TMI Blog2017 (4) TMI 403X X X X Extracts X X X X X X X X Extracts X X X X ..... do not find any infirmity in the order of CIT(A) for holding these shares as investment giving rise to the capital gain. The CIT(A) has properly appreciated the volume and frequency of the transaction, the assessee’s intention of investing in shares as well as department‟s conclusion of treating these shares as investment in the scrutiny assessment framed in earlier years. - Decided in favour of assessee. Disallowance u/s 14A - Held that:- No disallowance should be made under the head interest expenditure. Disallowance under Rule 8D (2) (iii) should be restricted to the expenses claimed in the P&L account, as disallowed in earlier year. See HDFC Bank Ltd (2016 (3) TMI 755 - BOMBAY HIGH COURT). Effective ground of appeal is allowed in favour of the assessee, in part. - I. T. A. /3150/Mum/2014, I. T. A. /3961/Mum/2014 - - - Dated:- 5-4-2017 - Shri Rajendra, Accountant Member and Ram Lal Negi, Judicial Member Revenue by : Shri A. K. Nayak- DR Assessee by : Shri S. L. Jain ORDER Per Rajendra, AM Challenging the order, dated 25/03/2014 of CIT (A ) 26, Mumbai the assessee and the Assessing Officer (AO) have filed cross appeals for the year under consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he speculative business profit was to be taxed as business income. 2. 1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, the assessee argued that identical issue had arisen in the AY. 2008 -09, that the then FAA had decided the issue in favour of the assessee, that the AO himself had, in the AY. s 2006-07 and 2007-08 had taxed the profit from the share transaction under the head capital gains. He referred to the case of Gopal Purohit (228 CTR 582) and submitted that no borrowed funds were utilised for investment, that shares were purchased from the sale proceeds of the shares held by him, that the capital owned by him far exceeded the investment in shares, that he had sold unlisted shares held by him to the tune of ₹ 4. 21 crores, that sufficient funds were available with him for making investments, that all along he had made investment in shares that he had never converted the same into stock in trade, that in the past the AO had assessed the same under the head capital gains, that he had assess the income from sale of unlisted shares is capital gains in the earlier years, that it had valued its in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s case laws cited by the ld. Authorized Representative and ld. CIT DR and in the context of factual matrix of the case. We had also deliberated on the case laws referred to by lower authorities in their respective orders. The question as to whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case. Such decision is to be arrived at by taking into account the intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business therein. The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade. If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains. On the other hand, if the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd exempt the long term capital gain earned from sale of shares and levying 10 % tax on short term capital gain earned on sale of shares. It is noted that under the old provisions of the Income-tax Act, profits or gains arising to an investor from the transfer of securities were charged to tax either as long term capital gains or short term capital gains depending on the period of holding of the said securities; Short-term capital gains arising from transfer of securities were taxed at the applicable rates (normal rate) and Long-term capital gains were taxed @ 20%, after adjusting for inflation by indexing the cost of acquisition. For listed securities, the 8 ITA 7087/M/11 ITA 7410/M/11 taxpayer had an option to pay tax on long-term capital gains @ 10% but without indexation. For Foreign Institutional Investors (FIIs), the longterm capital gains and short-term capital gains were taxed at the rate of 10% (without indexation) and 30% respectively. In case of a trader in securities, however, the gains were taxed as any other normal business income. Thus tax liability on the income from purchase sale of shares as regards to the STCG business income was at par. However, the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Verghese vs TO, 131 ITR 597 (SC) observed as under:- The task of interpretation of a statutory enactment is not mechanical task. It is more than a mere reading of mathematical formulae because few word possesses the precision of mathematical symbols. It is an attempt to discover the intent of the legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provisions to be drafted with divine prescience and perfect clarity. 11. The above observations of Hon'ble Judges of the Apex Court was reiterated by Hon'ble Apex Court in the case of Kerala State Industrial Corporation, 259 ITR 51 (SC) holding as under:- That the Finance Minister s Speech can be relied upon to throw light on the object and purpose of the particular provisions introduction by the Finance Bill has been recognized by this Court in K. P. Verghese vs ITO 1981), 131 ITR 597 (SC), at 609. Again in the case of R B Falcon (A) Pvt. Ltd vs CIT (2008) 301 ITR 309 (SC), it was held that (Page 323):- Rules of execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the assessee made investment in shares with intention to earn dividend income on appreciation of price of shares. Therefore, it cannot be said that the assessee was doing business. 14. From the record, we found that the assessee has made investment in shares and securities out of sale proceeds of shares held as long term investment on which assessee has declared long term capital gains of ₹ 10. 91 croress. Since the assessee has earned dividend income, the AO disallowed ₹ 33, 87, 373/- by invoking provisions of Section 14A. The assessee has also earned long term capital gain of ₹ 10. 91 croress and suffered short term capital loss of ₹ 1. 34 croress. However, the AO did not accept assessee‟s claim of capital gain and treated the same as business income. The basic plea of the AO was that assessee has invested borrowed funds for the acquisition of shares and securities, therefore, the profit/loss earned thereon was treated as business income. From the record we found that assessee was following consistent practice of holding shares as investment‟ in its books of accounts in all the years. Such investment was consistently valued at cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra), the Tribunal held that presentation in the books of accounts is most crucial source of gathering intention of the assessee with regard to the nature of transaction. It is also not the case of AO that the shares which were held as investment in earlier AY. s i. e. 2005-06, 2006-07 2007-08 and accepted by the department as investment were converted into stock in trade so as to attract the provisions of Section 43(5) of the Act. Since the shares held as investment in earlier years and also accepted by the department as such, the assessee having not converted its shares in stock in trade , there was no reason to assess the profit arising out of sale as business income in place of capital gains. 15. Now, coming to the AO s observation with regard to the borrowed fund having been utilized for acquiring shares, we found that incremental investment made during the year was of ₹ 3. 79 croress which was completely financed out of sale proceeds of earlier investment on which long term capital of ₹ 10. 91 croress has been returned by the assessee. We found that shares costing for ₹ 3. 59 croress were realized for ₹ 14. 50 crores. The shares were sold during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate proceedings, before the FAA, the assessee argued that his own capital exceeded the total investment in shares hearing exempt income, no disallowance under the head interest expenditure could be made applying to section 14A read with rule 8D of the Rules. He referred to the cases of Reliance Utility and Power Ltd (313 ITR 340) and Yatish Trading Private Ltd. (129 ITD 237). After considering the available material, the FAA observed that assessee had not been able to substantiate, by producing the bank statement showing movement of funds, that no borrowed funds had been used for investment in shares, that during the year he had entered into several share transactions income from which had been offered for taxation under the head capital gains, that he had not been able to submit his certainty that the funds from the same bank accounts used for all business purposes did not include application of borrowed funds also for investment activities. Referring the order of his predecessor for the earlier AY. he held that the AO had rightly made the disallowance applying the provisions of Rule 8D (2) (ii) of the Rules. 3. 2. During the course of hearing before us, the AR stated that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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