TMI Blog2024 (1) TMI 761X X X X Extracts X X X X X X X X Extracts X X X X ..... the nature of investment and not motivated by trade. In this context, the CIT(A) and the Tribunal, among other things, looked at the transactions from the following prism: quantum of trade, value, purpose, the period for which mutual funds were held, and how disclosure had been made in the books of accounts/financial statements. For the sake of brevity, we are not setting forth the findings returned on the said aspects by these statutory authorities once again. Reference in this regard has been made in the paragraphs above. None of these findings have been assailed before us as being perverse. Concededly, revenue has not proposed a question that the findings returned by the Tribunal concerning the aforementioned aspects were perverse as they were not based on the material placed on record. Appreciation of material/evidence placed before the statutory authorities cannot form a subject matter of appeal under Section 260A of the Act unless the Court were to conclude that the findings were perverse or were returned without evaluating the relevant material on record - no substantial question of law arises Capital contribution received by assessee should be taxed in its hands as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, in the Tribunal, it was a second round of litigation. In the first round, the respondent/assessee had approached the Tribunal against the order dated 12.03.2011, passed by the Commissioner of Income Tax [CIT] under Section 263 of the Income-tax Act, 1961 [hereafter referred to as the Act ]. 1.2 The CIT, exercising its powers under Section 263 of the Act, had set aside the assessment order dated 08.12.2008. Significantly, the assessment order dated 08.12.2008 was framed under Section 143(3) of the Act, albeit after scrutiny. The CIT, however, took the view that the said assessment order was both erroneous and prejudicial to the interests of the revenue and, in this regard, flagged two issues. First, the gain made by the respondent/assessee on redemption of mutual funds should have been treated as business income, not short-term capital gain. Second, the capital contribution received by the respondent/assessee should be taxed in its hands as deemed dividend under the provisions of Section 2(22)(e) of the Act. 1.3 The conclusion arrived at by the CIT in his order passed under Section 263 of the Act was, as indicated above, taken in appeal to the Tribunal by the respondent/a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds or any other securities and carry on the business of lending of monies for interest or on other terms and conditions out of own funds or arranged funds . (iii) The capital invested was rotated 3.13 times during the period in issue. The respondent/assessee did not enter into a large number of transactions in terms of value when compared with its capital and the frequency with which the mutual funds had been rotated. The respondent/assessee had concluded only 23 redemption transactions concerning mutual funds, demonstrating that the respondent/assessee intended to invest in mutual funds and not engage in a business activity. (iv) The purchase and redemption of mutual funds was undertaken only vis- -vis 15 mutual funds during the period in issue. The respondent/assessee did not repeatedly transact and redeem the same mutual funds. The mutual funds were, thus, not churned again and again by the respondent/assessee. (v) That a commercial motive was not established, as the respondent/assessee had invested in mutual funds to earn dividends and appreciation in value. This was evident as the respondent/assessee had not repeatedly invested in the same mutual funds. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the following conclusion: ....I am of the considered view that the payments made by the company partners are not taxable in the hands of the appellant firm; however, the same is chargeable to tax in the hands of the shareholders. Reliance is placed on the decisions in the cases of Bhaumik Colour (P) Ltd. 118 ITD 1 (Mum) (SB), CIT Vs. L. Alagusundaram Chettiar (1977) 109 ITR 508 (Mad) and Ankitech P. Ltd, 340 ITR 14 (Del). Accordingly, the deemed dividend of Rs.21,08,38,530/- is hereby deleted. Consequential relief shall be given by the AO. The AO may consider taking remedial action as per law in assessing the deemed dividend of Rs.21,08,38,530/- in relevant AY in the hands of registered beneficial shareholders; Mr. Pradeep Wig and Mrs. Neera Wig. In view of the above finding, ground no. 4 succeeds and ground no. 5 fails. 4. Against this order, cross-appeals were preferred concerning the AY in issue, i.e., AY 2006-07. The Tribunal, in this round, i.e., the second round, dealt with not only the appeals instituted by the appellant/revenue and the respondent/assessee for AY 2006-07 but also adjudicated the appeal of the appellant/revenue concerning AY 2011-12. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anced by Mr Zoheb Hossain, while Mr S. Ganesh made submissions on behalf of the respondent/assessee. 8. The submissions of Mr Hossain can be broadly paraphrased as follows: (i) The respondent/assessee intended to trade in mutual funds. This is demonstrable if one considers that the respondent/assessee had invested Rs. 86.19 crores in mutual funds in the period in issue, of which only Rs. 3 crores was invested through portfolio managers. During the period in issue, the respondent/assessee had earned a profit of Rs. 4,31,96,995/- and dividend amounting to Rs. 1,74,24,717/-. Thus, the motive was to earn profit on transactions. The dividend earned by the respondent/assessee was incidental to the trade in mutual funds carried out by it. (ii) Merely because mutual funds were shown as investment in the books of accounts, the gain made on its transfer, offered for tax as capital gain, would not change the nature of the income. (iii) If the transactions were examined bearing in mind the time when entry and exit were made qua a particular mutual fund, it would show that the respondent/assessee intended to maximize profit. Thus, after the profit had been booked as a divid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the first day of the year in issue should have been added to the income of the respondent/assessee. 8.4 The expression any payment obtained in Section 2(22)(e) of the Act, which was not necessarily a loan or advance, can be treated as a deemed dividend. 8.5 The Tribunal s view that the transaction was purely a commercial transaction was utterly unsustainable, having regard to the facts and circumstances that obtained in the case. 8.6. It is a well-established legal position that if the shares of a company are held in the name of a firm's partner, since the firm cannot be registered as a shareholder, the partnership firm can be treated as a registered shareholder. Given this position, the transaction in question falls within the ambit of Section 2(22)(e) of the Act and, hence, was assessable in the hands of the respondent/assessee. 8.7 In support of the assertions above, reliance was placed on the following decisions: CIT vs. National Travel Services (2012) 347 ITR 305; National Travel Services vs. CIT (2018) 3 SCC 95 and Gopal Sons (HUF) vs. CIT (2017) 3 SCC 574 . 8.8 Lastly, the Tribunal failed to appreciate that it had the power to tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of investment or stock-in-trade , is an aspect which is fact-centric, juxtaposed with the law enunciated qua like transactions. Thus, what the adjudicating authority has to discern is the intent of the assessee. The intent has to be ascertained keeping in mind the magnitude and frequency of the transactions, the period for which shares are held, the purpose for which they are held, and how transactions are disclosed in the books of account. There is no presumption in law that the acquisition of shares by an assessee is necessarily for trade as against investment. The courts have enunciated this principle in several decisions, including Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal, [1969] 73 ITR 652 (SC); P.M. Mohammed Meerakhan v. Commissioner of Income-tax, Kerala, 73 ITR 735 (SC); Commissioner of Income Tax v NSS Investments Ltd 2007 (277) ITR 149 (Mad); Commissioner Of Income Tax vs Rewashanker A. Kothari (2006) 201 CTR Guj 510 and CIT vs Amit Jain 2015:DHC:2076-DB. 12. The CIT(A) and the Tribunal, after appreciating the material on record, have concluded that the transactions concerning mutual funds were in the nature of investment and not motivated by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the transactions, the period for which shares are held, the purpose for which they are held, how transactions are disclosed in the books of account, etc. Therefore, each judgment cited by the appellant/revenue is distinguishable on facts. 15. Accordingly, in our view, no substantial question of law arises as regards the first issue. 16. Insofar as the second issue is concerned, it is not disputed that capital contributions were accepted by the respondent/assessee from KPFSE and KICIPL. KPFSE contributed Rs.14 crores, while KICIPL contributed Rs. 47 crores. It is on this account that the AO held that Rs.21,08,38,530/- should be taxed as deemed dividend in the hands of the respondent/assessee. 17. It is also not disputed that apart from KPFSE and KICIPL, the other two partners, Pradeep Wig (HUF) and Mrs Neera Wig, had not made any capital contribution to the respondent/assessee. What also comes to the fore is that even though Pradeep Wig (HUF) and Mrs Neera Wig had 20% and 10% shares, respectively, in the profit of the respondent/assessee, they did not have to bear the burden of any loss; the loss, if any, had to be borne by the partner companies, i.e., KPFSE and KICIPL. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts, as demonstrated hereafter: 20.1 In the judgment rendered by the Supreme Court in National Travel Services vs CIT, the assessee was a partnership firm consisting of three partners, Mr Naresh Goyal, Mr Surinder Goyal, and M/s Jet Enterprises Private Limited. The assessee firm had taken a loan from M/s Jetair Private Limited (JPL). The assessee firm had also subscribed to the equity share capital of JPL, albeit in the name of two of its three partners, i.e., Mr Naresh Goyal and Mr Surinder Goyal. Together, these two parties held a 48.19% equity stake in JPL and were shown as shareholders in the register of members maintained by JPL. It is in this context that the provisions of Section 2(22)(e) of the Act were invoked. However, as would be apparent from the facts, in the instant case, the two companies, i.e., KPFSE and KICIPL, had made capital contributions to the respondent/assessee. Since no money had been loaned or advanced to the respondent/assessee, both the CIT(A) and the Tribunal came to a conclusion, as noticed above, that if at all, the additions could be made only in the hands of the individual partners, after affording them an opportunity of hearing. The capital con ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
