Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2016 (6) TMI 483

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... stion has to be assessed under the head “Short Term Capital Gain” as declared by the Assessee Disallowance u/s 14A - Held that:- As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore no disallowance of interest expenses ought to have been made. A perusal of Balance sheet of the Assessee as on 31.3.2008 will show that the Assessee had own funds of 34.84 Crores and investment were acquired at cost of ₹ 27.97 Crores. Therefore the disallowance of interest expenses of ₹ 16,04,669/- is directed to be deleted. As far as disallowance of other expenses under Rule 8D(2)(iii) of the Rules i.e., disallowance of other expenses is concerned income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The Assessee had not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% a .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... Interest recd. in this year for Last year considered in last Year return 2,36,917.00 CAPITAL GAINS 1089,05,015.00 DEPRECIATION (AS PER IT) 6,98,815.00 1140,79,607.00 211,43,027.00 ADD DEPRECIATION(AS PER ACCO 11,47,217.00 Expenses disallowed u/s 14A 825,00,965.00 Dividend Stripping u/s 94(7) 37,924.00 15,14,479.00 BUSINESS INCOME 226,57,496.00 CAPITAL GAINS TOTAL CAPITAL GAINS 1089,05,015.00 LONG TERM CAPITAL GAINS (EXEMPT U/s 10) 825,00,965.00 SHORT TERM CAPITAL GAINS 264,04,050.00 TAXABLE AT SPECIAL RATE @ 10% U/S 111A 264,04,050.00 TAXABLE INCOME 490,61,546.00 4. The AO analyzed t .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ,560/- 9,60,000/- 1,19,440/- PUNJLLYOD 43360 62,84,968/- 1,29,60,376/- 66,75,407/- SB TINL 342838 1,47,28,996/- 66,01,854/- (-)81,27,142/- SKUMARYNF 100000 77,84,105/- 92,74,162/- 14,90,056/- SUBEX 1195 5,70,859/- 7,74,240/- 2,03,380/- TRIVENI 115600 59,06,817/- 1,60,72,443/- 1,01,65,625/- Grand Total 857549 6,43,84,147/- 9,07,88,198/- 2,64,04,050/- Table-2 Name of the scrip Total No.of shares Total Purchase value Total sale value Profit .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ITC 15750 18,34,212/- 32,68,089/- 14,33,876/- JM FINANCIAL 15508 1,22,01,266/- 3,57,16,080/- 2,35,14,813/- KTK BANK 68000 65,32,538/- 1,44,33,259/- 79,00,721/- ZEE TELE 2500 3,01,007/- 8,92,500/- 5,91,492/- TAURUS MF 8313 1,00,000/- 3,04,488/- 2,04,488/- DISH TV 1438 29,796/- 1,53,147/- 1,23,350/- Grand Total 335415 4,09,99,926/- 12,35,00,890/- 8,25,00,963/- In addition to the above, the trading result as disclosed by the assessee is summarized as under :- Table -3 Sale of Shares .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... than six months, (v) the profit is ₹ 2,64,04,0501- The assessee has made a series of transactions regularly and these transactions are its organized and regular business activities. The assessee company does not maintain any separate demat accounts for these transactions. The assessee is a SEBI registered Stock Broker. It carries out activities of sale purchase of shares as a member of NSE. The series of transactions in table-I constitutes adventures in the nature of trades. Considering the magnitude and volume of transactions, the period of holding, frequency of transactions and the nature of activities and also common demat accounts, the profit shown in table 1 was held by the AO as the business income of the assessee. Similarly for transactions evidenced by Table-2 above, the AO observed that (i) the assessee has purchased 335415 shares, (ii) the total purchase consideration is ₹ 4,09,99,926/-, (iii) the total sale consideration is ₹ 12,35,00,890/-, (iv) the profit is ₹ 8,25,00,963/-. He also observed that the Assessee did not maintain any separate demat accounts for these transactions. For the same reasons given for concluding that gains on sale of sha .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... came to the following conclusion : 20. On the analysis of the various decisions relied upon by the appellant and the Assessing Officer it is observed that there is no specific terms and conditions, which can be applied mechanically to come to a conclusion. The issue regarding taxation of gains from shares depends upon the facts and circumstances of each case. The Hon'ble appellate Courts have determined the issue on the facts of each case giving the various points/issues considered' for coming to a conclusion regarding the head of income under which the share profit is to be taxed. 21. The frequency of buying and 'selling of shares by the appellants were high; only one demat account; the period of holding was less in the case of short term capital gain; interest being paid by appellant on borrowed money in common kitty for trading and investments; the high turnover was on account of frequency of transactions; the assessees had dealt in delivery trading purely with the intention of making quick profits on a huge turnover; the period of holding of a majority of the stock was few days; in most of the transactions, the asses sees did not even hold on to at least .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... de for denying the benefit of capital gain on sale of shares. As per the various facts circumstances mentioned in Para 9 and after considering the observations of the Assessing Officer in the assessment order and submissions of the appellant and aforesaid discussion on this issue in detail, the short term capital gains on sale of shares is being held to be business income. It is held that the sale and purchase of shares shown in the investments portfolio except long term capital gains is treated as business income under the head of 'profits gains of business' for the current assessment year. The gain on sale of shares having short term capital gains is held to be assessed as business income. The long term capital gain shown by the assessee is accepted as long term capital gains. The appellant will not get the benefit of closing stock of investments shown in the final accounts as on 31 st March 2008 to be considered as capital gains in the Assessment Year 2009-10 merely because it has been accepted so in this appellate order. The appellant has given the details of shares in the investment folio in which there is short term capital gain. As per appellant the short term ca .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 5 of the Appellate Order that the Investment in shares disclosed in the Balance-sheet as on 31 st March 2008; should not be accepted to be Investments in relation to appellant's assessment for the A. Y. 2009-10 onwards. 4) For that on the facts and in the circumstances of the case, the findings of the Ld. CIT CA) with regard to assessment of short term capital gains under the head 'profits gains of business' and his direction to the AO not to accept depiction of Investments in shares as on 31 st March 2008 as by way of Investment; in the subsequent assessment year; be held to be perverse as the same is not based on any cogent material and reasoning and the same be held to be arbitrary. 5) For that on the facts and in the circumstances of the case, the AO be directed to assess the short term capital gains of ₹ 2,64,04,051 /- under the head 'capital gains' and be further directed to charge the tax at the rate prescribed in Sec. 111A of the Act. 6) For that on the facts and in the circumstances of the case, the A'O be directed to accept ₹ 27,97,93,524/- being Investment in shares as on 31 st March 2008 as Investment for A.Y. 200 .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... Hon ble Supreme Court. Besides the above our attention was also drawn to the fact that in assessment completed for A.Yrs. 2010-11 to 2012-13 u/s 143(3) of the Act the revenue has accepted the claim of the assessee that gain on sale of shares held as investments give rise to capital gain. The relevant assessment orders were placed in the paper book filed before us. 11. The ld. DR while placing reliance on the order of AO submitted that the facts and circumstances of each will not be looked into before coming to the conclusion whether gain on sale of shares held as investment should be treated as capital gain or income from business. He placed reliance on the CBDT Circular No. CBDT Circular No.4/2007 dated 15/6/2007, wherein the department has laid down certain guidelines for deciding the question as to whether income from sale of shares will give raise to capital gain or income from business. 12. We have given a careful consideration to the rival submissions. As far as the appeal of the Revenue is concerned, the question is whether the Long term Capital Gain declared by the Assessee can be said to be income from business, the reasoning given by the AO in this regard was making .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... need no adjudication. 14. Before we deal with the facts of the case of the assessee, we will briefly narrate the principles applicable in deciding the above issue as laid down in several judicial pronouncements :- (a) Whether a transaction of sale and purchase of shares were trading transactions or whether they were in the nature of investments is mixed question of law and fact. CIT Vs. Holck Larsen, 60 ITR 67 (SC). (b) It is possible for an assessee to be both an investor as well as a dealer in shares. Whether a particular holding is by way of investment or formed part of stock in trade is a matter which is within the knowledge of the assessee and it is for the assessee to produce evidence from his records as to whether he maintained any distinction between shares which were hold by him as investments and those hold as stock in trade. (CIT Vs. Associated Industrial Development co. Ltd., 82 ITR 586 (SC). (c) Treatment in the books by an assessee will not be conclusive. If the volume, frequency and regularity with which transactions are carried out indicate systematic and organized activity with profit motive, then it would be a case of business profits and not capi .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 4. No borrowed funds had been utilized for making investments. 5. There is no bar in law that a person who does share trading as business cannot hold shares as investments and that he can have two portfolios one of shares one held as investment and the other as stock-in-trade of business. 16. In CIT Vs. Gopal Purohit 228 CTR 582 (bom), the question of law raised was regarding whether STCG declared by the Assessee was to be assessed as business income or not. Question (b) considered by the Hon ble Bombay High Court was as follows: (b) Whether, on the facts and circumstances of the case and in law, the Hon ble ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as resjudicata to preclude the authorities from holding such transactions as business activities in current year? 17. The Hon ble Bombay High Court held as follows: 3. In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1 of its judgment that the assessee has followed a consistent practice i .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ot call for any adjudication. 21. Ground No.7 raised by the assessee and ground no.2 by the revenue can be decided together. These grounds read as follows :- Ground No.7 raised by the Assessee: 7) For that on the facts and in the circumstances of the case, the CIT CA) erred in law and on facts in upholding the disallowance of expenses u/s 14A in conformity with Rule 8D of the Income Tax Rules without pointing out any specific infirmity in the assessee's working of the amount disallowable u/s 14A. Ground No.2 raised by the Revenue: 2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in holding that the opening value of investments will be reduced by the amount of short term investments sold during the year to calculate the disallowance u/s 14A of the I.T.Act. 22. It is not in dispute that the assessee earned dividend income does not form part of the total income. In view of the provisions of section 14A of the Act which provides that the expenditure incurred in earning income which does not form part of the total income under the Act, should not be allowed as deduction while computing the total income, AO wanted to disallow ex .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... e Authorised Representative and have perused the audited accounts of the appellant for the AY 2008-09. It is the plea of the appellant that it carries on business activities through multiple divisions though underlying transactions conducted' by these divisions involves purchase and sale of shares and securities. It is the assessee's plea that it maintains separate accounts for each of the division which inter alia include investment division from which the assessee derives income by way of capital gains and dividend. The income derived from this division substantially qualifies for exemption under Section 10(34) or 10(38) of the I.T. Act, 1961. The Authorised Representative primarily argued that the expenses incurred in relation to investment division were identifiable and therefore the disallowance under Section 14A should be made in relation to expenses of the investment division only and not in accordance to Rule 8D of the I.T. Rules,1962. It is also the assessee's plea that since net owned funds by way of capital and reserves were sufficiently large to cover the cost of investments no part of the interest paid was liable to be disallowed under Rule 8D(2)(ii) of the .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... sent case the assessee has not been able to establish with sufficient material that the manner of calculating the amount disallowable for earning the exempted income (i.e. income not forming part of total income), as per his working was the correct method and that no other expenses were incurred in relation to earning of tax free income. I am satisfied that the claim of expenditure incurred and shown by the appellant with regard to the accounts is not correct. Once the assessee has failed to establish his explanation then the only course permissible for working out the amount disallowable is application of Rule 8D. I am satisfied that the expenses shown by the appellant are not correct having regard to the entries in the books of accounts. For the reasons set out above, I therefore held that in the appellant's case the disallowance under Sec 14A was required to be made in conformity with Rule 8D by the Assessing Officer. This ground of appeal is therefore dismissed. 29. The appellant has suo moto disallowed an amount of ₹ 3,29,338/- as expenses on the earning of exempted income in the return of income. The appellant has received dividend amounting to ₹ 42,38,86 .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ,701 = 24,29,451 X 34,59,23,333 16,04,669 (iii) Amount equal to 0.50% of the average value of investments = 0.50% X 22,84,84,701 11,42,424 Expenditure in relation to income not includible in total Income 30,98,586 Less: Expenditure already disallowed by appellant (3,29,338) Expenditure to be disallowed 27,69,248 36. Therefore the disallowance under Section 14A read with Rule 8D is calculated at Rs:30,98,586/-. The appellant itself has disallowed an amount of ₹ 3,29,338/- and thereby the net disallowance is determined at ₹ 27,69,248/-. The figure of closing stock of investment taken for calculation does not give rise to any right to the appellant to consider the whole of closing amount of investments necessarily to be considered as investment in the next year since the figure has been taken only for the purposes of calculation of working of disallowance under Section 14A read with Rule 8D for this assessment year. The disallowance is very .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ed reliance on the decision in the case of CIT vs Reliance and Power Ltd. 313 ITR 340 (B). The ld. Counsel for the assesse further submitted that the disallowance u/s 14A of the Act cannot be made on a notional basis and in this regard referred to certain judicial pronouncements. The ld. DR relied on the order of AO. 26. We have given a very careful consideration to the rival submissions. As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore no disallowance of interest expenses ought to have been made. A perusal of Balance sheet of the Assessee as on 31.3.2008 will show that the Assessee had own funds of 34.84 Crores and investment were acquired at cost of ₹ 27.97 Crores. Therefore the disallowance of interest expenses of ₹ 16,04,669/- is directed to be deleted. 27. As far as disallowance of other expenses under Rule 8D(2)(iii) of the Rules i.e., disallowance of other expenses is concerned, we find that the Assessee had suo moto disallowed an amount of ₹ 3,29,338/- as expenses .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates