TMI Blog2012 (6) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... ging on record any material or evidence to establish the nexus between such alleged expenditure and the earning of said income – Held that:- in the case of Godrej Boyce Mfg. Co. Ltd. (2010 - TMI - 78448 - BOMBAY HIGH COURT - Income Tax), that Rule 8D is applicable for and from assessment year 2008-09 and prior to that the Assessing Officer can make estimate in the given facts and circumstances. disallowance restricted to 1% in relation to earning of exempted dividend income and direct the Assessing Officer to calculate the expenditure on that basis. This ground of assessee's cross objections is partly allowed. appeals of the revenue are dismissed and the Cross Objections of the assessee are partly allowed - IT Appeal Nos.586 & 609 (Kol.) of 2009 - - - Dated:- 24-6-2011 - Mahavir Singh, Akber Basha, JJ. D.R. Sindhal for the Appellant. R. Salarpuria and S. Jhajharia for the Respondent. ORDER Mahavir Singh, Judicial Member Appeal in ITA No.586/K/2009 by revenue and cross objection No.32/K/2009 by assessee are arising out of the order of CIT(A)-XXXII, Kolkata in Appeal No. 72/CIT(A)-XXXII/Cir-12/08-09/Kol vide dated 22.01.2009, ITA No.609/K/2009 by revenue and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main object of the assessee company is to buy, invest, acquire, subscribe, to hold, dispose of and deal in shares/units etc. The Assessing Officer also noted that the assessee company has carried out in a systematic and organized manner numerous transactions of buying and selling of shares/units, which constituted its business activities and accordingly, he assessed the assessee's income under the head "capital gain" disclosed by assessee "business income". Aggrieved, assessee preferred appeal before CIT(A) and he reversed the order of Assessing Officer by holding that the assessee company is investment company and income earned from sale and purchase of shares is capital gain. For this, the CIT(A) held as under: "I have considered the submissions made by the A.R of the Appellant and perused the impugned assessment order. I have also carefully gone through the judicial decisions relied upon by the AO and by the A.R. In ground Nos. I 2 the material question raised by the assessee is whether the income realised by the transfer of shares/units of mutual funds held by it as 'investment' was assessable as Business Income or as Capital Gains, One of the factor which appears to ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clear from the audited accounts that investment in shares and units was made by the assessee out of its own funds and not out of any borrowed funds as its balance sheets do not reflect any borrowed funds. (5) The assessee has carried its investments in shares/units, in its books of account, at 'cost price' and not at 'Cost or market price' which is generally the case of goods are held as stock-in-trade. I have also considered the decision of Hon'ble Delhi High Court in the case of CIT v. Ess Jay Enterprises Pvt. Ltd. [2007] 165 Taxman 465 wherein the Court following the Apex Court Judgment in 77 ITR 253 distinctly held that gain on shares, held as investment and not as stock-in-trade, have to treated as capital gain only. The appellant had also placed a copy of the order of Jurisdictional Tribunal in the case of DCIT v. Reliance Trading Enterprises Ltd. being ITA No. 944/Kol/2008 dated 03.10.2008. It is observed that the facts of that case are very similar that of the appellant. There the Hon'ble Tribunal has held that the profit from assessee's activity of purchase and sale of shares and securities was to be assessed as capital gains and not business income. Accordingly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares within a short period held adventure in the nature of trade. V. Amirtham Ammal v. CIT [1969] 74 ITR 739 (Mad.) Burnside Investment Holdings Ltd. v. CIT [1997] 61 ITD 501 (Mad.). (iv) Shares purchased with borrowed funds the sale of the share held "Adventure in the nature of trade" (a) CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC) (b) Atlas Corpn. v. ITO [1996] 57 ITD 139 (Mum.) (c) Smt. Neerja Birla v. Asstt. CIT [1998] 66 ITD 148 (Mum.). (v) As the assessee carried out 253 purchase and sale transaction, the speculative transactions were 31, all shares were purchased and sold in the same year, no share was held for one year, 100 transactions were purchased and sold within 30 days. It was held that the income was to be assessed as "Business Income". ITAT, Mumbai in the case of Asstt. CIT v. Tripura Prasad N. Pandya [IT Appeal No.1336 (Mum.) of 2010, dated 18-2-2011]. (vi) In the shares purchased by raising share capital and acquired money from other sources with which the company had acquired very large blocks of shares and on sale the transaction held "Business Income - XYZ/ABC, Equity Fund, In re, [2001] 250 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therwise not. It depends on situation to situation and as a general rule, when shares are purchased to sell the same on profit and no other motive is involved, then it is business loss, otherwise it is not allowable as business loss. He stated that for treatment of loss on sale of shares it is not relevant whether the shares are shown as investment or stock-in-trade and also it is not relevant whether the shares are valued at cost or market price or even when a dealer did not deal in shares for few years and then sold shares, it was held as business loss. He referred to the following factors: "Mere possibility of realisation of enhanced value will not render the transaction a business venture - Whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment depends on the question whether the excess is an enhancement of the value by realising a security or a gain in an operation of profit-making. The totality of all the facts will have to be borne in mind and the correct legal principles have to applied to them Raja Bahadur Visheshwara Singh v. CIT [1961] 41 ITR 685 (SC). The surplus realised on the sale of shares wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on court decisions: "(i) In case shares are taken as stock-in-trade, then the loss is business loss i.e., if the assessee is dealer in shares and incurs loss in dealing in shares that are purchased in ordinary course of dealing without any other intention. (ii) But it does not mean that every kind of deal in shares in case of dealer will be business deal and result in revenue loss, i.e., if the shares are purchased for acquisition of managing agency by virtue of the intention behind such acquisition, they will, in all probability, constitute capital asset in the hands of the purchaser and not his stock-in-trade. The same way, if the shares are purchased on investment account, then also the loss will be on capital account. (iii) Whether the purchases of shares/securities are on trading account or investment is dependent on many considerations, i.e., length of time, number of transactions, motive behind purchase and treatment given by the assessee or department, but the same may not be conclusive in itself. It will also be not relevant that the same were shown as stock or investment in the accounts. (iv) If the losses are incurred on purchase and sale of shares or securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res are dealt with regularly, it is presumed that the assessee is a dealer in shares and in case of isolated transactions, it is treated as investment. But only that is not conclusive by itself; even a single transaction can be treated as an adventure in the nature of trade. The Supreme Court in the case of Ramnarain Sons (P) Ltd. v. CIT [1961] 41 ITR 534 observed that in considering whether a transaction was or was not an adventure in the nature of trade, the problem should be approached in the light of the intention of the assessee having regard to the legal requirements which were associated with the concept of trade and business. The inference on this question raised by the Tribunal on the facts found was a mixed question of law and fact and was open to challenge before the court. Where memorandum of association of a company permitted dealing in shares, then loss suffered by the company in a solitary transaction of purchase and sale of shares could not be allowed as trading loss. So a solitary transaction in shares if resulting in loss, will, in the absence of proof to the contrary, be capital in nature as held by the Supreme Court in case of Patiala Biscuit Mfrs. (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to determine nature of loss but is not conclusive by itself. Where shares are purchased with the intention to resell at profit then loss will be business loss New Prahlad Mills (P) Ltd. v. CIT [1972] 85 ITR 480 (Bom) but if the assessee's intention is to hold as investment, then it is capital loss Seth Ganga Sagar, In re [1934] 2 ITR 155 (All). When the main purpose is not to get profit from resale but some other motive such as to obtain managing agency CIT v. National Finance Ltd. [1962] 44 ITR 788 (SC) then it will be capital loss even in the case of dealer of shares Ramnarain Sons (P) Ltd. v. CIT [1961] 41 ITR 534 (SC) and Tribunal's finding in this case that shares were purchased to acquire control or not was a relevant one CIT v. Shree Krishna Properties Ltd. [1994] 205 ITR 308 (Cal.). In another case, where shares were purchased to eliminate competition Gondhara Transport Co. (P.) Ltd. v. CIT [1972] 84 ITR 294 (P H), it was held as capital loss. Sometimes motive is not to trade in shares but either to get tax advantage or manipulate in shares for some other purpose and transactions are generally between relatives or group companies and even dealings are also sometimes not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, it was held as business loss Karsondas Ranchhoddas v. CIT [1972] 83 ITR 256 (Bom). It was observed in CIT v. Shanti Prasad Jain [1967] 66 ITR 289 (Pat.). See also CIT v. Shree Krishna Properties Ltd. [1994] 205 ITR 308 (Cal.) and CIT v. Bagla Bros. [1972] 84 ITR 20 (All), that where a dealer in shares sold certain shares and incurred loss and the shares had not been acquired to obtain controlling interest in the companies, the said loss was a business loss. In CIT v. Chase Trading Co. [1999] 236 ITR 665/[1998] 101 Taxman 263 (Bom.), it was observed that as assessee-firm was dealer in shares, the sale of share by firm to partners was a commercial transaction and, therefore, the assessee-firm was entitled to claim deduction of loss suffered in such transaction. Losses in share business of HUF taken over by firm are business loss if shares were held as stock-in-trade. Finally, he summarized the arguments as under: "(i) For deciding the issue various factors have to be considered and the issue cannot be decided on one factor. Considering the all the factors as discussed by the A.O. in assessment order and as argued by me the cumulative factors shows that the share trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re and the volume of the expenditure in the Schedule 'J' further suggest that the assessee was dealing in share business transactions and was not an Investor. (ix) All the above referred facts lead to the inference the assessee's transaction in buying and selling units/shares amount to business activities with the motive behind the transactions being to earn profits. (x) The above conclusion is also strongly supported by the Hon'ble Supreme Court of Dalhousie Investment Trust Co. Ltd. v. CIT 68 ITR 486. (xi) The CIT(A) has failed to rebut almost all the findings given by the A.O. Hence, he has not passed a reasoned and speaking order. Hence the same is untenable in the eyes of law." Ld. CIT-DR, in view of the above stated that in the present case share transactions are business transactions, hence resulted in business income and not capital gains. He urged the Bench to restore the order of the AO. 7. On the other hand, the Ld. Counsel for the assessee Shri R. Salarpuria argued that only ground raised by revenue is in respect to treatment on purchase and sale of shares as "Business Income" as against "Capital Gain" declared by the assessee and for this, he stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 05 : (c) In assessment year 2004-05 the profit on sale of investment was shown at Rs. 48,79,072/- (Page 197 of the P.B.) In the computation of income placed at page 375 of the P.B. the income from capital gain after set-up of brought forward losses was shown at Rs. 72,08,236/- and the total income for such year was shown at Rs. 23,46,730/-. In the assessment order passed u/s 143(3), page - 377 of the P.B., the AO has passed order after taking seven hearings. The AO has made due discussion in the order in respect of the capital gain and has also mentioned that the assessee company is engaged in business of investment in shares and mutual fund. Having all the details and documents the AO has accepted the capital gain so declared by the assessee which is evident from the computation of income done by the AO and which is a part of such order placed at page 379 of the P.B. A.Y 2006-07 : (d) In assessment year 2006-07 the assessee had declared capital gain of Rs. 1,28,38,601/- after set off of brought forward losses and short-term capital gain of Rs. 26,12,926/- (placed at page 395 of the P.B.) and in such computation of income the total income was declared at Rs. 1,19,26,738/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2004-05. (iv) Investment in shares and units were made by the assessee out of assessee's own fund and not out of borrowed fund. (v) The assessee carried investment in shares / units in its books of accounts at cost price and not at cost of " Market Value" whichever is lower, which is generally the case of Goods held as "Stock-in-Trade". The Ld. Counsel stated that the CIT(A) has rightly held that the volume of transactions/frequency cannot alter the character of the transactions and further the AO has not rejected the books of account before arriving at such conclusion. The Ld. Counsel requested the bench to consider the following: i. The shares/mutual fund were duly classified as investment in the books of account. In such respect it is further submitted that. ii. The profit earned out of such sale as all along been declared as "Capital Gain" and the same has been accepted by the revenue in preceding and succeeding years. iii. Shares and securities were held as investment and were duly reflected in the Balance Sheet for the A.Y 2002-03 (Paper Book page - 99), A.Y 2003-04 (Paper Book page - 152), A.Y 2004-05 (Paper Book page - 187) A.Y 2005-06 (Paper Boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l No. 659 (K) 2007]. The Ld. Counsel for the assessee also negated the arguments of Ld. CIT-DR, which we will discuss in this order i.e., the later part. 8. We have heard rival submissions and gone through facts and circumstances of the case. We find that Ld. CIT-DR mainly contended that the purchase and sale of shares is within a short period and about the proposition laid down by Hon'ble Apex Court and Hon'ble High Courts there is no dispute but in the given facts and circumstances of this case, we have to take a decision. We find from records that such shares have been held by assessee for a considerable period of time say 3-4 months and even more than year in some of the cases, hence facts have been properly verified. Contention of Ld. CIT-DR that shares were purchased with the borrowed fund as well as raising share capital by assessee, we find from facts that assessee has not issued any fresh share capital during the year for which money has been received and indeed it is the only amalgamation of other companies with the assessee which has taken place in respect of which shares have been issued and this fact is verified from assessee's paper book page 89, where the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees' Remuneration Benefits 992,866 1,458,892 21,226,040 Refer Note below Adminstrative Other Exp. 3,473,292 4,479,054 8,643,389 Refer Note below Interest 695,954 Refer Note below Depreciation 257,113 252,400 553,893 Total 4,723,271 6,190,346 42,537,991 Profit Before Taxation 15,683,489 11,674,174 (11,340,535) Taxation 1,406.720 (827,455) 2,864,008 Minus due to deferred tax impact Profit after Taxation 14,276,769 12,501,629 (14,204,543) Dividend Dividend Tax Paid 1,382,270 1,379,138 Dividend Paying Co. Note: The above figures includes the amounts pertaining to M/s Nav-Jyoti Investments Dealers Limited, which was merged with the Company vide Order dt. 17.03.20O3 of Hon'ble High Court at Calcutta, w.e.f. 01.10.2001. The said Company was engaged in the business of Textiles manufacturing. Hence, the whole figures of Sales, Profit on Sale of Fixed Assets, Stocks, Purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12,225,040 12,225,040 No Change in Share Ca Reserves Surplus 127,733,407 114,838,908 103,716,417 Secured Loans - - - No Borrowings Unsecured Loans - - - No Borrowings Referred Tax Liability (Net) 989,508 835,439 2,511,304 Current Liabilities 2,680,652 4,186,692 5,879,362 Provisions 2,593,443 3,752,255 4,554,530 Total 146,222,050 135,838,334 128,886,653 Fixed Assets (Net) 9,743,389 9,953,900 12,196,672 Investments 132,941,421 107,508,159 85,070,332 Stock-in-trade - - 650,000 Refer Note below Sundry Debtors - 271,522 1,570,528 Refer Note below Cash Bank Balances 1,144,609 6,073,380 14,565,816 Loans Advances 2,325,539 11,941,917 14,833,305 Other Current Assets - - - Misc Expenditure 67,092 89,456 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having reached finality, it cannot be contended now that such conclusion by the AO is erroneous in those years, besides, the AO has passed such orders after due discussion. We are of the view that the "Rule of Consistency" has to be followed although the "Principle of Res judicata" does not apply to income tax proceedings, where the facts are identical and issue in hand is the same. In case there is change in facts and circumstances, the decision can be changed but in the present case the revenue could not bring any new fact or evidence which changes the factual position from earlier year, in such circumstances, we cannot take a different view. Similarly, Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. v. CIT [1980] 123 ITR 669/[1979] 2 Taxman 22 wherein it is held that whether the ITO was justified in refusing to continue the relief of tax holiday granted to the assessee-company for the assessment year 1968-69, in the assessment year under reference, that is, 1969-70, without disturbing the relief granted for the initial year. Hon'ble Court held that it should be stated that there is no provision in the scheme of s. 80J similar to the one wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years 1974-75 and 1975-76, the disallowance of the relief under s. 89J to the assessee was not valid. For this, Hon'ble High Court held as under: "It is contended by the learned counsel for the department that the principle of res judicata has no application to proceedings under the I.T. Act and the findings reached for one particular assessment year cannot be held to be binding in the assessment proceedings for a subsequent year. As a general rule, there can be no dispute with this principle. But this general rule is subject to the qualification that a finding reached in the assessment proceedings for an earlier year would not be reopened in a subsequent year if it is not arbitrary or perverse, has been arrived at after due enquiry and if no fresh facts are placed in the subsequent assessment year. This is on the principle that there should be finality and certainty in all litigations including litigations arising out of the I.T. Act (see Burmah-Shell Refineries Ltd. v. G.B. Chand [1976] 61 ITR 493 (Bom.) and CIT v. Dalmia Dadri Cement Ltd. [1970] 77 ITR 410 (P H). In the instant case, no fresh material was brought in, in the assessment proceedings for the years 1974-75 and 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was due application of mind by the Assessing Officer to the very same issue during the course of the earlier two assessment years and that the assessments were finalized after considering the reply filed by the assessee specifically to the query raised by the Assessing Officer. In the circumstances, the Tribunal was, in our view, justified in following the decision of the Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321. While the principle of res judicata could not as an abstract principle apply to assessment proceedings since each year of assessment has to be considered separately, yet when a fundamental aspect was duly considered after a query was raised by the Assessing Officer and was answered by the assessee on the same facts, a change in view, was evidently not warranted for the assessment year in question. So construed, we do not find that the decision of the Tribunal will give rise to any substantial question of law. The view which we have taken is consistent with the principle laid down by the Division Bench of this court in Karsondas Ranchhoddas v. CIT [1972] 83 ITR 256. The appeal is hence dismissed." 13. In view of the above factual and legal position, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts and circumstances of the case the Ld. CIT (A) was wholly wrong and unjustified in disallowing Rs. 8,41,755/- as against the disallowance of Rs.1,82,145/- made by the AO u/s 14A of Income Tax Act, 1961. The Ld. CIT (A) had enhances the said disallowance by applying the provisions of Rule 8D(2)(iii) of Income Tax Rules. The CIT (A)'s action in such regard is bad and illegal as such Rule 8D having been notified only on 24.03.2008 cannot be applied for computation of such expenses. The AO's action is liable to be quashed / cancelled. Even otherwise and without prejudice the disallowance made was highly excessive and wholly unreasonable." 15. We have heard rival submissions and gone through facts and circumstances of the case. We find that the co-ordinate Bench of this Tribunal has been taking a consistent view to restrict the disallowance to 1% in relation to earning of exempt dividend income. We find that Hon'ble Bombay High Court in the case of Godrej Boyces Mfg. Co. Ltd. v. Dy.CIT [2010] 328 ITR 81/194 Taxman 203 at pages 138 139 vide sub-paras (v) to (vii) held that rule 8D is prospective as under: "(v) The provisions of rule 8D of the Income-tax Rules which have been not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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