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TMI Blog2018 (12) TMI 1059X X X X Extracts X X X X X X X X Extracts X X X X ..... nt amounting to Rs. 1,09,74,197/- as capital gain [short term capital gain] ignoring the fact that the assessee company was running losses from, the business and there was no excess surplus to utilize for investment purpose and also the volume of share transaction, holding period and number of transactions carried out by the assessee under the head "short term capital gain" and "long term capital gain" resulting into business income". (ii) "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest expenses made of Rs. 37,430/- U/S.14A of the Income Tax Act despite the fact that the expenditure incurred in relation to the income does not form part of the total income". (iv) The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal." 3. The assessee, in its appeal, has taken a single ground on the issue of disallowance of expenses incurred in relation to exempt income u/s 14A of the Income-tax Act, 1961. The ground taken by the assessee is extracted below:- "1) On the facts and circumstances of the case, the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess or profession' in place of short term capital gain declared by the assessee. Aggrieved by the assessment order, assessee preferred appeal before the CIT(A). 5. Before the CIT(A), assessee has filed elaborate written submissions which have been reproduced by the Ld.CIT(A) in his order at para 2.3.1. on pages 4 to 11. The sum and substance of the arguments of the assessee before the Ld.CIT(A) are that investment in shares is out of its own funds and there is no merit in the findings of the AO that the assessee has used borrowed funds. The assessee further submitted that investments in shares has been treated as 'current investments' in its financial statements. Sofar as period of holding and frequency of transaction, it was submitted that the assessee has entrusted its investment portfolio management to a portfolio management service company, which is actively involved in managing assesse's portfolio investment, therefore, assessee does not have any control over purchase and sale of shares and which is at the discretion of PMS in order to maximize its investments. Assessee further submitted that even otherwise, except in one or two cases, the period of holding of shares is comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ingly. The Ld.AR further submitted that the Board has issued further circular vide its circular No.6 of 2016 dated 29-02-2016 in order to reduce litigation and gave clear direction to the field formation in respect of assessment of profit from sale of shares in the light of various judicial precedents and clarified that once the assessee has desired to treat the profits / gains from sale of shares under the head 'capital gain', irrespective of the period of holding and other facts, the AO cannot disturb the head of income so long as the assessee continued to claim the same head of income in the subsequent years. In this regard, he relied upon plethora of judicial precedents including the decision of Hon'ble Bombay High Court in the case of CIT vs Smt. Datta Mahendra Shah (2015) 317 ITR 304 (Bom). 9. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The AO has treated profit generated from sale of shares under the head 'profit and gains from business or profession' for the reason that the assessee is involved in systematic activity of share trading which is evident from the fact that the holding period of some ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. The CBDT further stated that the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchase and sales and the ratio between purchase and sales and the holding period would give a good guide to determine the nature of transactions. We further notice that over the years, the Courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock in trade. Disputes ever continued to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares / securities. In order to overcome/ reduce the litigation and uncertainty in the matter, in partial modification of its earlier circular, and further to instruct the AO in holding whether surplus generated from sale of listed shares would be treated as capital gain or business income issued a circular No.6 of 2016 dated 29-02-2016 clarifying its earlier circular No.4 of 2007 dated 15-06-2007 as per which listed share and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desired to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Ld.CIT(A) and reject ground taken by the revenue. 12. A similar issue arose for our consideration from ITAs No. 2635 & 2636/Mum/2016 for AYs 2007-08 & 2008-09. The AO has treated profit derived from sale of shares under the head 'profit & gains of business or profession', for similar reasons. The reasoning given by us in the preceding paragraphs in ITA No.2634/Mum/2016 shall mutatis mutandis apply to these appeals also. Therefore, for similar reasons, we direct the AO to assessee profit derived from sale of shares under the head, 'capital gains', as claimed by the assessee. 13. The next issue that came up for our consideration is disallowance of expenses incurred in relation to exempt income. The assessee has earned dividend income from shares and mutual funds and claimed exemption u/s 10(38) of the I.T. Act, 1961. During the course of assessment proceedings, the AO observed that the assessee has not made any disallowance of expenses in relation to exempt income, therefore, called upon the assessee to explain as to why the provisions of section 14A r.w.r. 8D(2) shall not be invoked to determine disallowance of expenses in relation to exempt income. In response to notice, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate disallowance would not hold good. Nevertheless, invoking provisions of rule 8D, the ld. AO had to bring out the nature of direct expenses and nexus between exempt income, and in this regard it was found that once PMS charges amounting to Rs. 88 lakhs and demat charges amounting to Rs. 1.82 lakhs had already been disallowed, there was no occasion for the AO to forcibly disallow the same. Therefore, to that extent, the AO was directed to modify the disallowance of direct expenses. However, with regard to the interest and other expenses, the Ld.CIT(A) observed that the AO was erred in disallowing interest in spite of the fact that the assessee has filed necessary evidence to prove that it was having sufficient own funds. Accordingly, he directed the AO to cause necessary enquiries in the light of decision of Hon'ble Bombay High Court in the case of Reliance Power & Utilities Co Ltd vs CIT 313 ITR 340 (Bom) and HDFC Bank Ltd vs CIT 366 ITR 505 (Bom). Aggrieved by the order of Ld.CIT(A), the assessee as well as the revenue are in appeal before us. 15. The Ld.DR submitted that the Ld.CIT(A) was erred in deleting disallowance of interest expenses made by the AO u/s 14A of the Act de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and demat charges, since the assessee has already disallowed direct expenses in statement of total income, no further disallowance u/r 8D(2)(i) of I.T. Rules, 1962 could be made. In respect of interest expenses, the Ld.CIT(A) observed that assessee has failed to prove one to one nexus between investment in shares and interest free funds, in order to apply the principles laid down by the Hon'ble Bombay High Court in the case of HDFC Bank Ltd vs CIT (supra). The Ld.CIT(A) is silent on the aspect of disallowance quantified by the AO u/r 8D(2)(iii). 18. Having considered arguments of both the sides, we find that there is no dispute with regard to the fact that the provisions of rule 8D(2) has no application prior to AY 2008-09. This fact has been reiterated by the Hon'ble Bombay High Court in the case of CIT vs Godrej Boyce & Mfg Co Ltd (supra). Once the provisions of rule 8D(2) has no application, the expenses incurred in relation to exempt income has to be determined on proportionate basis considering the nature of expenses incurred by the assessee and the quantum of exempt income earned for the year. The Ld.CIT(A) has restricted expenses in relation to exempt income to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X
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