TMI Blog2018 (10) TMI 1179X X X X Extracts X X X X X X X X Extracts X X X X ..... held and redeemed mainly on maturity date which again indicates that the intention for purchase of mutual funds was only for the purpose of investment and held for benefits accruing thereon. Further on perusal of the profit and loss account it is seen that there is no expenditure debited which can be said to be incidental for the business purpose. Though here in this case redemption of mutual funds are for a period less than 12 months, but it is quite clear from the CBDT circular that intention of the assessee and the treatment given by the assessee in the books has been given paramount importance. CIT (A) has rightly held that redemption of units of mutual funds is to be taxed as capital gains and not as business. - Decided against revenue. Deemed dividend addition u/s 2(22)(e) - CIT(A) has deleted the said deemed dividend in the hands of the assessee firm on the ground that firstly, such a capital contribution is not a loan or advance, because no one gets right to share the profit of the firm merely by giving loan and advance; and secondly, the assessee firm not being the registered or beneficial shareholders in these two companies, therefore, provision of deemed dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een 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 ₹ 4,18,84,945/- was accepted. Thereafter, such an assessment order was set aside by the Ld. CIT in his revisionary jurisdiction u/s 263, vide order dated 15.3.2011 on the ground that, provision of deemed dividend u/s 2(22)(e) has not been examined; and redemption of mutual funds by the assessee during the year should be treated as business income as against the capital gains declared by the assessee. The assessee is a partnership firm and one of the clauses in the Partnership Deed was to invest in equity and debt funds and other kinds of securities. During the year assessee has shown gain of ₹ 4,88,00,000/- on redemption of Mutual Funds which was declared a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 mutual rights and duties of the partners of the firm may be determined by way of contract which may be express or implied and the terms and condition of the said contract can be varied. Section 12 provides that every partner has a right to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue 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 the volatile market condition. No borrowed fund has been utilised and the investments have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, Bhanuprasad D. Trivedi (HUF) reported in (2018) 95 taxmann.com19. 9. We have hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 nature of trade for profit. Here it is not a case where the mutual funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 were later on transferred in the name of Shri Pradeep Wig individua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Neera Wig 5 40 45 41.67% Neera Wig Pradeep Wig 5 40 45 41.67% Shanta Wig Pradeep Wig 1 8 9 8.33% Shanta Wig Pradeep Wig (Dr. K.L. Wig s Estate A/c) 1 8 9 8.33% 12 96 108 100% 11.2 Thereafter, AO noted the position of capital contribution of the partners of the assessee firm that, M/s. Kwality Ice Creams India Pvt. Ltd. has contributed ₹ 47 crores, whereas M/s. Kwality Processed Food Services Equipment Pvt. Ltd. has contributed ₹ 14 crores. After detailed discussion and relying upon various judgments, he held that amount of ₹ 15,37,36,375/- and ₹ 5,71,02,155/- is to be taxed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the firm. But he gave direction to the AO that he may consider remedial action in the hands of the registered and beneficial of the shareholders, i.e., Shri Pradeep Wig and Mrs. Neera Wig. 13. Ld. DR submitted that this entire arrangement was made to divert the profit of the two companies for the benefit of two partners and all the investment in mutual funds were in the name of Shri Pradeep Wig and Mrs. Neera Wig, because the firm cannot hold on its own name. It is for this reason AO has treated the capital contribution of the two partners in the nature of loan/advance/payments in the benefit of Shri Pradeep Wig and Mrs. Neera Wig to the firm and the same has rightly been taxed in the hands of the firm. He thus strongly relied upon the order of the AO. 14. On the other hand, Ld. Counsel for the assessee submitted that, once it is an admitted fact that the assessee firm is neither a registered nor beneficial shareholder then no deemed dividend can be taxed in the hand of the assessee firm and this proposition is well supported by various judgments, the list and compilation thereof have been given before us. Apart from that, he has submitted that it is purely a commerci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... end u/s 2(22)(e). 16. Ld. CIT(A) has deleted the said deemed dividend in the hands of the assessee firm on the ground that firstly, such a capital contribution is not a loan or advance, because no one gets right to share the profit of the firm merely by giving loan and advance; and secondly, the assessee firm not being the registered or beneficial shareholders in these two companies, therefore, provision of deemed dividend cannot be attracted. Such a conclusion is based on well settled proposition of law, therefore, same is affirmed. However, the Ld. CIT(A) has given direction to the AO to examine the issue of deemed dividend in the hands of individual persons. In so far as the direction of the Ld. CIT(A) to delete the addition of deemed dividend in the hands of the firm the same is affirmed, but in so far as direction given to the AO, we are not interfering in such a direction, because that issue if at all could be examined if only any such action is taken in the hands of the individuals and not otherwise. Accordingly, the grounds raised by the revenue on this score are dismissed. 17. In so far as the additional ground raised by the revenue that such a direction of the Ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee firm had intended to do business in shares as held by him in the earlier years. The long-term capital gain and the working of capital gain as shown by the assessee in its return of income were as under: - Long term capital gain on investment in shares ₹ 1,09,84,077/- Less : Exempt U/s 10 (38) ₹ 1,09,84,077/- Nil Long Term Capital Gain on Redemption of Mutual Funds ₹ 27,31,515/- Less : Exempt U/s ₹ 27,31,515/- Nil Short term capital gain on Redemption of Mutual Funds ₹ 17,63,615/- 21. AO has treated not only the gain on mutual funds as business income but also gain on profit and sale of shares as also as business income. Now in view of the CBDT Circular dated 29.9.2016, if shares are held for more than 12 months which have been treated as investment, the same has to be taxed under the head capital gain and not as business income . Accordingly, we hold that Ld. CIT (A) has rightly held that gain on account of sale ..... X X X X Extracts X X X X X X X X Extracts X X X X
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