TMI Blog2020 (10) TMI 252X X X X Extracts X X X X X X X X Extracts X X X X ..... tion which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances we are not impressed by the submission canvassed on behalf of the Revenue that once there are mixed funds, Rule8 would be attracted automatically. Tribunal committed no error in passing the impugned order. The issues raised in these Tax Appeals are covered by various decisions of the Supreme Court as well as this Court.- Decided against revenue. - R/TAX APPEAL NO. 81 of 2020, 83 of 2020, 72 of 2020 - - - Dated:- 18-2-2020 - HONOURABLE MR. JUSTICE J.B.PARDIWALA AND HONOURABLE MR. JUSTICE BHARGAV D. KARIA MR.VARUN K.PATEL FOR THE APPELLANT MR B S SOPARKAR FOR THE OPPONENT JUDGMENT PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA 1. Since these Tax Appeals are having common substantial questions of law, the same were heard analogously and are being disposed of by this common order. 2. For the sake of convenience Tax Appeal no.81 of 2020 is treated as lead matter. 3. This Tax Appeal is filed at the instance of revenue under Section 260A of the Income Tax Act, 1961 (for short the Act, 1961 ) and is directed against the common orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urchase of shares and securities and profit on sale of securities was almost at par with the profit arising out of the gas manufacturing business of the assessee. The Assessing Officer thereafter, relying upon the instruction no.1827 issued by the Central Board Of direct Taxes (CBDT) and the various decisions of the Supreme Court and the High Court, held that the share transactions were adventure in nature of trade and the assessee was engaged in the business of trading shares and security. The Assessing Officer therefore, treated the profits in respect of all the sale transactions on shares and securities received by the assessee in the year under consideration as business income and not as long term or short time capital gain as claimed by the petitioner and made an addition of ₹ 16,59,53,272/-. 6. The Assessing Officer also held alternatively on protective basis that if the profit on account of the sale transaction is to be considered as capital gain instead of business income disallowance under Section 14A with regard to the professional charges amounting to ₹ 62,56,732/- and interest of ₹ 1,11,47,727/- is required to be made. 7. The assessee being aggri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 2007-08, the ld. CIT(A) did not concur with the AO and accepted the claim of the assessee. The ld. CIT(A) has upheld that on sale and purchases of shares and mutual funds gain/loss is to be assessed under the head Short term capital Gain or Long Term Capital Gain/Short Term Capital Loss or Long Term Capital loss . From the Asstt.Year 2008-09, the ld. CIT(A) did not concur with his predecessor and took a contrary view, whereby the alleged investment in the shares has been treated as a trading activity. Gain/loss on sale of such shares has been assessed as business income. But on sale of mutual funds, the ld. CIT(A) has accepted the stand of assessee that this activity is to be considered as an investment and profit/loss on sale of mutual fund is to be assessed as long term capital gain/short-term capital gain/loss. The Revenue is challenging this part of order in ground no.3 in Asstt. Year 2008-09, 2009-10 and ground no.1 in the Asstt. Year 2010-11. The ld. counsel for the assessee, for buttressing his claim, relied upon the orders of the ld. CIT(A) form the Asstt.Year 2005-06 to 2007-08. On the other hand, the ld. CIT-DR relied upon the orders of the ld. CIT(A) from the Asstt. Y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and purchase of investments are not routed through profit and loss account, but only net gain/loss on such investments are reflected in the profit loss account. The fact that the shares/securities were held as non-trading assets has been disclosed in Notes to the accounts in Schedule15 at item 1(d). The assessee has valued its closing stock at lower of cost or market value, whereas the investment in shares securities has been valued at cost only. It is further seen that the provisions made for diminution in value of investment has been added back in the computation of income. Thus, in the assessment years under consideration and respective previous assessment years, the following amounts have been added back to the total income on this count in the computation and no deduction has been claimed under section 88E for the securities transaction tax paid during the year. Asstt. Year Amount added back to the total income Amount added back in the total income in previous Asstt. Year 2005-06 ₹ 31,565/- ₹ 6,02,99,64/- 2006-07 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .99 22.83 141.05 955.87 2008-09 166.52 139.33 240.63 546.48 583.75 444.38 62.75 1090.88 752.03 7.12 364.15 1123.31 2009-10 151.21 150.25 204.27 505.73 822.14 20.89 33.25 876.28 589.40 9.44 45.4 914.24 2010-11 395.75 204.49 148.44 748.67 1308.84 18.08 54.24 1381.16 1070.46 Nil 52.29 1122.75 2011-12 249.25 195.16 126.43 570.84 821.80 1.73 3.65 827.18 1005.65 17.51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2005-06 24.32 (including LTG ₹ 10.17) 7.61 2.98 19.69 2006-07 3.47 (including LTG ₹ 1.22) 52.81 8.07 64.63 2007-08 11.46 (including LTG ₹ 2.73) 26.67 38.12 2008-09 11.87 (including LTG ₹ 7.64) 48.04 59.91 2009-10 During the year, the company has incurred loss of ₹ 7.33 crores on scale of investments. 2010-11 6.29 (including LTG ₹ 6.29) (-) 6.01 Capital loss 0.28 2011-12 37.37 (including LTG ₹ 32.59) - 5.67 43.04 27. The ld.counsel for the assessee submitted that in the books of accounts, the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edabad ITA No.3326/Ahd/2009 and others order dated 17.3.2015, ITAT, Ahmedabad. vi) CIT Vs. Kapur Investments P.Ltd. 61 taxmann.com 91 (Kar) vii) ITA No.1912/Ahd/2012 and others in the case of Alembic Ltd. Vs. DCIT, order dated 9.12.2016 (ITAT, Ahmedabad.) viii) Gajjala Madhusudhan Reddy Vs. ITO, 39 taxmann.com 157 (ITAT, Hyderabad) ix) DCIT Vs. UMIL Share Stock Broking Services Ltd., 96 taxmann.com 168 (KolTrib.) x) PCIT Vs. Bhanuprasad D. Trivedi, HUF, 87 taxmann.com 137 (Gujarat) xi) PCIT Vs. Bhhanuprasad D. Trivedi HUF, 94 taxmann.com 114 (SC) He has placed on record copies of the above decision. 30. We have duly gone through all these details. In the first test i.e. how to find out intention of the assessee that it has purchased shares for investment purpose, the assessee has pointed out that in the books of accounts, it has treated these shares in the investment account. It has not valued the shares at the end of the year at cost or market value whichever is less, rather it has valued them at the cost of acquisition. This treatment in the account is being given when the shares are being purchased in investment account. The asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort-term capital gain Tribunal found that assessee had regularly dealt in purchase and sale of share which indicated period of holding to be very short and that he earned only a meager amount of dividend while gains from sale of shares was ₹ 65.45 lakhs High Court upheld order of Tribunal that income arising from sale of shares was assessable as business income Whether special leave petition filed against impugned order was to be dismissed - Held, yes in favour of revenue. (2). CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. [100 ITR 706 (Supreme Court) Section 2(13) of the Income tax Act, 961 Business Adventure in nature of trade Assessment year 1956-57 Assessee company purchased shares and sold part of it Assessee claimed that shares were purchased by way of investment and profit amount to capital gains Tribunal found as of fact that assessee purchased shares out of borrowed fund and did not make sale on account of any pressing necessity Whether on facts dominant intention of assessee being to make profit by resale of shares and not to make investment. Tribunal was correct in holding that transaction was adventure in nature of trade Held, yes. (3). Smt. Harsha N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of business. [11] In the case of Pari MangaldasGirdhardas Vis. Commissioner of Income Tax, 1977 CTR (Guj.) 647, after analyzing various decisions of the Apex Court, this Court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business. [a] The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline. [b] The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. [c] The third test, which is frequently applied, is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee. Has it been treated as stock intrade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant is not conclusive. [d] The fourth test is as to how the assessee himself ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares or making the investment in shares is to be examined by the Assessing Officer. 14. In view of the above, it was submitted that the Tribunal failed to appreciate that borrowed funds on which interest was paid during the year and the surplus business funds were mixed-up and it cannot be accepted that the funds deployed for earning tax free income were entirely out of interest free funds, moreover, the assessee did not maintain separate account for source of funds utilized for the investment activities. In such circumstances, it was submitted that, the disallowance made by the Assessing Officer under Section 14A of the Act, 1961 was required to be upheld. 15. On the other hand, Mr. B. S. Soparkar, learned advocate appearing for the respondent assessee submitted that there are concurrent findings of fact arrived at by the CIT(A) and the Tribunal. Mr. Soparkar would submit that the CIT(A) has considered the facts of the case with regard to the intention of the assessee, borrowed funds of the assessee, frequency of transactions, retention and appreciation in the value of shares and secu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different contrary stand in this regard in subsequent years: (c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 18. From the above instructions of CBDT, it was submitted that in the facts of the case as the assessee has treated the income arising from the transfer of sale and security as capital gain, the Assessing Officer could not have disputed the same as the assessee consistently fol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest expense under Section 14A of the Act, 1961. 23. Having heard learned advocates of the respective parties and having gone through the materials on record , we are of the opinion that in view of concurrent findings of fact arrived at by the CIT(A) and the Tribunal and more particularly when the CIT(A) has treated the surplus on sale of shares and securities as capital gain instead of business income by giving cogent reasons with regard to (i) the intention of the assessee, (ii) showing purchase of shares and security under the head of investment in the balance-sheet and not as stock in trade, (iii) the assessee has valued its investment and shares and securities not lower of cost or market value but at cost only,(iv) the assessee has not claimed any deduction under Section 88E of the Act, 1961 for security transaction tax paid during the year,(v) the assessee has made investment from its own funds and therefore, there is no involvement of borrowed funds for transaction in shares and securities carried-out by the assessee. 24. As against the observation made by the Assessing Officer with regard to the volume of trade frequency etc. of the transaction in shares and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctions for the information of assessees as well as for guidance of the Assessing Officers. 5. In the case of Commissioner of Income-tax (Central), Calcutta v. Associated Industrial Development Co. (P) Ld. [197182 ITR 586, the Supreme Court observed that: Whether a particular holding of shares is by way of investment or forms part of the stock in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. 6. In the case of Commissioner of Income-tax, Bombay v. H. Holck Larsen 1986160 ITR 67 the Supreme Court observed : The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were riding transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact. 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade, where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits. 10. CBDT also wishes to emphasise that it is possible for a taxpayer to have two portfolios. Les an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, Le capital gains as well as business income. 11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment and therefore giving to capital gains) or as stock-in-trade and therefore giving rise to business profits). The Assessing Officers are further advised that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following -- (a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, (b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different contrary stand in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made and this disallowance would be worked out accordingly. The ld.CIT(A) has held that profit on share transaction is to be assessed as capital gain. We have upheld this finding of the ld.CIT(A) while rejecting the ground of appeal taken by the Revenue in the above discussion. Therefore, we are required to adjudicate what amount ought to be disallowed under section 14A of the Act. A perusal of the record would indicate that the ld.AO has made disallowance under two heads; (a) out of professional fees, and (b) out of interest expenses. As far as out of professional fee of ₹ 62,56,732/- is concerned, this disallowance has been confirmed by the ld.CIT(A) at ₹ 60 lakhs. It has been challenged by the assessee in ground no.4 of ITA No.1379/Ahd/2009. We have discussed this issue while dealing with the issue, whether the assessee was indulged in share trading or its activities were of investments. We have confirmed this disallowance, after taking note of the submissions made by the ld.counsel for the assessee. Out of interest expenditure, the ld.AO has worked out the disallowance at ₹ 1,11,47,727/-. He worked out this disallowance with help of the following formula: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment. In this situation, part expenditure cannot be culled out unless a direct nexus has been demonstrated. It is neither discernible in the assessment order nor in the CIT(A) s order. We have extracted relevant finding of the ld.CIT(A). In view of the above discussion, we are of the view that this disallowance is not discernible. Consequently, ground of appeal raised by the Revenue is rejected, whereas ground of appeal raised by the assessee is allowed. The disallowance of ₹ 19,83,858/- stands deleted. No other ground remained in the appeal of the Revenue for the Asstt.Year 2005-06. Therefore, ITA No.1661/Ahd/2009 stands dismissed. 29. The aforesaid findings arrived at by the Tribunal are in consonance with the decision of this Court in case of the assessee in Tax Appeal no.11 of 2019 with Tax Appeal no.28 of 2019 (supra) as well as the decision in case of Gujarat State Fertilizers and Chemicals (supra), wherein the Court has held as under :- 14. We had the occasion to consider the provision of Section14A of the Act as well as Rule8D of the Rules in the Tax Appeal No.100 of 2019 decided on 18/06/2019 [Principal Commissioner of Income Tax, Vadodara1 Vs. Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th retrospective effect from 1st April 1962. 8. It is further submitted that after the insertion of Rule 8D, in all the cases of mixed funds, i.e. interest free as well as interest bearing funds, the subsequent decision of the Supreme Court in the case of Maxopp Investment Limited (supra), more particularly para-42 regarding the case of M/s. Avon Cycles Limited, would be applicable for disallowance under Section 14A and such disallowance is required to be assessed as per the provisions of Rule 8D only. The decision of this Court in the case of Shreno Limited, which is based on the prior decision of the Supreme Court in the case of S.A.Builders Limited (supra) is, therefore, not applicable to the cases of mixed funds. 9. On the other hand, this Tax Appeal has been vehemently opposed by Mr. Manish Shah, the learned counsel appearing for the respondent assessee. Mr. Shah submitted that the decision of the Supreme Court in the case of Maxopp Investment Limited(supra) should not be understood as clinching the issue with regard to the interpretation of Section14A of the Act and Rule 8D of the Rules. He submitted that in the case of Maxopp Investment Limited(supra), the questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of the loan taken by the assessee for purchasing the shares or making the investment in shares is to be examined by the Assessing Officer. 16. We also refer to and rely upon a decision of this Court in the case of Principal Commissioner of Income Tax v. Shreno Limited, reported in (2018) 409 ITR 401 (Gujarat), more particularly paragraphs 16 and 17, which read thus : 16. The primary question which the Supreme Court considered in case of Maxopp Investment Ltd., (Supra) was whether disallowance of expenditure under Section 14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control over the said company and incidentally tax free dividend income was generated. The assessee had contended that the dominant intention for purchasing the shares was not for earning the dividend but to gain control over the business in the company in which the shares were purchased. The Supreme Court held that the purpose for which the shares were purchased was inconsequential. As long as such investment generated tax free income, disallowance of expenditure for making such investment would be justified. This issue does ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the said judgment of the Supreme Court. 17. This Court, in Shreno Limited (supra), has taken the view that Maxopp Investment Limited (supra) cannot be seen or understood to be fundamentally changing the understanding and interpretation of Section14A and Rule 8D. It went on to hold that the judgment of the Supreme Court does not lay down the proposition that, the requirement of subrule (1)of Rule 8D of recording the satisfaction by the Assessing Officer before applying the formula given in sub rule (2) of Rule 8D is done away with. It clarifies that the judgment in the case of Maxopp Investment Limited does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds and utilized them for making investment into securities earning tax free income, Section 14A read with Rule 8D would be attracted automatically. The assessee has further relied on the judgment in the case of Principal Commissioner of Income Tax v. Gujarat State Financial Services Limited in the Tax Appeals Nos.1252, 1253 and 1255 of 2018 decided on 15th August 2018, which has followed the decision in the case of Shreno Limited (supra) dealing with the same issue and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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