Income Tax Appellate Tribunal - Chandigarh
Bahadur Chand Investment P. Ltd.,, ... vs Assessee on 21 December, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH 'B', CHANDIGARH BEFORE Ms. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA No.910 /Chd/2009 (Assessment Year : 2006-07) The A.C.I.T., Vs. M/s Hero Investment (P) Ltd., Circle-V, Hero Nagar, G.T. Road, Ludhiana. Ludhiana. PAN: AAACH4072N And ITA No.896 /Chd/2010 (Assessment Year : 2007-08) The A.C.I.T., Vs. M/s Hero Investment (P) Ltd., Circle-V, Hero Nagar, G.T. Road, Ludhiana. Ludhiana. PAN: AAACH4072N And C.O.No.29/Chd/2010 Arising out of ITA No.896 /Chd/2010 (Assessment Year : 2007-08) M/s Hero Investment (P) Ltd., Vs. The A.C.I.T., Hero Nagar, G.T. Road, Circle-V, Ludhiana. Ludhiana. And ITA No.911 /Chd/2009 (Assessment Year : 2006-07) The A.C.I.T., Vs. M/s Bahadur Chand Investment (P) Circle-V, Ltd., Hero Nagar, G.T. Road, Ludhiana. Ludhiana. PAN: AAACB6706F And ITA No.889 /Chd/2010 (Assessment Year : 2007-08) The A.C.I.T., Vs. M/s Bahadur Chand Investment (P) Circle-V, Ltd., Hero Nagar, G.T. Road, Ludhiana. Ludhiana. PAN: AAACB6706F (Appellant) (Respondent) And C.O.No.28/Chd/2010 Arising out of ITA No. 889/Chd/2010 (Assessment Year : 2007-08) M/s Bahadur Chand Investment (P) Ltd., Vs. The A.C.I.T., Hero Nagar, G.T. Road, Circle-V, Ludhiana. Ludhiana. (Appellant) (Respondent) Appellant by : Shri S.K. Mittal, DR Respondent by : Shri Subhash Aggarwal Date of hearing : 21.12.2011 Date of Pronouncement : 30.12.2011 O R D E R PER SUSHMA CHOWLA, J.M, :
Out of these six appeals, two appeals are by Revenue in the case of M/s Hero Investment (P) Ltd against the orders of CIT(A) dated 2.6.2009 and 29.3.2010 relating to assessment years 2006-07 & 2007-08 respectively against order passed under section 143(3) of the Income Tax Act. The assessee has filed Cross objection against the appeal of the Revenue relating to assessment year 2007-08. The balance three appeals are filed by sister concern of the assessee M/s Bahadur Chand Investment (P) Ltd. Out of the three appeals, two appeals are by the Revenue relating to assessment years 2006-07 & 2007-08 and Cross Objection raised by the assessee relating to assessment year 2007-08. The appeals by revenue are against orders of CIT(A) dated 02/06/2009 and 11/03/2010 relating to assessment years 2006-07 & 2007-08 respectively against order passed u/s 143(3) of the Act.
2. The Revenue in ITA No.910/Chd/2009 (M/s Hero Investment (P) Ltd., assessment year 2006-07) has raised the following grounds of appeal:
"1. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.13,55,79,900/- made by the A.O. by assessing the income shown by the assessee under the head long term capital gain as business income assessed by the assessee company.
2. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.4,54,61,731/- made by the A.O. by assessing the income shown by the assessee under the head short term capital gain as business income assessed by the assessee Company."
3. The Revenue in ITA No.896/Chd/2010 (M/s Hero Investment (P) Ltd. Assessment year 2007-08) has raised the following grounds of appeal :
"1. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.14,56,03,302/- made by the A.O. by assessing the income shown by the assessee under the head 'Capital Gains' as 'Business Income' assessed by the assessee company.
2. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.1,78,06,813/- by making disallowance u/s 14A of the Income tax Act 1961."
4. The Revenue in C.O.No.29/Chd/2010 arising out of ITA No.896/Chd/2010 (M/s Hero Investment (P) Ltd.- assessment year 2007-08) has raised the following ground of appeal :
"1. That the Ld. CIT(A)-II having accepted the appeal of the appellant holding that the appellant is an investor has at the same time failed to deal with the alternate grounds raised by the appellant."
5. The Revenue in ITA No.911/Chd/2009 (M/s Bahadur Chand Investment (P) Ltd., assessment year 2006-07) has raised the following ground of appeal:
"1. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.17,31,76,021/- made by the A.O. by assessing the income shown by the assessee under the head long term capital gain and short term capital gain as business income assessed by the assessee company."
6. The Revenue in ITA No.889/Chd/2010 (M/s Bahadur Chand Investment (P) Ltd., assessment year 2007-08) has raised the following grounds of appeal :
"1. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.3,82,98,378/- made by the A.O. by assessing the income shown by the assessee under the head Capital Gain as Business Income of the assessee company."
2. That the Ld. CIT(A)-II has erred in law and on facts in deleting the addition of Rs.1,04,91,771/- by making disallowance u/s 14A of the Income tax Act 1961."
7. The Revenue in C.O.No.28/Chd/2010 arising out of ITA No. 899/Chd/2010 (M/s Bahadur Chand Investment (P) Ltd., assessment year 2007-08) has raised the following ground of appeal :
"1. That the Ld. CIT(A)-II having accepted the appeal of the appellant holding that the appellant is an investor has at the same time failed to deal with the alternate grounds raised by the appellant."
Common grounds of appeal have been raised by the Revenue in both the case of the assessee in the appeal relating to assessment year 2006-07 and 2007-08. The Cross objection raised by the assessee in both the cases are identical. We proceed to take up the issue raised in the case of M/s Hero Investment (P) Ltd for adjudicating the same.
ITA No. 910/Chd/20098. The brief facts of the case are that the assessee during the year under consideration had declared income from sale and purchase of shares / Mutual Funds (MFs in short) / Portfolio Management Services (PMS in short); dividend received form the aforesaid investments and interest received from loans and investments. During the year under consideration, the assessee had declared income from long term capital gains and short term capital gains on sale and purchase of shares/ mutual funds / portfolio management services. The Assessing Officer show caused the assessee to explain why the said income should not be treated as trading income as the company was not doing any other activity other than trading in shares or equity and the main business of the assessee was to earn profit from trading of shares and not earning dividend by making long term investment. In reply, the assessee claimed that the total investment in shares / mutual funds / PMS were shown in its books as investment and the said proposition has been accepted in the past in the hands of the assessee. Further, it was pointed out that the main investment made was in the shares of group companies, which were held since long and no new shares were purchased during the year, except investment of Rs. 49,490/- in shares of M/s Majestic Auto Limited. The assessee further explained that the dividend income received on investment during the year was Rs. 36,93,58,843/-. Further, it was explained by the assessee that there was no frequency of transaction of sale and purchase of equity shares. In respect of PMS investment, it was clarified by the assessee that as per SEBI regulations, primary intention in PMS investment was to undertake investment on behalf of the clients. Further PMS could not engage in speculation or short selling but could carry out only delivery based transactions. The Assessing Officer vide para 5 elaborately examined the conjecture and surmises raised by the assessee and applying the ratio of the Apex Court in the case of Dalhousie Investment Trust Company Limited v CIT (Central), Calcutta (68 ITR 486) (SC), summarized the investments shown in the balance sheet as on 31.3.2006 by the assessee and held that the contention of the assessee that main investment was in equity shares of group companies was misplaced as 38% funds of the total income funds were included in the equity shares and 28.63% were invested in mutual funds and 32% in PMS. The Assessing Officer accepted the contention of the assessee that its main source of income was from dividend. However, from the various sources of income declared by the assessee, the Assessing Officer tabulated that the income shown on account of sale / purchase of shares was 33% of the total investment, dividend income 66% and interest income 0.6% and the balance being capital with partnership firm i.e. 0.4%. The Assessing Officer further observed as under:-
There was component of profit/loss in sale / purchase of shares.
The component of shares sale/purchase (trading) was substantial i.e. 1/3rd. Dividend earned was kept as reserve and not distributed by way of earnings to share holders. The small investment in shares during the year was held to be correct.
Where the investment was made by the assessee for the purchase of making profit, then the same were stock in trade and correspondingly the dividend was to be treated as its business income. The contention of the assessee that investments were made to earn dividend was found to be misplaced. Assessee has not received any dividend on the investment in MFs, PMS and Derivative trading. The length of holding of shares was found to be long in respect of long term investment, however, in respect of MFs / PMS, the length of holding was less than a year. The frequency of transaction in current investment in MFs and PMS was found to be quite high and consequently the contention of the assessee that there was no frequency of transaction of sale and purchase in direct equity shares were found to be wanting. The SEBI regulations in respect of PMS are to undertake investments on behalf of the assessee, however, as per Assessing Officer prove nothing with respect to the intention of the assessee. The comments of the assessee in respect of the PMS Manager i.e. nature of investment, as per the Assessing Officer, was not addressed by the assessee. Whether it is income or profit derived form transfer of investment and its treatment as capital gain or business income was the key question and the assessee had treated the investments as capital assets instead of treating them as stock in trade.
9. The Assessing Officer thus held that none of the points raised by the AR establish that the :-
a) Intention is to invest in shares / PMS/ MFs/ Derivatives
b) Investments are capital assets and hence the incomes therefrom are to be treated as either capital gains (In case of sale / purchase) or income from other sources (in case of Dividend, interest etc.) The Assessing Officer thereafter considered the factual aspect of the income shown by the assessee under different heads of income under para 6 at page 9 onwards and concluded at page 15 that it was clinchingly concluded that the company has been set up precisely with the intention of making profits and not just to derive income form its investments. The Assessing Officer thus held in light of this argument the investments made by the assessee are to be treated as stock-in-trade and the Revenue generated therefrom as Business income. As such the profit generated from the sale and purchase of investments is to be treated as Business profit (and not capital gain). The income from dividends being incidental to this business of dealing in securities is also be treated as business income. The earning of dividend is a part of the continuous and organized activity of the business concern and is therefore, to be taken as business income.
10. Accordingly, long term capital gains and short term capital gains declared by the assessee was taken as business income and the dividend income shown by the assessee were treated as exempt u/s 10(34) / 10(35) of the Income Tax Act. The Assessing Officer disallowed expenses incurred with respect to these transactions which were exempt u/s 10(34)/ 10(35) and disallowed the same u/s 14A of the Act amounting to Rs. 28,03,399/-.
11. Before the CIT(A), the Ld. AR for the assessee filed a written submissions which are incorporated in para 3.8 at pages 6 to 43 of the paper book. In the said written submissions, the assessee has explained the nature of income offered on account of sale of shares / MFs/PMS extensively including the year of investment / purchase and year of sale-script wise. The plea of the assessee before the CIT(A) was that all the above said transactions were in respect of the investments held by the assessee from year to year in respect of shares of group companies part of which were sold by the assessee and there was no merit in assessing the same as business income. Further, the capital gain offered on redemption of MFs was claimed to be a non tradable and hence the gain arising on its sale merits to be accepted as income from capital gain. In respect of the PMS investment, elaborate submissions were made by the assessee i.e. nature of investment, period of holding and the profit motive for such investment and its was claimed that the said transactions in PMS were in the nature of investment made by the assessee and consequently the profit arising on its sale was to be assessed under the head income from capital gains. The CIT(A) after considering the contention of the assessee in respect of each item of income shown by the assessee concluded that the shares held by the assessee were old investments in shares of group companies and the said shares were sold because of certain regulations of SEBI and the income arising from sale of such shares was to be assessed as income or capital gain in the hands of the assessee. In respect of the income earned on sale of mutual funds, the CIT(A) accepting the plea that the units were not transferable and the investment made by the assessee was to be considered as an investment held that on its redemption, the gains arising therefrom was to be assessed as "capital gains", both long term capital gains and short term capital gains.
12. The CIT(A) has elaborately considered the aspect of PMS investment by the assessee and the income declared as short term capital gains on its sale during the year in para 5.3 onwards. On consideration of the factual aspect of PMS holding by the assessee, the CIT(A) observed that the allegations that the assessee was holding the shares for a short period and selling the same in profit in respect of the PMS transaction did not appears to be correct. The CIT(A) observed that the Asset Management Company maintains the D-Mat account of the assessee and the shares were purchased and sold through the said D-Mat account by taking / giving actual delivery of shares. Further the assessee was found to have been carrying on sale and purchase of shares through PMS in the preceding year also. In view thereof, income declared by the assessee was held to be income from capital gains.
13. The CIT(A) further held that the ratio laid down in Dalhousie Investment Trust Company Limited v CIT (Central) Calcutta (supra) was not applicable to the facts of the present case as in the facts before the Apex Court, the investment in securities was made out of borrowed funds and on the basis of the said reason the Apex Court held that the investments were on account of business transactions. The CIT(A) referring to the elaborate submissions made by the assessee in this regard observed that the investments were made out of the assessee's own surplus funds and further the decision of the Apex Court was rendered when the provisions of section 45(2) were not on the statute book. Relying on the ratios of the various Courts and Benches of the Tribunal, the CIT(A) held that where the intention to hold the assets was investments, the gain arising on its sale is to be booked under the head "income from capital gains".
14. The CIT(A) also addressed the issue of short term capital gains shown by the assessee in respect of sale of mutual funds as tabulated under Para 5.2 at page 48 of the appellate order. The CIT(A) noted that the assessee had shown long term capital gains on sale of mutual funds at Rs. 6,28,32,285/- and short term capital gains at Rs. 123,75,018/-. The short term capital gains had arisen on account of the dividend earned on the investment in mutual funds which were reinvested by the mutual fund companies as detailed by the assessee in its submissions. On the basis of period of holding, the gain on redemption of units received on re-investment of dividend was shown as short term capital gains by the assessee. Therefore, CIT(A) held that the assessee had not made the investment for redemption on short term basis and rather the same was held for longer period in order to earn long term capital gains. In view thereof, the objections of the Assessing Officer in this regards were dismissed.
15. The Ld. AR for the assessee had raised an alternative plea that in case income is to be assessed as business income by treating the investment as stock in trade, then method of valuation of stock in trade i.e. lower of cost or market price was to be adopted and loss on valuation of inventories was required to be allowed as deduction out of business income. The said loss was computed by the assessee at Rs. 28,97,77,621/- The CIT(A) thus directed the Assessing Officer to consider the income shown on sale of shares / mutual funds / PMS investment under the head income from capital gains. In respect of the alternative submissions made by the assessee, the CIT(A) observed as under:-
"6. In the written submissions the Ld. Counsel for the appellant has made certain alternative submissions also. These were as under:-
Alternatively
(a) That the Ld. Additional Commissioner of Income Tax has wrongly considered these transactions as 'Business Income' without giving the effect of provisions of section 45(2) of Income Tax Act.
The Ld. A.O. has not calculated the profit as per provisions of section 45(2) instead of treated the whole income as 'Business Income' by over taking the provisions of Income Tax Act. Also the loss on diminution in value of shares at Rs.28.97 crores has not been given from the business income.
(b) That the Ld. Additional Commissioner of Income Tax has not allowed the Rebate in respect of Security Transaction Tax (STT) paid at Rs.10,82,518/- appearing under the head "Administration & Other Expenses" from the amount of Income Tax u/s 88E.
The Ld. A.O. has failed to allow the rebate in respect of STT as per section 88E. This rebate is from tax due and not from the income."
6.1 However, as the main contention of the appellant has been accepted and the ground of appeal has been allowed for the reasons discussed in the preceding paragraphs, these alternative grounds need not be discussed in detail in this order.
7. Ground of appeal No.3 is also against the action of the A.O. in treating the income on sale of the shares etc. as business income. It is stated in this ground that the Additional CIT has failed to follow the principle of consistency followed in earlier years to treat the gain on sale of investments as "capital gains".
16. The Revenue is in appeal against the order of the CIT(A) in respect of the direction of the CIT(A) in assessing the gain on sale of shares / mutual funds / PMS as long term capital gains or short term capital gains, as the case may be.
17. The Ld. DR for the Revenue elaborately took us through the observations of the Assessing Officer starting from page 3 with the reply of the assessee and the observations of the Assessing Officer from page 5 onwards, item wise, referring to all the allegations of the Assessing Officer. The Ld. DR for the Revenue pointed out that in the preceding year, the investment shown by the assessee in mutual fund was accepted as such and the same finds mention in the order of the Assessing Officer. Thereafter, the Ld. AR for the assessee pointed out that the assessee had shown gain on sale of shares of Munjal Autos at Rs. 3.25 Crores which was included as income from capital gains. Further, the Ld. DR for the Revenue referred to the observation of Assessing Officer in para 5.1 and 5.2 in respect of the capital gains shown on sale of mutual funds. Thereafter, the Ld. DR referred to the observation of the Assessing Officer in para 5.3 to 5.5 in respect of the sale of shares through PMS. It was further contended by the Ld. DR that the CIT(A) observed that there were no investment in derivative by the assessee. The Ld. DR fairly admitted that there was nothing on record to controvert the same. In conclusion, the Ld. DR pointed out that the assessee was making the investment in group companies for holding, was investing in mutual fund and the investment through PMS was with the intention to earn profits, which can be seen from the frequency of transaction, which was very high. Further, it was pointed out by the Ld. DR that the CIT(A) while giving relief on this account had not referred to the transaction of PMS investment through PruICICI and relief has been allowed without considering the same. The Ld. DR fairly conceded that in view of the allowing the relief to the assessee, the alternative ground of appeal raised by the assessee before the CIT(A) were not adjudicated.
18. The Ld. AR for the assessee pointed out that the Ld. DR has read through the complete order of the Assessing Officer, though the department is in appeal against the order of CIT(A), who had elaborately dealt with the said issues and no fault has been pointed out by the Ld. DR for the Revenue with the said order of CIT(A). The Ld. AR for the assessee placed reliance on the complete order of CIT(A) i.e. submissions made before the CIT(A) and the conclusion in para 5 to 5.3 at pages 44 onwards of the order of CIT(A). The Ld. AR for the assessee refereed to the written submissions at page 29 of the appellate order in respect of investment in derivative through PMS under which short term capital loss of Rs. 14,56,489/- was adjusted against the long term capital gain. Our attention was further drawn to the PMS investment shown and its treatment in the earlier years in the hands of the assessee and it was pointed out that the profit on PMS investment was accepted as income from capital gains. Further, reliance was placed on ITO, Mumbai v Radhu Birju Patel (ITA No. 5382/Mumbai/2009) relating to assessment year 2006-07 order dated 30.11.2010 for the proposition that gains arising from PMS transactions are capital gains and not business profits. Reliance was also placed on ARA Trading & Investment Pvt Ltd v DCIT (Pune) (ITA No. 499/Pune/2008) relating to assessment year 2004-05 and KRA holding & Trading Pvt Ltd v DCIT (Pune)(ITA No. 500/Pune/2008) relating to assessment year 2004-05 order dated 31.8.2009 for the said proposition. The Ld. AR for the assessee placed reliance on the various decision of Chandigarh Bench of the Tribunal and other Benches of Tribunal, which shall be referred to by us later. The Ld. AR further pointed out that the issue of assessability of income from sale of mutual fund has been considered in the case of the sister concern of the assessee by the Chandigarh Bench of the Tribunal and it is held that such gains are to be assessed as income from capital gains and not as business income. The decision referred to by the Ld. AR for the assessee was in the case of ACIT Vs Puja Investment Pvt. Ltd. in ITA No. 669/Chd/2009 relating to assessment year 2006-07 order dated 29/04/2011.
19. We have heard the rival contentions and perused the material available on record. The assessee during the year under consideration had shown income from long term capital gains at Rs. 13,55,79,900/- and short term capital gains at Rs. 454,61,731/-. The bifurcation of the long term capital gains is as under:-
Long Term Capital Gain - Rs. 13579900/- Rs Bifurcation is under:.
(i) Profit on sale of shres M/s Munjal Aut Ind. Ltddd. 3252578 (Acquired in Assessmet Year 2004-05) M/s Hitech Gears Ltd.
(Acquired in Assessmet Year 2004-05) 753655 33276233
(ii) Redemption on equity/oriented Mutual Fund
(a) Franklin Tem. Prima Fund invested on 31.8.04, redeemed on 1.9.2005 24046833
(b) Franklin India Flexi Cap Fund Invested on 2.3.05 38785452 62832285 Less: Long Term Loss 13 62832272
(c) Long Term Capital Gain on investment Through Portfolio Managers 39471395 135579900
20. The break up of short term capital gains is as under:-
(1) Capital Gain on redemption of equity/oriented M.F.
(a) Franklin Tem Prima Fund on units of 4325047 Dividend reinvestment on 8.10.04 & 15.7.05 redeemed on 1.09.05 (Original Investment on 31.8.04)
(b) HDFC Multi Cap Fund Invested on 6.4.05 redeemed on 5678240
21.9.05
(c) Prudential ICICI Power Fund Invested on 3.9.04 & Div. Units on 25.3.05 redeemed on 28.06.05. 3320386 13323673 Less: Short Term Capital Loss MF (Rs.2042042 - 1093387 Ignored u/s 94(7) (-)948655 12375018
(ii) On Investment through Portfolio Managers 34562634 Less: Short Term Capital Loss PMS 1475921 33086713 45461731
21. The assessee is an investment company and since its inception has made investment in the share capital of the group companies to promote such companies and also to meet their funds requirement from time to time. The assessee during the year under consideration had declared dividend income of its group companies at Rs. 3588.46 lacs. Similar income was being declared by the assessee both in the preceding and the succeeding years. The claim of the assessee is that the source of investment in shares and securities was out of divided income and share of profit earned from group companies earned by the assessee from year to year and no interest bearing loans were raised for the said investments in shares of group companies/MFs/PMS investment. The assessee in its written submissions filed before CIT(A) has tabulated its sources of income from assessment years 2000-01 to 2006-07 at pages 7 & 8 of the appellate order and pointed out that the profits of the assessee are utilized for investment in shares of group companies, loans to group companies and for investment in MFs/PMS investment. The investment made by assessee in various securities is tabulated at page 8 of the appellate order.
22. The aforesaid activities of earning the income and their investment thereon is claimed to be carried on from year to year and even for the year under consideration. The assessee had shown the aforesaid investments under the head investment from year to year and the said position has not been disturbed in any of the earlier years. The Courts have time and again held that the intention of parties to either invest or to earn profits is to be judged from its conduct i.e. the entries in the books of accounts. Merely because the assessee has entered in multiple transactions and made profits in short span of time does not establish that the assessee was carrying on the said activities only for profit earning and is engaged in business activities. Where the assessee had entered into multiple transactions of sale and purchase of its securities, which were held as investment, the gain/loss arising from such transactions are to be assessed as income from long term/short term capital gains. We find support from the under mentioned case laws:
(a) ITO Vs Rohit Anand 34 SOT (Del) Affirmed in 327 ITR 445 Vesta Investment & Trading Co. Pvt. Ltd. Vs CIT 70 ITD 200(Chd).
Vinod K.Nevatia Vs ACIT ITA No. 6556/09 assessment year 2005-06 dated 03.12.2010 Janak S. Rangwalla Vs ACIT 11 SOT 627 (Mum).
Shri. Inder Paul Singh Vs ACIT ITA No. 58/Chd/2009 - A.Y. 2005-06 order dated 28/03/2011.
23. The first issue arising in the case is gain on sale of shares of group companies. The assessee during the year had sold part of its holding in M/s Munjal Auto India Ltd. The assessee had invested in 700,000 shares of the said Co. in assessment year 2004-05 and the same was being shown as investment from year to year. During the year, as referred in paras hereinabove, the assessee had to disinvest part of its holdings due to SEBI Regulations. The gain raising from sale of such investment is to be assessed as income from long term capital gains. We are in agreement with the findings of CIT(A), which read as under:
"5. I have carefully considered the contention of the Ld.Counsel for the appellant, report of the Assessing Officer mentioned above and perused the relevant record. In the written submissions of the Ld.Counsel which have been reproduced above arguments have been given in respect of the various reasons considered by the A.O. for assessing income from the sale and purchase of shares as business income as against the claim of the appellant that such income was assessable under the head capital gains. From the details furnished by the Ld.Counsel it is seen that during the relevant period the appellant has earned long term capital gain of Rs.135579900/- and short term capital gain of Rs.45918898/-. Details of the same are given in para 3A and 3B of the written submissions reproduced above. As could be seen from these details the long term capital gain has been shown to be earned by the appellant on the sale of shares of M/s Munjal Auto India Ltd. and from redemption of units of Mutual Funds of Franklin India Prima Fund and from Franklin India Flexicap Fund. As far as sale of shares of M/s Munjal Auto India Ltd. is concerned, it is seen that the appellant had invested in 7,00,000 shares of this company in the assessment year 2004-05. This investment was made by the appellant in shares of the group companies and the same was shown under the head "investment" in the Balance Sheet as on 31.3.2004. The appellant sold certain shares of this company during the relevant period because the group was holding 76.8% of the total share capital of the company and as per SEBI(Substantial acquisition of shares & takeovers) Regulation and clause 40A of the Lease Agreement holding of promoters group could not be more than 75%. Therefore, as rightly pointed out by the Ld.Counsel sale of these shares had been affected only to comply with the Regulation 7(3) of the (Substantial acquisition of shares & takeovers) Regulation, 1997 and clause 40A of Leasing Agreement as per group decision. Shares of group companies in a similar manner are acquired and held by such companies to have control over the group companies and also for having control on prices of the shares of the group companies. Holding of shares of the group companies for the above purpose cannot in any manner be termed as for trading in shares. Purchase of such shares of the group companies are only "investments" and such shares can never be considered to have been acquired by such assessees for the purposes of trading in shares. Therefore, for any income earned on sale of such shares that too to comply with the SEBI Regulation etc. as in the assessee of the appellant, "capital gains" would be the result and not any business income as considered by the A.O. Considering this issue from the above angle itself the profit earned by the appellant on the sale of shares of M/s Munjal Auto India Ltd. cannot be taken to be business income and the same is assessable under the head capital gains as claimed by the appellant."
Accordingly, we hold that the gain arising on sale of shares is to be assessed as income from long term capital gains.
24. The second issue arising in the present appeal is the sale/redemption of MFs. The assessee during the year had earned long term & short term capital gains on following transaction:
Company Name Long Term Capital Gain Short Term Capital Gain A Franklin India Prima Fund 24046833 4325047 B Franklin India Flexi Cap. Fund 38785452 NIL C HDFC Premier Multi Cap. Fund NIL 5678240 D Prudential ICICI Power Dividend NIL 3320386 E Principal Focussed Advantage Fund NIL
-948655 Total 62832285 13275018
25. The assessee in the written submissions filed before the CIT(A) had extensively explained the sources of investment in the said Mutual Funds and dividend amount reinvested in the units of MFs and gain arising on its sale. The long term capital gain has been shown on sale of the original investment made in MFs and short term capital gains in relatable to the reinvested dividend units. The said explanation of assessee is reproduced at page 26 to 29 of the appellate order.
26. We find that similar issue in relation to assessability of gains on sale of MFs arose before the Chandigarh Bench of Tribunal in ACIT Vs M/s Puja Investment Pvt. Ltd. (supra) The Tribunal vide order dated 29/04/2011 (supra) had held that "the units of mutual fund are not tradable and the purchase and sale of the said units of mutual fund are to be directly purchased or sold to the company in which investment is made and the same is not commodity which can be traded in open market"
27. The facts of the present case before us are identical to the facts before the Tribunal (supra) in M/s Puja Investment Pvt. Ltd. (supra). The assessee in the present case had made investment in Mutual Funds and the said investment was made in the earlier years out of its own funds. The gain arising on its sale/redemption is to assessed as income from long term/short term capital gains depending on the period of its holding. The relevant findings of CIT(A) in para 5.2 are as under:
"5.2 Coming to the short term capital gain shown by the appellant at Rs.45918897/- gain of Rs.12375018/- is on redemption of Mutual Funds only. The other short term capital gain of Rs.27844797/- and short term capital loss of Rs.(-) 27387631/- is also on other Mutual Funds. For the reasons discussed in preceding paragraphs pertaining to the issue of investment and redemption of units of such Mutual Funds, such income is to be taken to be assessable under the head capital gains only."
28. We are also in conformity with the findings of CIT(A) in para 5.13, that the short term capital gains on sale of MFs had arisen on account of sale of reinvested dividend units, which was the pay out on the original investment in MFs made by the assessee out of its surplus funds. Such short term gains arising to the assessee cannot lead to the conclusions that the assessee was carrying on the business of sale and purchase of MFs. We find no merit in the observations of Assessing Officer in this regard. Upholding the order of CIT(A), we hold that income from sale of MFs are to be assessed as income from capital gains-long term or short term as the case may be.
29. The last transaction to be considered is purchase/sale of PMS investments. The explanation of the assessee as reproduced at page 22 of the appellate order is as under:
"C Lumpsum amount given to Portfolio Manager In last year the company has invested out of surplus funds in PMS. The brought forward balances with PMS Companies as on 1.4.2005 are as under:-
Company's Name Amount HDFC Asset Management Company Ltd. A/c No.10004107 10 Cr.Kotak PMS A/c No.HCS 17
5.02 Cr.
Pru.ICICI PMS A/c Nos.D100759, D100760 & D100761A 4.76 Cr.
The Pru ICICI PMS accounts have been closed during the year and part of the funds invested in HDFC Asset Management Company also got redeemed as the company was in need of funds for investment in capital of group company M/s Hero Motors Ltd. as explained above while analyzing the bank transactions.
As already submitted above, during the year, the company has received dividend from M/s Hero Honda Motors Limited amounting to Rs.34.61 cr. which has been credited incurrent account with Citi Bank. Out of this dividend, the company has made investment in the PMS managed by following three different Assets Management companies:-
Company's Name Amount HDFC Asset Management Company Ltd. A/c No.10004107 5 Cr.
BNP Paribas 5 Cr.Kotak PMS A/c No.HJA 17
5 Cr.
Whenever any amount is given to Asset Management Company for pooling shares for the purpose of investment, such asset management company maintains a separate account of the investor from where the amount is transferred whenever investment is made and the surplus money is again reverted back to this account.
These asset management companies have invested the funds received from Assessee Company in the shares of different companies.
Asset Management Company-wise chart indicating the investments made by them is given as under:-
No.of shares purchased/Oppg.Bl.(Assorted) Cost No.of shares sold (Assorted) % of shares sold Cost of Sale value Balance as on 31.3.06 Short Term Capital Gains Long Term Capital Gains HDFC Asset Mgt.Co. Ltd.
1073402 217083001 562346 52.38% 102642635 114440366 9340945 30377187 Kotak Securities A/c.No.HCS 17 365445 46366556 37170 10.17% 2662539 43704017 499332 0 Kotak Securities A/c.No. 317940 466164207 3205 1% 500317 46563890 0 80568 BNP Paribas 374599 72623654 177714 47.44% 22449000 50174654 1125239 0 Pru ICVICI PMS (A/closing stock Closed) 749088 123018164 749088 100% 123018164 0 22029827 8975024 32995343 39432779 Add: From M/Fs 1547859 38616 TOTAL:
33086713 39471395 The assessee company had shown Long Term Capital Gain at Rs.3,94,71,395/- and Short Term Capital Gain at Rs.3,30,86,713/- on the transactions/mutual funds held by the Portfolio Managers.
As explained above that the PMS accounts with Pru. ICICI PMS have been closed during the year and Rs.3 Crore has been withdrawn from HDFC PMS for the purpose of investment of Rs.10 Crore in group company M/s Hero Motors Ltd. Hence investment in shares by these PMSs has been liquidated by them."
30. The said income was held to be assessable under the head business income by the Assessing Officer. The CIT(A) held as under:
5.3 Further under the head short term capital gain the appellant has shown short term capital gain of Rs.33086713/- on PMS investments. The A.O. has considered this income also to be assessable under the head business income. However as explained in the written submissions lump sum amount is given to the portfolio manager to make investment in shares along with the investment of the other investors on which it has no control. The appellant has however not made any investment in "derivatives". Though it is the allegation of the A.O. that the appellant did not hold such shares for long and that is one of the reasons for the A.O. in considering the income earned from such sale of shares through PMS as the business income of the appellant, the following information furnished by the Ld. Counsel does not support such findings of the A.O.:-
Company name Amount invested in shares Cost of shares sold Ratio of shares sold Kotak Securities A/c No.HCS 17 46366556 2662539 5.74% Kotak Securities A/c No.HJA17 466164207 500317 0.10% HDFC Asset Management Co. Ltd.
217083001 102642635 47.28% BNP Paribas 72623654 22449000 30.91% Pru ICICI PMS(A/closing stock Closed) 123018164 123018164 100%
31. The CIT(A) concluded by holding 5.6 Besides discussing the position with regard to the capital gains income shown by the appellant from different sources as discussed above, the other details arguments of the ld. Counsel brought out in the written submissions also support the grounds of appeal. IN this case the major part of the income of the appellant is income from dividend and interest income. Trading in shares has never been the business of the appellant. There is thus considerable force in the contention of the Ld. Counsel that the investments in question had been made by the appellant with an intention to earn dividend. It is settled position of law on the basis of various decisions and few of which have been cited by the Ld. Counsel in the written submissions reproduced above that the intention of an assessee at the time of making investment was required to be seen to come to a conclusion as to whether such an investment was on account of business transaction or capital investment. I agree with the Assessing Officer that even a single transaction can also constitute business transaction if facts & circumstances of that case point out in that direction. However the intention of the assessee at the time of making the investment is of paramount importance with regard to this aspect. In the case of the appellant the undisputed and admitted position is that impugned investments had been shown under the head "investment" and not as stock in trade in the balance sheet for the respective preceding years. Assessments in the preceding years had been completed u/s 143(3) of the Act and however this position was not interfered with. From the above position also it has to be considered that the appellant had purchased these shares and Mutual Funds as and investment and not as a business transaction."
32. We find that issue of PMS investment was before the Mumbai Bench of the Tribunal in ITO, Mumbai v Radhu Birju Patel (ITA No. 5382/Mumbai/2009) relating to assessment year 2006-07 order dated 30.11.2010 The Tribunal vide order dated 30/11/2010 held as under:
In our consideration view, in circumstance, in which the assessee is engaged in a systematic activities of holding portfolio through a PMS Manager, it cannot, by any stretch of imagination , be said that the main object of holding the portfolio is to make profit by sale of shares during the course of maintaining the portfolio investment over the period. As regards the high number of transactions, which have been referred to by the Assessing officer, we have noted, on a perusal of statement filed before us, that the number of transaction reflected in the statement do not .constitute independent transaction inasmuch as when, in a computer based trading system, let us say the assessee buy 1000 shares and this purchase is split over 10 transactions from different persons, while over all transactions is of only one purchase 100 shares, the statement reflect of the individual component of the transaction and will thus show a misleading high figure. Keeping it in mind all these factors as also the entirety of the case, we are in considered agreement with the conclusions arrived by the C1T (A) which needs no interference. Grievances raised by Assessing officer are thus rejected.
33. In the facts of the present case, the findings of CIT(A) are that the transactions in PMS investment are through D-Mat account of the assessee. The assessee in the written submissions filed before the CIT(A) has elaborately explained the position of sale of shares through PMS, which are at pages 31 to 37 of the appellate order. On consideration of the said factual aspects, the CIT(A) vide paras 5.3 to 5.5 had held that such gains on sale of PMS investment is to be assessed as income from capital gains. The factual findings of CIT(A) have not been controverted by the Ld. DR for the revenue. In view of the ratio laid down in ITO, Mumbai v Radhu Birju Patel (ITA No. 5382/Mumbai/2009) relating to assessment year 2006-07 order dated 30.11.2010 and factual findings of the present case, we hold that gains arising on sale of PMS investment are to be assessed as income from long term/short term capital gains, depending on the period of holding.
34. Admittedly the assessee during the year had incurred loss of Rs. 1456489/- on sale of derivatives through Pru ICICI PMS. The said loss cannot be set off against the income from capital gains on sale of PMS Investment. The Assessing Officer is directed to recompute the income from capital gains accordingly. Thus, grounds No. 1 & 2 raised by revenue are dismissed except for ignoring the loss on sale of derivaties of Rs. 1456489/-.
ITA No. 896/Chd/2010Ground No. 1.
35. Both the authorized representatives fairly admitted that the issue raised vide Ground No. 1 was identical to the issue raised in ITA No. 910/Chd/2009. In view of our order in paras herein above, we dismiss the Ground No. 1 raised by the revenue with the direction to the Assessing Officer to verify whether any loss from derivaties had been claimed by the assessee, which is not to be set off against income from capital gains.
Ground No. 2.
36. The issue in Ground No. 2 raised by revenue is against the computation of disallowance in view of section 14A of the Income tax Act read with Rule 8D of the Income Tax Rules. As held by the Hon'ble Bombay High Court Rule 8D is prospective and not applicable to instant assessment year. The said Rule 8D comes into operation from assessment year 2008-09. Further the contention of the assessee is that no expenditure has been claimed against any of the incomes declared by assessee and hence no disallowance is warranted u/s 14A of the Income Tax Act. The CIT(A) in para 7 to 7.2 have given a finding to this effect. The assessee has also filed relevant evidence in this regard before us.
37. In view of the same, there is no merit in making any disallowance u/s 14A of the Act. The ground No. 2 raised by revenue is this dismissed.
CO No. 29/Chd/201038. The assessee is aggrieved by the non-adjudication of alternate grounds raised before CIT(A). In view of our dismissing the appeal of revenue, the cross objections raised by the assessee are infractous. Hence the same are dismissed.
ITA No. 911/Chd/2009Ground No. 1.
39. Both the authorized representatives fairly admitted that the issue raised vide Ground No. 1 was identical to the issue raised in ITA No. 910/Chd/2009. In view of our order in paras herein above, we dismiss the Ground No. 1 raised by the revenue with the direction to the Assessing Officer to verify whether any loss from derivaties had been claimed by the assessee, which is not to be set off against income from capital gains.
ITA No. 889/Chd/2010Ground No. 1.
40. Both the authorized representatives fairly admitted that the issue raised vide Ground No. 1 was identical to the issue raised in ITA No. 910/Chd/2009. In view of our order in paras herein above, we dismiss the Ground No. 1 raised by the revenue with the direction to the Assessing Officer to verify whether any loss from derivaties had been claimed by the assessee, which is not to be set off against income from capital gains.
Ground No. 2.
41. The issue in Ground No. 2 raised by revenue is against the computation of disallowance in view of section 14A of the Income tax Act read with Rule 8D of the Income Tax Rules. As held by the Hon'ble Bombay High Court Rule 8D is prospective and not applicable to instant assessment year. he said Rule 8D comes into operation from assessment year 2008-09. Further the contention of the assessee is that no expenditure has been claimed against any of the incomes declared by assessee and hence no disallowance is warranted u/s 14A of the Income Tax Act. The CIT(A) in para 7 to 7.2 have given a finding to this effect. The assessee has also filed relevant evidence in this regard before us.
42. In view of the same, there is no merit in making any disallowance u/s 14A of the Act. The ground No. 2 raised by revenue is this dismissed.
CO No. 28/Chd/201043. The assessee is aggrieved by the non-adjudication of alternate grounds raised before CIT(A). In view of our dismissing the appeal of revenue, the cross objections raised by the assessee are infractous. Hence the same are dismissed.
In the result, the appeals filed by the revenue and Cross Objection filed by assessee are dismissed.
Order Pronounced in the Open Court on 30th day of December, 2011.
Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 30th December, 2011
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
True Copy
By Order
Assistant Registrar, ITAT, Chandigarh
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