Income Tax Appellate Tribunal - Lucknow
Akg Consultants Pvt. Ltd., Kanpur vs Department Of Income Tax on 13 August, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL, LUCKNOW BENCH 'A', LUCKNOW. BEFORE SHRI H. L. KARWA, HON'BLE VICE PRESIDENT AND SHRI N. K. SAINI, ACCOUNTANT MEMBER I.T.A. No.665/Luc/10 Assessment Year: 06-07 Income Tax Officer-5(3), Vs. M/s AKG Consultants Pvt. Ltd. Kanpur. 15/197, Civil Lines, Kanpur. PAN:AABCA7844C (Appellant) (Respondent) C.O. No.51/Luc/10 (in I.T.A. No.665/Luc/10) Assessment Year: 06-07 M/s AKG Consultants Pvt. Ltd. vs. Income Tax Officer-5(3), Kanpur. Kanpur. (Objector) (Respondent) Revenue by : Shri Vivek Mishra, Sr. D. R. Assessee by : S/Shri A. K. Gupta & Pankaj Agarwal, F.C.A. O R D E R
PER N. K. SAINI:
The appeal by the Department and the Cross Objection by the assessee are directed against the order dated 13/08/2010 of the CIT(A)-II, Kanpur. Since the appeal of the Department and the Cross Objection of the assessee were heard together so these are being disposed of by this consolidated order for the sake of convenience.
2. First we will deal with the Cross Objection of the assessee in C.O.No.51/Luc/10. The only ground raised by the assessee reads as under:
"1. Because the learned CIT (A)-II Kanpur has erred on facts and in law in confirming the disallowance of `6,37,288/- u/s 14A read with Rule 8D of the I.T. Rules, 1962 retrospectively to the year under appeal while Rule 8D was effective from assessment year 2008-09."
3. The facts related to this case, in brief, are that the assessee is a company registered under the Companies Act, 1956 and is deriving the income under the head 'Income from house property', 'profit and gains of business or profession' and 'capital gains'. For the year under consideration, the assessee filed the return of income on 29/11/2006 declaring an income of `80,84,581/- which was processed u/s 143(1) of the I.T. Act. Later on the case was selected for scrutiny. The assessee claimed a sum of `44,07,496/- which included a sum of `2,31,003/- being dividend and agricultural income and `41,76,493/- as long term capital gain. The Assessing Officer pointed out that the assessee did not make any corresponding disallowance voluntarily while computing its income. The Assessing Officer disallowed a sum of `6,37,288/- u/s 14A of the I.T. Act read with Rules 8D of the I.T. Rules, 1962 by following the decision of the ITAT Mumbai Bench in the case of ACIT vs. Citicorp Finance (India) Ltd. [2008] 300 ITR (AT) 398.
4. The assessee carried the matter to learned CIT(A) and submitted as under:
"The appellant himself has added back the expenditures related to investments giving exempt income viz Security Transaction Tax and Demat Charges. The learned Assessing Officer ought not to have made any further addition u/s 14A.
Without prejudice it is submitted that the value of the land and properties which are yielding taxable income in the form of Rentals/ business income/ capital gains ought to be excluded from the value of Investments. The details are: (a) included In Investments schedule `1,22,52,538/- (previous year `9637012) and (b) included in fixed assets `82,91,420/- (previous year `62,41,500/-). Thus closing and opening value of exempted assets is taken excess by `2,05,43,958/- and `1,58,78,512/- respectively.
Further, the total assets considered by learned AO are not correct as she has omitted to include amounts of liabilities `1,34,15,405/- (previous year `1,11,40,153/-) which are deducted in Balance Sheet from the value of total assets."
4.1 The learned CIT (A) restored the issue back to the file of the Assessing Officer by observing as under:
"In view of the decision of the Hon. ITAT (SB) in the case of Daga Capital, the disallowance of expenses made in terms of section 14A read with rule 8D has to be confirmed. However, the AO was not right in his computation of total assets, which he is directed to recompute. Further, the value of land will be included in exempted income assets only if such land is agricultural land (as income derived from agricultural land is exempt from tax). The AO is directed to recompute the disallowance as per my above findings."
Now the assessee has filed Cross Objection.
5. The learned counsel for the assessee submitted that the assessee is a share broker and also doing trading in shares therefore, investment in shares is incidental to business activities. The subject investments are old and the capital (non borrowed funds) were more than investments. There is no nexus between any expenditure or interest and the income claimed as exempt. That the Ld. C.IT.(A) has confirmed the disallowance made by the A.O. merely by following the decisions in the case of:
a) Daga Capital Management (P) Ltd. (2009) 312 I.T..R. (AT) Page 1 (ITAT Mumbai Special Bench).
b) Chem Invest Ltd., 121 ITD page 318 (ITAT Delhi Special Bench).
It was further submitted that the Ld. C.I.T. (Appeals) has neither discussed the facts nor has given reasons for confirming the disallowance/additions.
It was stated that recently, the Hon'ble Bombay High Court of the Judicature at Mumbai held in the case of Godrej Boyace Mfg. Co. Ltd. vs. Dy.CIT. and another (2010)328 ITR 81 held that -
a) " ... .It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April, Consequently, rule 8D which has been notified on March 24, 2008, would apply with effect from assessment year 2008-09 ... "
b) " ... .ITO V. DAGA CAPITAL MANAGEMENT P. LTD. [2009] 312 ITR (AT) 1 (Mumbai) [SB] impliedly disapproved on this point. .. "
It was further stated that Rule 8D of Income Tax Rules 1962 was inserted by the I.T. (Fifth Amdt.) Rules 2008 with effect from 24.03.2008, hence the same was applicable only from Assessment Year 2008-2009 and not the earlier years."
Reliance has also been placed on the following case laws:
(i) Decision of the ITAT, Delhi Bench of the Income-tax Appellate Tribunal in the case of Impulse (India) Pvt. Ltd. vs.ACIT (2008) 22 SOT 368,
(ii) Decision of the I.T.A.T., Mumbai Bench in the case of M/s. Godrej Agrovet Ltd. vs. ACIT, Range 10(2), Mumbai (ITA No.1629(Mum.)/09 for A.Y. 2005-06,
(iii) Decision of the I.T.A.T., Delhi Bench in the case of Maruti Udyog Ltd. vs. Dy.CIT,92 ITD 119.
(iv) Wimco Seedlings Ltd. vs.Dy.CIT, 107 ITD 267 (Del.)TM,
(v) CIT vs. Reliance Utilities and Power Ltd.(2009) 313 ITR 40.
Finally, the assessee has prayed as under :
"i) From the detailed facts and explanation submitted here above, your honours will kindly appreciate that the authorities below have mechanically made the disallowance allegedly u/s 14A of the income Tax Act, 1961, read with Rule 8D of the Income Tax Rule 1962, without establishing:
a) Nexus between borrowed funds and the investments giving rise to exempt income.
b) That the expenses and interest are attributable to exempt income.
c) Section 14A and Rule 8D can be applied retrospectively.
ii) That the disallowance u/s 14A of the I.T. Act read with Rule 8D of I.T. Rules made by the Ld. A.O. and sustained by the Ld. C.LT.(A)-II, Kanpur is insupportable in law and on facts and therefore, is liable to be quashed. "
6. The ld.D.R., in his rival submissions, supported the impugned order passed by the ld.CIT(A).
7. We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts was a subject matter of the assessee's appeal in the case of M/s. Goel Investment Ltd. vs. Addl.CIT, Bareilly for the assessment year 2006-07 in I.T.A.No.238(Luc.)/2010 wherein the issue had been remanded back to the AO vide order dated 15.9.2010 by observing as under:
"8. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the AO invoked the provisions of Section 14A of the Income-tax Act, 1961. The said provision reads as under :
"14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001."
8.1 From the above provisions it would be clear that the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee. This Section is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the I.T.Act has to be disallowed under section 14A. Under Sub-Section (2) of Section 14, the AO is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. In the present case, although the AO has not established the nexus between the expenditure and the exempted income (dividend) to work out the expenditure but for making disallowance invoked the provisions of Rule 8D of the Income-tax Rules, 1962 which are inserted by the Income-tax (Fifth Amendment) Rules,2008, w.e.f. 24.3.2008. However, as per the ratio laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), the provisions of Rule 8D are applicable prospectively and not retrospectively. In the said case, their Lordships of the Hon'ble Bombay High Court, while interpreting the provisions of Section 14A of the Act and Rule 8D of the Income-tax Rules, 1962, observed at paas 66 & 67 of the aforesaid referred to order (Head Note) as under :
"The first point to be noted about the provisions of s. 14A and r. 8D is that different dates have been provided in these provisions for their enforcement: (i) Sub-sec. (1) of s. 14A was inserted by the Finance Act of 2001 with retrospective effect from 1st April, 1962; (ii) Sub-ss. (2) and (3) were inserted in s. 14A by the Finance Act of 2006 w.e.f. 1st April, 2007; (iii) The proviso was inserted by the Finance Act of 2002 with retrospective effect from 11th May, 2001; (iv) Rule 8D was inserted by the IT (Fifth Amendment) Rules, 2008 by publication in the Gazette dt. 24th March, 2008. Sub-r. (2) of r.1 stipulates that the rules shall come into force from the date of their publication in the Official Gazette. This by itself is not conclusive. Secondly, prior to the insertion of s. 14A by the Finance Act of 2001 the Supreme Court had held in its decisions in CIT vs. Indian Bank Ltd. AIR 1965 SC 1473, CIT vs. Maharashtra Sugar Mills Ltd. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC): (1971) 3 SCC 543 and Rajasthan State Warehousing Corporation vs. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) that in the case of a composite and indivisible business which resulted in taxable and non-taxable income, it was impermissible for the AO to apportion the expenditure incurred in relation to such business as between the earning of taxable and non-taxable income. Sub-sec. (1) of s. 14A was inserted with retrospective effect from 1st April, 1962 to overcome the decisions of the Supreme Court. At the same time, as has been noticed by the Supreme Court in its decision in CIT vs. Walfort Share & Stock Brokers (P) Ltd. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233, the theory of apportionment of expenditure between taxable and non-taxable income has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it has been observed that the words "expenditure incurred" in s. 14A refer to expenditure on rent, tax, salary, interest etc. in respect of which allowances are provided for. Thirdly, sub-ss. (2) and (3) were introduced by a legislative amendment brought about by the Finance Act of 2006. The Memorandum Explaining the Provisions of the Finance Bill of 2006 recognizes that the existing provisions of s. 14A did not provide a method of computing the expenditure incurred in relation to income which does not form part of the total income. Consequently, there was a considerable amount of dispute between the taxpayers and the Department on the method of determining such expenditure. It was in view of these disputes that Parliament inserted a new sub-sec. (2) to permit the framing of subordinate legislation to provide a mandatory method for the AO to follow in determining the expenditure incurred in relation to income which does not form part of the total income, if the AO was not satisfied with the correctness of the claim of the assessee. The Memorandum provided that "this amendment will take effect from 1st April, 2007 and will, accordingly apply in relation to the asst. yr. 2007-08 and subsequent years". A circular was issued by the CBDT on 28th Dec., 2006 once again clarifying the position that the amendment would be applicable "from the asst. yr. 2007-08 onwards". At any rate this construction which has been placed on the amendment both in the Memorandum Explaining the Provisions of the Finance Bill of 2006 and in the circular of the CBDT dt. 28th Dec., 2006 can be regarded as a reasonable interpretation of the provision. The fourth aspect of the matter which would merit emphasis, is the principle of law that in determining as to whether a rule in a piece of subordinate legislation is to be regarded as prospective or retrospective, an important aspect is as to whether the rule embodies what is essentially a well known, a well settled or well accepted method. As a matter of fact in the present case there can be no doubt about the position that r. 8D has essentially put into place an artificial method of estimating the expenditure that can be regarded as being relatable to income that does not form part of the total income under the Act. Before the insertion of s. 14A, there was no specific method of determining the expenditure incurred in relation to non taxable income. Looking at the totality of the circumstances, the measure of 0.5 per cent provided in r. 8D(2)(iii) is reasonable. Hence, while the method of computation provided in r. 8D is fair and reasonable to pass muster under Art. 14, the method must take effect prospectively. Finally, sub-sec. (4) of S. 295 empowers the rule-making authority to give retrospective effect to subordinate legislation. However, unless expressly or by necessary implication, a contrary provision is made, no retrospective effect is to be given to any rule so as to prejudicially affect the interests of the assessee. Even in the absence of sub-ss. (2) and (3) of S. 14A and of r. 8D, the AO was not precluded from making apportionment. Such an apportionment would have to be made in order to give effect to the substantive provisions of sub-s. (1) of S. 14A which provide that no deduction would be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. The change which is brought about by the insertion of sub-ss (2) and (3) into S. 14A by the Finance Act of 2006 w.e.f. 1st April, 2007 is that in a situation where the AO is not satisfied with the correctness of the claim of the assessee in regard to the expenditure incurred by it in relation to the non-taxable income, the AO would have to follow the method which is prescribed by the rules. The amendment rules were notified to come into force on 24th March, 2008. It is a trite principle of law that the law which would apply to an assessment year is the law prevailing on the first day of April. Consequently, r. 8D which has been notified on 24th March, 2008 would apply with effect from asst. yr. 2008-09. The rule consequently cannot have application in respect of asst. yr. 2002-03 which is the year under consideration in this case."
8.2 In the present case, since the AO applied the provisions contained in Rule 8D,which are applicable with effect from A.Y. 2008-09, while the assessment year involved in this case is 2006-07, therefore, we are of the view that the ld.CIT(A) was not justified in confirming the action of the AO by considering the ratio laid down by the I.T.A.T., Special Bench in the case of M/s. Daga Capital Management Private Ltd., 312 ITR 1 (S.B.) Mumbai, which is not a good law in view of the judgment of the Hon'ble Bombay High Court in the aforesaid referred to case of Godrej & Boyce Mfg. Co. Ltd. (supra), We, therefore, set aside the order of the ld.CIT(A) and remand the issue back to the file of the AO for fresh adjudication by keeping in view the guidelines laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) and direct the AO to compute the disallowance, if any, by applying a reasonable method having regard to the facts and circumstances of the case."
9. Since the facts for the year under consideration are identical to the facts involved in the preceding year, therefore, respectfully following the aforesaid order dated 15th September, 2010 in assessee's own case in I.T.A.No.238(Luc.)/2010, we remand the issue back to the file of the AO for fresh adjudication as was directed in the preceding year.
8. So, respectfully following the decision of this Bench of the Tribunal in the case of M/s. Goel Investments Ltd. vs. The Addl. CIT, Bareilly, we remand the issue back to the file of the AO for fresh adjudication after affording reasonable opportunity of being heard to the assessee.
9. Now we will proceed with the appeal of the Department in I.T.A. No.665/Luc/10. The effective grounds raised in this appeal read as under:
"1. On the facts and in the circumstances of the case the Commissioner of Income Tax (Appeals)-II, Kanpur has erred in law and on facts in deleting the addition of $41,76,493 (wrongly taken as `82,16,250/-) on the ground of frequent transactions in shares by rejecting the claim of Assessing Officer's stand of its being business income and accordingly termed it as income from Capital Gain. I find that the decision of the Assessing Officer as reproduced above is correct, supported by law and facts and justified.
2. That the order of Commissioner of Income Tax (Appeals-II, Kanpur being erroneous, in law and on facts deserves to be vacated and that the order of the Assessing Officer be restored; and
3. That the appellant craves leave to modify and of the grounds of appeal given above and/or add any fresh ground as and when it is considered necessary to do so."
10. The facts related to this case, in brief, are that in the computation of income the assessee had shown the income of `41,76,493/- as having been derived from long term capital gain and accordingly the exemption had been claimed there upon u/s 10(38) of the I.T.Act. The nature of this transactions was explained by the assessee vide letter dated 23/10/2008 as follows:
"Apropos your query requiring explanation as to why the amount of `41,76,493/- claimed as exempt be not treated as normal business profit, it is submitted that the same has been claimed exempt u/s 10(38) in respect of Long Term Capital Asset, being Equity Shares or Units of an Equity Oriented Fund, the transaction of which has been chargeable to securities transaction tax. Your good self will appreciate that the period of holding of these Equity Shares and Units has been more than one year, qualifying them to be Long Term. Since the time of their purchase, these have been held as investments and shown as such in the Schedule of Balance Sheets. The purchase of the same has been treated and accepted as "Investment" in earlier years and has been brought forward as such in the year under consideration. There is no reason to treat the same other than "Capital Assets" and to deny the exemption as eligible u/s 10(38) of the Income Tax I.T. Act 1961."
10.1 The claim of the assessee was as under:
Short term capital gain from sale of property 1,87,500/-
Long term capital gain from sale of property 16,50,151/- Short term capital gain from sale of shares and securities 22,02,105/- Long term capital gain from shares and Securities exempt u/s 10(38) 41,76,493/-
10.2 The Assessing Officer did not accept the claim of the assessee on account of long term capital gain amounting to $41,76,493 by observing as under:
"a. The magnitude and frequency of the share transactions tilt the scale in favour of them being business activity.
b. The proportion of dividend earned with the profit earned from the sale of shares definitely indicate that the shares were not held as investment or capital asset to earn income accrued thereon.
c. Deployment of professional companies to handle the volume of the trade carried out from two cities go far to prove that the real nature of these transactions is business activity not sale of a property held as capital asset to qualify for capital gain.
d. Memorandum of Association of the company carries the object clause that allows assessee to carry on share trading as business."
11. The assessee carried the matter to learned CIT(A) and the submissions on the issue relating to long term capital gain from shares were as under:
"1.1. The learned Assessing Officer adopting the pick and choose, accepted the short-term gain from sale of shares and securities arising under the head 'Capital Gains'. However, the learned Assessing Officer, to deny the benefit of section 10(38) of the Income tax Act, 1961 the Act to the gain of `41,76,493/-, treated the long term capital gain from shares which has suffered Securities Transaction tax differently as 'business income' and added the same to the income of the appellant.
1.2 The learned Assessing Officer is not justified in treating the part of transactions which were held for more than 12 months as not arising from long term capital assets being equity shares while treating part of it which were held for a period of less than 12 months as arising from capital assets.
1.3 The learned assessing officer has denied the exemption inter alia on the following grounds:
1.4 The magnitude and frequency of the share transactions tilt the scale in favour of them being business activity.
1.5 The proportion of dividend earned with the profit earned from the sale of shares definitely indicates that the shares were not held as investment or capital asset to earn income accrued thereon.
1.6 Deployment of professional companies to handle the volume of the trade carried out through two parties go far to prove that the real nature of these transactions is business activity, not sale of property held as capital asset to Qualify for capital gain.
1.7 Memorandum of Association of the company carries the object clause that allows assessee to carry on share trading business.
Magnitude and Frequency The averment of the learned Assessing Officer that magnitude and frequency of the share transactions tilt the scale in favour of them being business activity is contrary to the facts as is evident from the following table:
S.N. Particulars No. of scripts Amount (`)
1.
Opening Investment Quoted Investment Unquoted investment Mutual Funds Debentures Property 54 7 7 2 10242878.76 4471125.00 1609417.02 12722.00 9637012.41 Total Opening Investment 64 25973155.19
2. Purchase Quoted Investment Unquoted investment Mutual Fund Property 18 2 1 5888691.24 360000.00 1000000.00 3224800.00
3. Sales Quoted Investment Property 18 10296189.77 2425000.00
4. Closing Stock Quoted investment Unquoted investment Mutual Fund Debentures Property 56 9 2 2 12117783.70 48,31,125.00 2609417.02 12722.00 1,22,52,538.11 1.8.1 The learned Assessing Officer has treated part of sale of quoted Investments as arising from business averring that the magnitude and scale tilt in favour of business. On appreciation of above table, your honor would appreciate that the ratio of scrip sold to holding is only 1:4 and the frequency is also seldom and low. The volume does not suggest that investments held so were not investments and were in the nature of business.
1.8.2 Out of total sale in 18 scripts:
a. 4 scripts have given both short-term and long-term capital gain; 8 scripts have given short-term capital gains; and 6 scripts have given Long-term capital gains.
b. Scripts held for less than 12 months giving short-term capital gains, except two scripts, were purchased in immediately preceding year and not in the current year. Hence, the gain was shown as short-term and accepted so by the learned assessing officer.
c. In respect of 10 scripts which were held by the appellant as 'Investment' for a period of more than 12 months and sold through Stock exchanges and has suffered 'Security Transaction tax: gain of `41,76,493.49 was claimed as exempt u/s 10(38) of the Act. Out of these 10 scripts, 2 scripts were held by the appellant since earlier to 2001-02, 4 scripts since financial year 2003-04, 3 scripts since 2004-05 and one script was purchased in 2002-03 and 2004-05. Thus, majority of the shares in respect of which exemption has been claimed has been held for a sufficiently long duration. It proves that the shares were held as 'capital assets'.
d. The act of learned Assessing Officer in treating part of sale as 'business' and part as 'capital gain' is contrary to the facts and the provisions of law and by his own volition, he ought to have accepted the claim of the appellant in respect of scripts giving gain of `4176493.49 as exempt within the provisions of section 10(38) of the Act.
1.9 Proportion of dividend to profit earned 1.9.1 The averment of the learned Assessing Officer that the proportion of dividend earned with the profit earned from sale of shares definitely indicates that shares were not held as investment or capital asset to earn income accrued thereon is contrary to the facts, law and custom. Any investment, whether in shares, real estate or gold etc., is made with intent to make regular income by way of dividend, rent etc. or for reaping the benefit of appreciation. In the year of realization of investment, the profit on realization will generally be higher as compared to regular income and hence, will not change the character of investment to that of business. Hence, the view taken by the learned Assessing Officer is without any leg to stand.
1.10 Deployment of professional firms 1.10.1 The learned Assessing Officer has averred in his assessment order that the appellant has availed services of Mani Stock Brokers Limited and such services are not required in seldom transactions yielding to capital gains. This view of the learned assessing officer is also contrary to the facts, customs, usage and the provisions of law. Mani Stock Brokers Ltd. are registered brokers with NSE. For making any sale or purchase of shares, services of share broker will be required and also, it is required by the provisions of Securities Contracts (Regulation) Act, 1956. Section 13 of the Securities Contracts (Regulation) Act, 1956 makes any contract tor sale or purchase of securities to be illegal, if not made through or with member of stock exchange. Hence, for making any transaction purchase and sale of securities, it is necessary to avail the services of the member of any stock exchange and hence, services of Mani Stock Brokers Limited have been taken for purchase and sale of shares through National Stock Exchange of which Mani Stock Brokers Limited was member.
Object Clause in Memorandum of Association The learned Assessing Officer has reproduced clause 1 and 2 of the Main object and one clause of objects ancillary or incidental to the attainment of the main objects from the Memorandum of Association of the appellant. Reading either the main objects or the objects ancillary or incidental to the attainment of main objects, it cannot be inferred that purchase and sale of shares in general and the shares in respect of which capital gains has been claimed as exempt, is the business object of the appellant. Even the circular relied upon by the learned Assessing Officer states that Memorandum of association is not decisive of the nature of transactions and therefore, the act of the learned Assessing Officer in reading down the provisions of Memorandum of Association is contrary to the provisions of law.
1.11 The Investments are accounted and shown as such for several years since inception and accepted by the department. The learned Assessing Officer has ignored such important and relevant factor on irrelevant consideration.
1.12 The learned Assessing Officer blissfully ignored the ratio of various judicial decisions on which the reliance was placed by the appellant in support of his contention. The appellant places reliance on the following case laws in support of its contention:
a. CIT Vs. N.S.S. Investments P. Ltd 277 ITR 149 (Madras) b. Motilal Oswal Vs. Addl. CIT 8 SOT 771 (Trib Bom) c. Sarnath Infrastructure (P.) Ltd. Vs. ACIT 2009 (120) TTJ 216 (Trib Luc) d. CIT Vs. Gopal Purohit 228 CTR 582 (Bom) affirming the decision of Tribunal in 29 SOT 117 e. Shahla Investments & Financial Consultants (P.) Ltd. Vs. DCIT 2 SOT 371 (Trib Hyd) f. Bombay Gymkhana Ltd. Vs. ITO 115 TTJ 639 (Trib Bom) g. J. M. Share and Stock Brokers Limited Vs. JClT 2801/Mum/2000 h. Janak S. Rangwala Vs. ACIT 11 SOT 627 (Trib Bom) 1.13 In view of the facts stated above, acceptance of part of sale as arising from capital assets, and the case laws relied upon by the appellant, the learned assessing officer ought to have accepted the gain of `4176493/- arising from sale of shares entitled for exemption u/s 10(38) of the Income-tax Act, 1961."
11.1 The Learned CIT(A), after considering the submissions of the assessee, observed as under:
The assessee is maintaining its portfolio of shares and securities far several years and the same has always been accounted as Investments, The period of holding of shares is sufficiently long and are accounted as investments since inception, The assessee has said only 18 scripts during the year out of 85 securities in its portfolio, Out of 18 scripts sold 10 scripts are held for long term, Frequency of purchases and sale is not regular to show that that the assessee is a regular trader to earn profits,
(vi) The Assessing Officer has accepted a part of the same portfolio which is sold in short term as 'short term capital gain and,
(vii) Even the object clause of the Memorandum of Association does not include trading of shares."
11.2 By keeping in view of the above the learned CIT (A) held that the shares were held by the assessee as investment and not as trading assets and the profit on sale of such shares was capital gains. He accordingly directed the Assessing Officer to assess the same under the head 'capital gains'.
Now the Department is in appeal.
12. The learned D.R. strongly supported the order of the Assessing Officer and further submitted that the assessee was engaged in the share transaction frequently so those transactions were not the investments but the business transactions, therefore, the Assessing Officer was justified to treat the same as business income instead of capital gain claimed by the assessee.
13. In his rival submissions the learned counsel for the assessee strongly supported the order of the learned CIT (A) and reiterated the submissions made before the authorities below.
14. We have considered the rival submissions and carefully gone through the material available on the record. In the present case it is noticed that the assessee earned a profit of `41,76,493/- on account of sale of shares and claimed the same as long term capital gain.
14.1 The Assessing Officer however treated the above profit as business profit and did not accept the claim of the assessee that it was capital gain.
14.2 As regards to the addition of `41,76,493/- on account of long term capital gain) on sale of investment in shares and securities is concerned, the Assessing Officer made the addition by stating that the magnitude and frequency of the share transactions tilt the scale in favour of them being business activity and that the deployment of services of professional companies to handle the volume of the trade carried out through two parties go far to prove that the real nature of those transactions was business activity, not sale of property held as capital asset to qualify for capital gain. In the present case, it is noticed that the opening amount of investment by the assessee was at `2,59,73,155/- and during the year the assessee made the investment to the tune of `1,04,73,491/- and the closing amount of investment was at `3,18,23,385/-. The assessee made the investment in unquoted shares/securities. The opening balance was at `44,71,125/- which increased to `48,31,125/-. The detail of the investments by the assessee was as under:
S.N. Particulars No. of scripts Amount (`)
1.
Opening Investment Quoted Investment Unquoted investment Mutual Funds Debentures Property 54 7 7 2 10242878.76 4471125.00 1609417.02 12722.00 9637012.41 Total Opening Investment 64 25973155.19
2. Purchase Quoted Investment Unquoted investment Mutual Fund Property 18 2 1 5888691.24 360000.00 1000000.00 3224800.00
3. Sales Quoted Investment Property 18 10296189.77 2425000.00
4. Closing Stock Quoted investment Unquoted investment Mutual Fund Debentures Property 56 9 2 2 12117783.70 48,31,125.00 2609417.02 12722.00 1,22,52,538.11 14.3 The assessee had shown the profit on the sale of the scripts held for less than 12 months as "short term capital gain" while the profits on the securities held for more than 12 months was shown as "long term capital gain." The assessee was showing the scripts as investment and maintaining its portfolio for several years. The same had always been accounted as "investment" and the period of holding of shares was sufficiently long and were accounted for investment since inception. The assessee was holding 85 securities out of which 64 scripts were shown as opening investment for a sum of `2,59,73,155.19 and 21 scripts were purchased during the year under consideration. Out of the 85 scripts (shares/securities) the assessee sold only 18 quoted investment for a sum of `1,02,96,189.77. Out of those 18 scripts, 8 scripts had given "short term capital gain" and 6 scripts had given "long term capital gain" while 4 scripts had given both long term capital gain and short term capital gain on the basis of holding of the scripts for the period of less than or more than 12 months as the case may be. The assessee sold the scripts through Stock Exchange. The frequency of purchase and sale was not so regular to show that the assessee was a regular trader to earn profit. The Assessing Officer also accepted a part of the same portfolio which was sold in short term as "short term capital gain" but did not accept profit of part of the same portfolio as long term capital gain, the said action of the AO was not justified. In the present case, the object clause in the Memorandum of Association of the assessee also did not reveal that the purchase and sale of shares was the business object of the assessee. In the instant case, the investments were accounted for and shown as such for several years by the assessee. The said investments were not doubted in the earlier years so it was not justified on the part of the Assessing Officer to change the stand for the year under consideration and consider the profit on sale of the investments as business profit instead of capital gain shown by the assessee. In the present case, the assessee explained before the authorities below with documentary evidence that sale of the scripts was not a regular feature to consider it as a business transaction and it was not the intention of the assessee to treat the investments as the scripts for regular trade. On a similar issue, the Hon'ble Madras High Court in the case of Commissioner of Income-tax Vs N.S.S. Investments P. Ltd. (Mad) [2005] 277 ITR 149 (Mad) has held as under:
"A company can hold some shares as stock-in-trade for the purpose of doing business of buying and sale of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earning dividend income. Here the shares in question were held as the assessee's capital and not as stock-intrade. Hence, there would be capital gain and not business income."
14.4 In the present case also the assessee although earned dividend along with the capital gain on the sale of the shares/securities but only on that basis it cannot be said that the assessee held the scripts as "stock in trade" particularly when the department had accepted in the earlier years the purchase of the shares/securities as "investment". Therefore, the Assessing Officer was not justified in treating the profit earned by the assessee on the said investments as business profit. As such, the learned CIT (A) was justified in directing the Assessing Officer to assess the same under the head "capital gains". We ,therefore, considering the totality of the facts do not see any valid ground to interfere with the findings of the ld.CIT(A), and accordingly do not see any merit in the appeal of the Department.
15. In the result, the appeal of the Department is dismissed and the Cross Objection or the assessee is allowed for statistical purposes.
(Order pronounced in the open court on 28.2.11) Sd. Sd. ( H. L. KARWA ) (N. K. SAINI) Vice President Accountant Member February 28th ,2011. Srivastava Copy forwarded to the: - Appellant. Respondent. CIT (A) CIT DR. Assistant Registrar PAGE 25