TMI Blog2015 (1) TMI 1154X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. It filed its e-return of income on 29.10.2007. The Assessing Officer in his order passed u/s 143(3) on 24.12.2009 determined the total loss at ₹ 11,87,12,025/- inter alia, disallowing expenditure claimed of ₹ 4,69,20,004/- relating to earning of exempt income and also treating the short term and long term capital gains earned from the sale of shares as business income. Aggrieved the assessee carried the matter in appeal. As regards the disallowance of expenditure incurred under Rule 14 A , the First Appellate Authority upheld the order of the AO. 3. Aggrieved the assessee is before us on the following grounds. 1. That the impugned order dated 26.10.2012 passed by the Ld.CIT(A)-XIII, New Delhi is bad in law and wrong on facts. 2. That on the facts and circumstances of the case, the Ld.CIT(A)-XIII, New Delhi has erred in law in confirming the disallowance u/s 14A of the Act r.w.Rule 8D of ITAT Rules, 1962 amounting to ₹ 4,68,99,665/- by upholding that the investment in shares and securities have been made out of borrowed funds, therefore, the provisions of s.14A are applicable. 3. That the appellant craves lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the exempt income. As the interpretation of provisions of sec. l4A r/w rule 80 is leading to unanticipated absurdities which cannot be the intention of legislature. Under these circumstances help of external aids of construction for interpretation of statute is called for. Looking at the varying interpretation offered by various courts and benches of tribunal in relation to sec. 14A, it is quite arduous to precisely decide the issue. In given facts and circumstances without going into all the issues, in our view it is appropriate to take guidance from Chandigarh bench judgment in the case of Punjab state coopt mft. Fed.(supra) holding that the disallowance of expenditure in any case cannot exceed the income earned. In our view this judgment takes a holistic view that disallowance in terms of sec. 14A can be maximum to the extent of exempt income, there is no dispute that in this case which is at ₹ 68,37,583/-. This judgment implies that reasonable expenditure less than the exempt income can be disallowed. In our considered opinion, in the interest of justice, it will be reasonable to estimate and disallow, 50% of exempt income (Rs.68,37,583/-) as relatable to exempt i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any substantial question of law. Hence, the deletion of the disallowance of ₹ 2,03,752/- - made by the Assessing Officer was in order. . 15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee, is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend mayor may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had made investments in subsidiary companies of the group. (xi) Investments in mutual funds was ₹ 50.50 crores. (xii) The quantum of sale and purchase of shares is very nominal and was limited to few companies. (xiii) The facts and circumstances of the case clearly suggest that the assessee has purchased shares only for investment purposes and not for trading purposes. (xiv) The assessee has not entered into any transaction of F O or day trading during the entire year. 10.1. The above factual findings could not be controverted by the Ld.D.R. before us. 11. We now discuss the case laws on the subject. In the case of G.Venkateswami Naidu and Co. Vs. CIT : 35 ITR 594 (SC), the Supreme Court held as under: If a person invests money in land intending to hold it, enjoys its income for some time, and then sells it at a profit, it would be a clear case of capital accretion and not profit derived from an adventure in the nature of trade. In deciding the character of such transactions several factors are relevant. Whether the purchaser was a trader and the purchase of the commodity and its resale were alli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould only be a realisation of capital and would not stamp the transaction with a business character. Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment. In Commissioner of Inland Revenue v. Fraser: [1942] 24 TC 498,502 Lord Normand said: The individual who enters into a purchase of an article or commodity may have in view the resale of it at a profit, and yet it may be that that is not the only purpose for which he purchased the article or the commodity, nor the only purpose to which he might turn it if favourable opportunity for sale does not occur ... An amateur may purchase a picture with a view to its resale at a profit, and yet he may recognise at the time or afterwards that the possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in a higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business ..... In the case of Karam Chand Thapar Bros. (P) Ltd. Reported in 82 ITR 899 the Hon ble Supreme Court held as follows. ..................... The Tribunal also relied on the circumstance that the assessee was showing these shares as investment shares in its books as well as in the balance sheet. It is true that circumstance by itself is not a conclusive circumstance. It cannot be denied that that is a relevant circumstance on which the Tribunal could have relied for drawing the inference it did. The explanation that it had to do so because of the provisions of the company law is unfounded. The Lucknow Bench of the ITAT in the case of Sarnath Infrastructure P.Ltd. vs. ACIT, 313 ITR (AT) 13 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock in trade) then onus would shift to the revenue to prove that apparent is not real. (viii) The mere fact of credit of sale proceeds of shares(or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that the assessee was holding the shares (or the items in question) for investment. (ix) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating these legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention to carry on illegal business in that item since beginning or when purchases were made? (x) It is permissible as per CBDT Circular no.4 of 2007 of June 15, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention from the conduct, the Assessing Officer cannot replace his opinion for that of the assessee in holding that the shares are held as stock in trade and profit from which is to be assessed as business income. In all such cases the intention is manifested by the assessee himself by his conduct and other relevant factors as considered by the learned CJT(A). It is also seen that the shares were treated as investment in earlier year and which fact has been accepted by the Assessing Officer. The assessee has also earned huge dividend income from such shares. The Assessing officer merely because of the total volume of transaction is substantial, is guided to hold the income as business income. However, he failed to. recognize that the volume of transaction includes the appreciation in shares also and such appreciation 'has been offered for tax. If volume of transaction is the criteria, what is to be examined is how frequently the transaction is done, whether the transaction is settled in the course of the day of trading itself or in the settlement period itself so as to avoid payment of full purchase price. Here. the assessee has been holding the shares by taking delivery and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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