TMI Blog2015 (6) TMI 95X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be assessed under the head income from business. - Decided in favour of assesse. Disallowance of expenditure under Section 14A - whether disallowance is excessive and unreasonable? - Held that:- Contention of the assessee is not acceptable that the disallowance restricted and upheld by the CIT(A) was incurred for the maintenance of the legal existence of the assessee company when the assessee company is earning exempt dividend income of ₹ 17,27,369 on the average investment of ₹ 32.81 crore, then the disallowance of ₹ 1,65,196/- under section 14A r/w Rule 8D(iii) being the actual expenses claimed by the assessee cannot be held as unjustified. It is pertinent to note that while the company was created for the purpose of real estate business and had not conducted any business in this regard, then the huge exempt dividend income earned from huge average investment of ₹ 32.8 crore cannot be ignored. On the basis of above noted fact, we safely conclude that the legal existence of assessee company during the year under consideration was maintained for the purpose on investments and as such no other business activity was conducted by the assessee during the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that the gain of ₹ 64,09 ,978/- out of the total short term capital gain from sales of shares was business profit; 2.1 That the Commissioner (Appeals) erred in holding that the gains on the shares sold within the periods of 30 days of their acquisitions were business profits instead of short term capital gains; 3. That the Commissioner (Appeals) erred in confirming the disallowance of expenditure of ₹ 1,65,196/- under Section 14A of the Act; 3.1 That the Commissioner (Appeals) failed to appreciate that no expenditure was incurred for the dividend income earned and as such no expenditure was to be deducted under the said provisions; 3.2 That the Commissioner (Appeals) failed to appreciate that the entire expenditure was incurred by the Appellant for the purposes of its business; 3.3 That the Commissioner (Appeals) failed to appreciate that the Assessing Officer erred in applying the formula laid down in the Rule 8D of the Rules without recording as to why the claim of the Appellant that no expenditure was incurred for the dividend income was incorrect; 3.4 That the Commissioner (Appeals) failed to appreciate that the Assessing Officer erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We may point out that in the similar set of facts and circumstances, after considering the contentions placed in para 8.1 of the Tribunal order (supra), the Tribunal in assessee s own case for AY 2006-07 (supra) has categorically held as under: 4. The Ld. Counsel for the assessee Mr. Ajay Vohra repeated the arguments raised by the assessee before the Ld.CIT(A). He supported the order of the Ld.CIT(A) to the extent the Ld.CIT(A) accepted the contentions of the assessee. On the finding of the Ld.CIT(A) that wherever the holding period of shares is less than 30 days, it should be held that the income arising from such shares if business income, the Ld. Counsel argued that this is an artificial segregation, which is not supported by any precedent or proposition of law. He referred to page 37 of the Ld.CIT(A) s order and pointed out that certain shares sold, were from out of investment made during the Previous Year and which were opening balances of the current year. He contended that there were no borrowed funds and the assessee had no infrastructure whatsoever to carry out any trading activity. He pointed out that the assessee had paid security transactions tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee objects is to carry on the business as Real Estate Developers. As the company was not able to start its business, investments were made in various shares and securities. 2. The Board of Directors at its meeting on 26.12.2004 and 25.3.2005 resolved to acquire and hold shares out of surplus funds as part of its investment portfolio. 3. The shares and securities acquired are classified as investments in the balance sheet and were valued at cost only. 4. There were no borrowed funds out of which the shares/securities were purchased. The purchases were made out of own funds. 5. In an order passed u/s 143(3) of the Act for the AY 2005-06 similar profits/gains declared under the head capital gains are accepted by the department as such. 6. Some of the shares sold were acquired during the preceding F.Y., wherein it was classified as investments and accepted as such. 7. The short term capital gains of ₹ 1,75,51,496/- was earned out of 41 shares/securities and thus can be classified as follows. i. ₹ 1,01,92,939 on shares held for more than 90 days; ii. ₹ 19,03,596/- for shares held between 61 to 90 days and Rs.18,45,019/- for shares hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such an intention is no doubt, a relevant factor and unless it is offset by the presence of other factors, it would raise a strong presumption that the transaction is an adventure in the nature of trade. Even so, the presumption is not conclusive; and it is conceivable that, on considering all the facts and circumstances in the case, the court may, despite the said - initial intention, be inclined to hold that the transaction was not an adventure in the nature of trade . (emphasis supplied) The apex Court in the case of Sutlej Cotton Mills Supply Agency Ltd: 100 ITR 706 (SC) observed as follows: ..... Where the purchase of any article or of any capital investment, for instance, shares, is made without the intention to resell at a profit, a resale under changed circumstances would 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the value by realising a security or gain in an operation of profit-making. If the transaction is in the ordinary line of the assessee's business, there would hardly be any difficulty in concluding that it was a trading transaction, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade. The surplus realised on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realising his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention of resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (v) 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 realisable value (whichever is less), it will indicate that items in question are treated as stock in trade. (vi) How the company is authorised in MOA/AOA? Whether for trade or for investment? If authorised only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity and vice versa. (vii) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven a single transaction can be in the nature of trade but the assessee has demonstrated that his. intention was never to trade in shares. The intention is manifested by treatment given to such investment that the investment is out of own fund and not borrowed that the investment is not rotated frequently, that the total number of transactions are very few, that all the shares purchased are not sold and rather held for quite number of days. It is to be noted the Income Tax Act itself has provided that when the shares are held for a period of one year or more will be treated as long term capital asset contrary to other assets where the holding period to treat such asset a long term is more than 36 months. Thus even after holding the shares for more than 12 months and showing such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO u/s 143(3) as capital gain only. iii. The entire investment is out of the funds of assessee and there is no case of any loan or use of borrowed funds. iv. The assessee has not paid any interest on such investment. v. All the share transaction where through demat accounts and subjected to security transaction tax (STT). vi. Separate details were maintained and profit and loss account was worked out on the basis of same and correctness such profit/loss is not in dispute. vii. The assessee has earned dividend income of ₹ 10,01,322/-. viii. The assessee has earned capital gain on the basis of period of holding. ix. In view of the unfavourable market conditions, the management of the assessee decided to investment the available funds in various shares/securities in order to earn return/dividend rather than keeping the funds idle. x. In the meeting held on 26.12.2004 and 24.3.2005 the board of assessee company resolved to acquire and hold shares/securities out of surplus funds to be held as part of the investment portfolio of the company. This shows the intention of appellant. xi. Shares/securities have been recorded in Scrip name Investment accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which were held for more than 5 months. This is not a characteristic of a trader. There are no borrowed funds. The assessee has always classified the purchases as investments in its books of accounts. In the earlier year the assessee has disclosed capital gains and the AO in the order passed u/s 143(3) accepted the same. On this factual matrix we agree with the contentions of the Ld.Counsel for the assessee that the gains in question cannot be assessed under the head income from business. 8.3. We now consider the findings of the Ld.CIT(Appeals) wherein he has held that the gains received on shares which were held for a period of less than 30 days should be assessed as income from business. The Mumbai H Bench of the Tribunal in the case of Mr.Hitesh Satishchandra Doshi Etemia vs. JCIT in ITA no.6497/Mum/2009 and ITA 148/Mum/2010 for the AY 2003-04 and other appeals had after considering a number of decisions at page 15 held as follows. Therefore, the bifurcation of the short term capital gain and treating the transaction as investment in the cases where the holding period of more than 30 days and as business transaction in the case where the holding period is l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase for AY 2006-07 (supra), the basis adopted by the CIT(A) on the criteria of holding period is not sustainable as per provisions of the Act and respectfully following the order of the coordinate Bench of the Tribunal, the conclusion of the CIT(A) is demolished. At the same time, we are inclined to hold that since the income from sale of shares was treated as short term capital gain in the earlier AYs by accepting the contentions of the assessee as noted in the Tribunal order para 8.1, hence, we have no reason to take a different view on the same set of facts and circumstances in the present case for AY 2008-09. Therefore, we conclude that the issue is squarely covered in favour of the assessee for AY 2008-09 and respectfully following the same, sole ground of the revenue being devoid of merits is dismissed and ground no. 2 and 2.1 of the assessee are hereby allowed. Ground No. 3 to 3.5 of the assessee. 8. Ld. Counsel of the assessee contended that the Commissioner (Appeals) erred in confirming the disallowance of expenditure of Rs.l,65,196/- under Section 14A of the Act. Ld. Counsel also contended that the Commissioner (Appeals) failed to appreciate that no expenditure was inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment and time of exit from the investment are well informed and well coordinated management decision involving not only inputs from various sources but also acumen of senior management functionaries. Therefore, cost is inbuilt even in so called passive investment. There are incidental expenditure of collection, telephone and follow up etc. Therefore, expenses related to earning of exempt income are embedded in the 'expenses debited to profit and loss account. It is seen that appellant has incurred ₹ 1,65,196/- other than Security Transaction Tax for earning exempt income. As per the formula prescribed by the Rule 8D, the 0.5% of the average investment comes to ₹ 16,40,609/-, however, the appellant has only incurred ₹ 1,65,196/- on earning exempt income. As discussed above, on earning exempt income the appellant has to incur indirect expenses on collection, telephone, management, follow up etc. Therefore, the expenses relating to exempt income are restricted to the extent of expenses claimed. Therefore, the disallowance made by the Assessing Officer of ₹ 1,65,196/- is confirmed. 11. In view of above, we are inclined to hold the contention of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 of the paper book, we note that the assessee has shown long term capital loss of ₹ 66,59,311. From bare reading of assessment order, we observe that the issue has not been properly and expressly addressed by the AO while framing assessment order and this issue was not raised by the assessee before the CIT(A) in the first appeal. Hence, we are of the considered view that the contention of the assessee cannot be accepted as the assessee itself has made the claim that the entire income/loss from sale of shares is either long term capital gain or loss or short term capital gain or loss and there was no other business activity of the assessee company during the period under consideration. Hence, as per settled legal position of the Act, the long term capital loss on sale of shares during the year under consideration cannot be deducted and allowed against the business income of the assessee. The AO is directed to provide reasonable treatment to this long term capital loss as per relevant provisions of the Act. With these directions to the AO, ground no. 4 of the assessee being devoid of merits is dismissed. 14. In the result, the appeal of the assessee on ground no. 2.1 and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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