TMI Blog2011 (2) TMI 1484X X X X Extracts X X X X X X X X Extracts X X X X ..... is case, in brief, are that the assessee is a company registered under the Companies Act, 1956 and is deriving the income under the head Income from house property , profit and gains of business or profession and capital gains . For the year under consideration, the assessee filed the return of income on 29/11/2006 declaring an income of ₹ 80,84,581/- which was processed u/s 143(1) of the I.T. Act. Later on the case was selected for scrutiny. The assessee claimed a sum of ₹ 44,07,496/- which included a sum of ₹ 2,31,003/- being dividend and agricultural income and ₹ 41,76,493/- as long term capital gain. The Assessing Officer pointed out that the assessee did not make any corresponding disallowance voluntarily while computing its income. The Assessing Officer disallowed a sum of ₹ 6,37,288/- u/s 14A of the I.T. Act read with Rules 8D of the I.T. Rules, 1962 by following the decision of the ITAT Mumbai Bench in the case of ACIT vs. Citicorp Finance (India) Ltd. [2008] 300 ITR (AT) 398. 4. The assessee carried the matter to learned CIT(A) and submitted as under: The appellant himself has added back the expenditures related to investments givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given reasons for confirming the disallowance/additions. It was stated that recently, the Hon'ble Bombay High Court of the Judicature at Mumbai held in the case of Godrej Boyace Mfg. Co. Ltd. vs. Dy.CIT. and another (2010) 328 ITR 81 held that a) ... .It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April, Consequently, rule 8D which has been notified on March 24, 2008, would apply with effect from assessment year 2008-09 ... b) ... .ITO V. DAGA CAPITAL MANAGEMENT P. LTD. [2009] 312 ITR (AT) 1 (Mumbai) [SB] impliedly disapproved on this point. .. It was further stated that Rule 8D of Income Tax Rules 1962 was inserted by the I.T. (Fifth Amdt.) Rules 2008 with effect from 24.03.2008, hence the same was applicable only from Assessment Year 2008-2009 and not the earlier years. Reliance has also been placed on the following case laws: (i) Decision of the ITAT, Delhi Bench of the Income-tax Appellate Tribunal in the case of Impulse (India) Pvt. Ltd. vs.ACIT (2008) 22 SOT 368, (ii) Decision of the I.T.A.T., Mumbai Bench in the case of M/s. Godrej Agrovet Ltd. vs. ACIT, R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 8.1 From the above provisions it would be clear that the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee. This Section is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed. All expenditure incurred in relation to income which does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible for the AO to apportion the expenditure incurred in relation to such business as between the earning of taxable and non-taxable income. Sub-sec. (1) of s. 14A was inserted with retrospective effect from 1st April, 1962 to overcome the decisions of the Supreme Court. At the same time, as has been noticed by the Supreme Court in its decision in CIT vs. Walfort Share Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it has been observed that the words expenditure incurred in s. 14A refer to expenditure on rent, tax, salary, interest etc. in respect of which allowances are provided for. Thirdly, sub-ss. (2) and (3) were introduced by a legislative amendment brought about by the Finance Act of 2006. The Memorandum Explaining the Provisions of the Finance Bill of 2006 recognizes that the existing provisions of s. 14A did not provide a method of computing the expenditure incurred in relation to income which does not form part of the total income. Consequently, there was a conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterests of the assessee. Even in the absence of sub-ss. (2) and (3) of S. 14A and of r. 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-s. (1) of S. 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. The change which is brought about by the insertion of sub-ss (2) and (3) into S. 14A by the Finance Act of 2006 w.e.f. 1st April, 2007 is that in a situation where the AO is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the non-taxable income, the AO would have to follow the method which is prescribed by the rules. The amendment rules were notified to come into force on 24th March, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently, r. 8D which has been notified on 24th March, 2008 would apply with effect from asst. yr. 2008-09. The rule consequently cannot have application in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustified. 2. That the order of Commissioner of Income Tax (Appeals-II, Kanpur being erroneous, in law and on facts deserves to be vacated and that the order of the Assessing Officer be restored; and 3. That the appellant craves leave to modify and of the grounds of appeal given above and/or add any fresh ground as and when it is considered necessary to do so. 10. The facts related to this case, in brief, are that in the computation of income the assessee had shown the income of ₹ 41,76,493/- as having been derived from long term capital gain and accordingly the exemption had been claimed there upon u/s 10(38) of the I.T.Act. The nature of this transactions was explained by the assessee vide letter dated 23/10/2008 as follows: Apropos your query requiring explanation as to why the amount of ₹ 41,76,493/- claimed as exempt be not treated as normal business profit, it is submitted that the same has been claimed exempt u/s 10(38) in respect of Long Term Capital Asset, being Equity Shares or Units of an Equity Oriented Fund, the transaction of which has been chargeable to securities transaction tax. Your good self will appreciate that the period of holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m shares which has suffered Securities Transaction tax differently as 'business income and added the same to the income of the appellant. 1.2 The learned Assessing Officer is not justified in treating the part of transactions which were held for more than 12 months as not arising from long term capital assets being equity shares while treating part of it which were held for a period of less than 12 months as arising from capital assets. 1.3 The learned assessing officer has denied the exemption inter alia on the following grounds: 1.4 The magnitude and frequency of the share transactions tilt the scale in favour of them being business activity. 1.5 The proportion of dividend earned with the profit earned from the sale of shares definitely indicates that the shares were not held as investment or capital asset to earn income accrued thereon. 1.6 Deployment of professional companies to handle the volume of the trade carried out through two parties go far to prove that the real nature of these transactions is business activity, not sale of property held as capital asset to Qualify for capital gain. 1.7 Memorandum of Association of the company carries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have given short-term capital gains; and 6 scripts have given Long-term capital gains. b. Scripts held for less than 12 months giving short-term capital gains, except two scripts, were purchased in immediately preceding year and not in the current year. Hence, the gain was shown as short-term and accepted so by the learned assessing officer. c. In respect of 10 scripts which were held by the appellant as 'Investment' for a period of more than 12 months and sold through Stock exchanges and has suffered 'Security Transaction tax: gain of ₹ 41,76,493.49 was claimed as exempt u/s 10(38) of the Act. Out of these 10 scripts, 2 scripts were held by the appellant since earlier to 2001-02, 4 scripts since financial year 2003-04, 3 scripts since 2004-05 and one script was purchased in 2002-03 and 2004-05. Thus, majority of the shares in respect of which exemption has been claimed has been held for a sufficiently long duration. It proves that the shares were held as 'capital assets'. d. The act of learned Assessing Officer in treating part of sale as 'business' and part as 'capital gain' is contrary to the facts and the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant. Reading either the main objects or the objects ancillary or incidental to the attainment of main objects, it cannot be inferred that purchase and sale of shares in general and the shares in respect of which capital gains has been claimed as exempt, is the business object of the appellant. Even the circular relied upon by the learned Assessing Officer states that Memorandum of association is not decisive of the nature of transactions and therefore, the act of the learned Assessing Officer in reading down the provisions of Memorandum of Association is contrary to the provisions of law. 1.11 The Investments are accounted and shown as such for several years since inception and accepted by the department. The learned Assessing Officer has ignored such important and relevant factor on irrelevant consideration. 1.12 The learned Assessing Officer blissfully ignored the ratio of various judicial decisions on which the reliance was placed by the appellant in support of his contention. The appellant places reliance on the following case laws in support of its contention: a. CIT Vs. N.S.S. Investments P. Ltd 277 ITR 149 (Madras) b. Motilal Oswal Vs. Addl. CIT 8 SOT 77 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. 13. In his rival submissions the learned counsel for the assessee strongly supported the order of the learned CIT (A) and reiterated the submissions made before the authorities below. 14. We have considered the rival submissions and carefully gone through the material available on the record. In the present case it is noticed that the assessee earned a profit of ₹ 41,76,493/- on account of sale of shares and claimed the same as long term capital gain. 14.1 The Assessing Officer however treated the above profit as business profit and did not accept the claim of the assessee that it was capital gain. 14.2 As regards to the addition of ₹ 41,76,493/- on account of long term capital gain) on sale of investment in shares and securities is concerned, the Assessing Officer made the addition by stating that the magnitude and frequency of the share transactions tilt the scale in favour of them being business activity and that the deployment of services of professional companies to handle the volume of the trade carried out through two parties go far to prove that the real nature of those transactions was business activity, not sale of property held as capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was holding 85 securities out of which 64 scripts were shown as opening investment for a sum of ₹ 2,59,73,155.19 and 21 scripts were purchased during the year under consideration. Out of the 85 scripts (shares/securities) the assessee sold only 18 quoted investment for a sum of ₹ 1,02,96,189.77. Out of those 18 scripts, 8 scripts had given short term capital gain and 6 scripts had given long term capital gain while 4 scripts had given both long term capital gain and short term capital gain on the basis of holding of the scripts for the period of less than or more than 12 months as the case may be. The assessee sold the scripts through Stock Exchange. The frequency of purchase and sale was not so regular to show that the assessee was a regular trader to earn profit. The Assessing Officer also accepted a part of the same portfolio which was sold in short term as short term capital gain but did not accept profit of part of the same portfolio as long term capital gain, the said action of the AO was not justified. In the present case, the object clause in the Memorandum of Association of the assessee also did not reveal that the purchase and sale of shares was the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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