TMI Blog2013 (1) TMI 675X X X X Extracts X X X X X X X X Extracts X X X X ..... act on the last day of the previous year – Held that:- The notional loss is allowable as long as there are no contingencies are attached and the notional gains should be allowed in the year of realization based on the principle of prudence. The question is what if there is difference between the anticipated profits quantified in an year and the actual profits realized thereafter. On finding that there is no dispute on the fact that the appreciated value of stocks is realized and afforded to tax in the next year – In favour of assessee Disallowance u/s 14A – Rule 8D – Expense in relation to exempt income - Earned dividend income and claimed exemption in view of the provisions of section 10(34) – Reckoning of units of MF as stock in trade or as investment - Held that:- Following the decision in case of India Advantage Securities Ltd. (2012 (11) TMI 458 - ITAT, MUMBAI) that assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee therefore disallowance u/s 14A did not upheld. AO needs to collect additional facts for deciding the principle of res judicata and the rule of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or gain at the end of the year is to be treated as expenses or gain resp. of the year and therefore, erred in deleting the addition of ₹ 2,50,32,898/- on account of open position of F O contract as on 31st March, 2008. 4. For these and other grounds that may be urged at the time of hearing, the decision of CIT(A) may be set aside and that of AO restored. 3. Grounds raised in Assessee's appeal: The only effective ground raised by the assessee reads as under: On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in confirming the addition of ₹ 1,56,23,811/- made by the AO under section 14A r.w. Rule-8D of the Income Tax Act, 1961.The appellant prays that the same may please be deleted. 4. Briefly stated the relevant facts of the case are that the assessee who has claimed to have engaged in the business of trading and investment, filed the return declaring the business loss of ₹ 21,78,14,379/-. The return was scrutinized u/s 143(3) of the Act and the total income was determined at ₹ 24,21,09,160/-. In the return, the assessee claimed business loss on sale of shares to the tune of ₹ 42,01,31,205/-. Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 94/- (short term and long term units) which was claimed as exemption u/s 10(34), AO proposed to invoke provision of section 14A read with Rule-8D of the Act and he relied on the judgment of jurisdictional High Court in the case of Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81. On this account, AO made addition of ₹ 1,56,23,811/-. Before the CIT(A): 7. Aggrieved with the above additions, the assessee filed appeal before the CIT(A) and the assessee made various submissions which are extracted in para 1.2 of the impugned order. On the issue of AO's decision in treating the business loss of ₹ 43,01,31,205/- as the short capital gains loss, the case of the revenue is that the same cannot be the business loss for the following reasons,- (a) number of transactions are not many - three transactions only; (b) intention was to earn the dividends - evidenced by the fact the assessee earned dividend of ₹ 30.82 cr (rounded off) as per the table below; S.No Scrip Date of purchase Units purchased Amount of purchase Date of dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same is given here. CIT(A) held that the case of the assessee does not fall in the category of 'colourable device' and relied on the CBDT circular to hold that the investor has option to do both investor and trader of the units/shares. CIT(A) relied on the books entries of the units held as stock, while mentioning that the same is not conclusive. He also discussed the aspects of applicability of res judicata to the income tax proceedings in the light of the Hon'ble Supreme Court's judgment in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321. Further, the CIT(A) commented that the department has accepted the assessee dealing in units as the business activity and loss thereof is business loss. As per the CIT(A), AO is not correct in disturbing the stand of the assessee in this regard. He also observed that the assessee loans have swollen to ₹ 270.29 cr at the end of March 2008 as against ₹ 70.31 cr at the end of March 2007. Finally, the CIT(A) granted relief to the assessee on this issue of business loss. BEFORE ITAT: 9. Aggrieved with the same the revenue is in appeal before us. Ground 2 is relevant here and it has four sub grounds. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness stock and the case of investment. In this regard, para 12 and 14 on page 10 of the order of the Tribunal was read to demonstrate the same. Next drawing our attention to the applicable principle of 'res judicata', Sri Mehta mentioned that so long as the facts are identical, this principle has no application and rule of consistency needs to be followed. Ld Counsel relied on the jurisdictional high Court's judgment in the case of CIT v. Darius Pandole [2011] 330 ITR 485. When the facts are identical, change of opinion of the AO is unwarranted. In this regard, Ld Counsel relied on the book entries consistently followed treating the units as stock in trade. Fairly, Sri Mehta also brought to our notice the fact of absence of provisions relating to dividend/bonus stripping in section 94 of the Act. These provisions are brought into statute by the Finance Act 2001 which are subsequently amended by the Finance (no. 2) Act, 2004. 11. Further, mentioning about the various facets of the investment or business transactions, Sri Mehta mentioned that the borrowing of funds as done by the assessee for acquiring of the units of MFs is an important feature of business activity. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nes to determine whether shares gains assessable as STCG or business profits. They are : (a) it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, (b) that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions namely, those by way of investment and those for the purposes of business, (c) that there should be uniformity in treatment and consistency when facts and circumstances are identical particularly in the case of the assessee and (d) that entries in books of account alone are not conclusive in determining the nature of income though they have a limited role to play. 13. The conclusion portion of the said judgment in the case of Gopal Purohit, supra reads that 'Tribunal having entered a pure finding of fact that the assessee is engaged in two different types of transactions namely, investment in shares and dealing in shares for the purposes of business and held that the delivery based transactions are to be treated as investment transactions and the profit received there from is to be treated as ST or LT capita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is one of the many parameters set for concluding if a transactions is of business nature or otherwise. Further, Ld Counsel's reliance on the order of the Tribunal on the validity of CIT's order u/s 263 of the Act, in our opinion, is misplaced as the issue in the review order relates to the valuation of the bonus units of MFs and not on if the units are held as stock-in-trade or investments. Then the issues adjudicated in the case of Wallfort Share Stock Brokers (P.) Ltd. v. ITO [2005] 96 ITD 1 (Mum.) (SB) relates to the AYs 2000-01 and 2001-2002 i.e. prior to the amendment to section 94 of the Act and that means there is change in the legal frame work/'circumstances'. Further, it is also relevant to mention that the assessee claims that he holds the units/shares both as stock in trade and partly as investments and he can rightly hold so. Computation chart depicts the relevant details of business income/loss and the capital gains/loss. AO needs to examine the basis on which the entries are made by the assessee in the books. On the facts of the disclosure of profits partly as business income and partly as short term capital gains, Hon ble AP High Court held in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue is of the opinion that the CIT(A) failed to appreciate that the assessee has claimed loss on open position of F O contract and did not offer the profit of ₹ 2,50,32,898/- for taxing on similar open position of F O contact on the last day of the previous year. We have discussed relevant facts in the preceding paragraphs of this order and mentioned that AO analyzed the profits and losses declared by the assessee involving the Futures and Options. AO noticed that a sum of ₹ 2,50,32,898/- was earned out of the Cent tex and not offered the said profits for tax in this year. On finding that the assessee did not recognize profit of ₹ 2,50,32,898/- as income of the year, AO recognized the same as profit of the assessee in the year under consideration. Assessee submitted that the said profits were offered to tax in the next financial year i.e AY 2009-2010 based on the principle of fact of realization of profits. Whereas the loss was debited to the P and L account based on the approved principle of Prudence. Apex court's judgment in the case of Chainrup Sampatram v. CIT [1953] 24 ITR 481 (SC) is relevant, which was followed by the Bombay Bench Tribunal in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we are of the firm view that the notional loss is allowable as long as there are no contingencies are attached and the notional gains should be allowed in the year of realization based on the principle of prudence. The question is what if there is difference between the anticipated profits quantified in an year and the actual profits realized thereafter. On finding that there is no dispute on the fact that the appreciated value of stocks is realized and afforded to tax in the next year. Therefore, in our opinion, the order of the CIT(A) on this issue does not call for any interference. Accordingly, the ground 3 is dismissed. 19. Grounds 1 and 4 are general and they do not call for specific adjudication. 20. In the result, the appeal of the revenue is partly allowed for statistical purpose. I.T.A. NO. 6997/M/2011 (Assessee's appeal) 21. The solitary ground raised by the assessee in its appeal read as follows. On the facts and in the circumstances of the case and in law, the Ld CIT(A) erred in confirming the addition of ₹ 1,56,23,811/- made by the AO under section 14A r.w. Rule-8D of the Income Tax Act, 1961.The appellant prays that the same may please be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roking commission was not relatable to earning of dividend income as the loan had been utilized for the purchase of shares and the profit shown for the sale of shares had been offered as business income. The Tribunal, therefore, directed the AO to bifurcate the expenditure proportionately. The order of the Tribunal was however, not upheld by the Tribunal. The High Court noted that 63% of shares which were purchased were sold and income derived was offered to tax as business income. The remaining 30% of shares which remained unsold had reverted to dividend income for which the assessee had not incurred any expenditure at all. The High Court also observed that the assessee had not retained the shares with the intention of earning dividend income which was incidental due to his sale of shares which remained unsold by the assessee. The High Court, therefore, did not uphold the order of the Tribunal disallowing the expenditure in relation to the dividend from shares. Thus, there being a direct judgment of a Hon'ble High Court on this issue, the same has to be followed in preference to the decision of the Special Bench of the Tribunal in the case of M/s. Daga Capitl Management P. Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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