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TMI Blog2018 (10) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares/mutual funds under the head 'capital gain' instead of business income without appreciating the fact that this is the core and only business activity of the assessee. (ii) The CIT(A) has erred in law and on facts in deleting an addition of Rs. 21,08,38,530/- u/s 2(22)(e) in the hands of appellant firm without appreciating the fact that the assessee firm is beneficial owner of shares of companies through its partners (Pradeep Wig - 55% & Neera Wig-45%) and is benefitted by the amount made available by the companies in the guise of capital contribution.)" 3. Apart from that an additional ground has also been filed by the Revenue, which reads as under: - "(i) Without prejudice to the ground No. 2 the CIT(A), while holding that deemed dividend u/s 2(22)(e) should be taxed in the hands of Shri Pradeep Wig and Ms. Neera Wig erred in not mentioning I explicit terms that his directions are directions u/s 150(1) of the Income Tax Act, 1961." 4. Brief facts are that, earlier the assessment in the case of the assessee was completed u/s 143(3) vide order dated 8.12.2008 whereby the income declared in the return of Rs. 4,18,84,945/- was accepted. Thereafter, such an assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that in the original Partnership Deed dated 12.7.2005 the assessee firm was constituted with the intention of doing business in shares and securities as per clause - 2 of the deed which reads as under: - ' .......the business of the firm shall be comprising of investment in stock, shares, debenture, bonds, mutual funds or any other securities of lending of monies for interest.....' This deed was later on modified on 31.8.2005 and the word 'business' was removed and hence AO even questioned the existence of the firm in absence of any business activities carried out in the relevant assessment year. He took note of section 6, 11 and 12 of the Partnership Act and opined that the Partnership Firm is a group of persons for carrying of business and distributing profit among themselves and profit can be earned only from business. Section 6 of the Partnership Act provides that the real relation between the parties has to be considered. Sharing of profits or returns arising from property does not make such person, partners. Even receipt of a share of profits of a business does not itself make him a partner in certain cases. Section 11 of the Partnership Act provides that the mut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red into large number of transactions as alleged by the AO and if one goes by the terms of value and also rotation of its capital then it can be seen that it not huge which is evident from the fact that only 23 transactions of redemption of mutual funds units have been done and such a lower rate of capital investment to turnover itself indicates intention of the assessee to undertake investment in mutual fund was not as a business activity. The material on record shows that transaction of purchase and redemption of mutual funds were undertaken only in 15 mutual funds during the year and transactions in same mutual funds were neither invested nor redeemed repeatedly, because the assessee has invested in different mutual funds and the same were not churned again and again. He further observed that the presence of commercial motive is a primary legal requisite in trade which is not established in the case of the assessee, because assessee has only invested in mutual fund for earning the dividend and appreciation in value therein which is evident from the fact that assessee has not repeatedly invested in units in the same mutual fund and they were not for reaping the profits looking to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght from the day one the assessee has treated the purchase of mutual funds as a part of investment in his books of accounts and same has been continued in the subsequent years also. The investments have been made out of its own funds and were never has been treated as part of stock in trade. He further submitted that at no point of time mutual funds were tradable commodities which can be traded in the open market, because it has to be redeemed to the same person from whom it was purchased and since they are not tradable securities and are not exchangeable freely between any two persons, therefore, it cannot be held that assessee was engaged in the business of purchasing and selling of mutual funds. In support of his contention that if shares and securities are disclosed under the head 'investment' then it cannot be treated as stock-in-trade for earning business income, he relied upon various judgments including that Hon'ble Bombay High Court in the case of CIT vs. Gopal Purohit, 228 CTR 582 (Bombay) SLP of which has been rejected by the Hon'ble Supreme Court (334 ITR 308); Delhi High Court judgment in the case of CIT vs. PNB Finance & Industries Ltd. (2010) 236 CTR; and lastly, Bha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch can be shared. Thus, this reasoning of AO is devoid of any merits. 10. One very important fact here is that the entire transaction is on account of redemption of mutual fund which is neither freely tradable nor exchangeable in the market. It is a transaction between two persons, that is, person buying the MF and the other is Mutual Fund Manager who facilitates the fund and it can only be redeemed from the same mutual fund manager from whom it has been purchased. Therefore, it would be very difficult to hold that one would carry out business of mutual funds and will not make any investment. If any item is purchased from one person which can be sold or redeemed to that person alone, then it cannot fall into the category of freely traded commodity. For instance, if the FDR is made from a particular bank then same can be encashed by that particular bank alone and it cannot be treated as tradable commodity. The concept of 'business' alludes to the concept of systematic activity carried out with an object to earn profit. Where investment is the motive then endeavour is to maximise the gain on such investment, but it does not mean that every gain on an investment is always in the natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the said decision of the Hon'ble Gujarat High Court has been dismissed. The same principle has been earlier reiterated by Hon'ble Bombay High Court in CIT vs. Gopal Purohit (supra) and Delhi High Court in CIT vs. PNB Finance & Industries Ltd. (supra) Accordingly, on facts and circumstances of the case we hold that Ld. CIT (A) has rightly held that redemption of units of mutual funds is to be taxed as capital gains and not as business. In the result ground No. 1 raised by the revenue is dismissed. 11. Coming to the issue of deemed dividend, the brief facts are that, the Partnership Firm constituted of four partners, viz., i) Pradeep Wig (HUF); ii) M/s. KPFSE; iii) M/s. KICIPL; and iv) Mrs. Neera Wig. The share profit has already been discussed in the earlier part of the order. The two partners namely, M/s. Pradeep Wig (HUF) and M/s. Neera Wig, though may not have contributed any amount as capital contribution but have taken 20% and 10% shares in the net profit and 67% and 63% shares in the net loss. The assessee firm has 6034 shares of M/s. Kwality Ice Cream India Pvt. Ltd. (KICIPL) which has been shown as part of capital contribution by the company. However, these shares w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he submissions made by the assessee as well as observations and finding given in the assessment order, held that in order to attract the provisions of 2(22)(e) there should be loan or advance by a company to its shareholder or any payment by any such company on behalf or for the individual benefit of any such shareholder. Every payment by company to its shareholder may not be a loan or advance or any payment by any such company on behalf or for the individual benefit. Here there are four partners and two of them are companies. Now one of the other two partners, Mrs. Neera Wig is a substantial shareholder in one of the partners companies and another partner which is HUF is also a substantial shareholder in another partner company. From the perusal of the balance sheet he noted that the assessee firm has not taken any loan from any of the company, then how a capital contribution by the partner companies can be treated as loan as advance for the purpose of deemed dividend u/s 2(22)(e). He thus held that amount given by the two partners to the assessee firm in which the shareholders of the company are substantial interest cannot be treated as loan and advances because no one can get a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l contribution is outside the ambit of provision of deemed dividend u/s 2(22)(e). He thus strongly relied upon the order of the Ld. CIT(A). 15. We have heard the rival submissions and also perused the relevant finding given in the impugned order as well as material referred to before us. The AO has sought to tax deemed dividend in the hands of the assessee firm for sums aggregating to Rs. 21,08,38,530/- on the presumption that the entire capital contribution has been made by the company namely, Kwality Ice Creams (I) (P) Ltd. and Kwality Processed Food Services & Equipments (P) Ltd. and no contribution has been made by the two other partners, namely Shri Pradeep Wig and Mrs. Neera Wig but still they are having share in the net profit of 20% and 10% respectively and the loss if at all was to be suffered by the companies only. In this manner without contribution any amount in the capital these individual persons are sharing the profit and thus such transaction has been sought to be brought within the ambit of section 2(22)(e). AO has also analysed share holding pattern of both the companies and found that Shri Pradeep Wig and Mrs. Neera Wig are one of the major shareholders having c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstance in such a ground, because the power to give such directions is only with the Ld. CIT(A) and this Tribunal cannot hold that any such direction given by the Ld. CIT(A) should be read in a particular manner and within any particular section. Thus, we cannot interfere so as to modify the directions of the Ld. CIT(A) to be read in the manner provided in section 150(1). Thus, additional ground raised by the revenue is dismissed. 18. In so far as the ground raised in the Cross Objection is concerned, that no action should be taken by the AO in the hands of the shareholder on the basis of such direction of Ld. CIT(A), we do not find any merits on such a plea, because the Ld. CIT(A) has mainly made the observation that AO may consider to take remedial action as per the law in the in the hands of the registered or beneficial shareholders. There is no categorical direction, but an observation suggesting the AO to take action as per law. Therefore, grounds raised by the assessee in CO are dismissed. 19. In so far as the revenue's appeal for the assessment year 2011- 12 is concerned the only ground raised is that, Ld. CIT(A) has erred in law in directing the AO to treat the profit of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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