITA No. 425 & 613/Kol/2015, squarely applies in ITA No. 1069/Kol/2015 & 1105/Kol/2015 in the case of Shri Suraj Khandelwal, facts being similar. Accordingly, grounds taken on this issue by the assessee are allowed and those by the revenue are dismissed. 20. On the issue relating to the disallowance made u/s 14A, at the outset, ld. Counsel for the assessee submitted that it should be restricted to the extent of considering only those investments which yielded exempt income for which a detailed working is placed on record [extracted (supra) from page 35 of the paper book]. He thus, prayed that the matter may be remitted back to the file of the ld. Assessing Officer who may be directed to consider this computation after due verification. 21. On confrontation of this submission by the ld. Counsel to the ld. Sr. D/R, nothing was objected upon. Accordingly, we find it proper to remit the matter back to the file of ld. Assessing Officer for the limited purpose of verification of the calculations made by the assessee reproduced (supra) and accordingly consider the disallowance u/s 14A of the Act. This fi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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