Gujarat High Court
The Principal Commissioner Of Income ... vs Gujarat Fluorochemicals Ltd. on 18 February, 2020
Author: J. B. Pardiwala
Bench: J.B.Pardiwala, Bhargav D. Karia
C/TAXAP/81/2020 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/TAX APPEAL NO. 81 of 2020
With
R/TAX APPEAL NO. 83 of 2020
With
R/TAX APPEAL NO. 72 of 2020
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as
to the interpretation of the Constitution of India or any
order made thereunder ?
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THE PRINCIPAL COMMISSIONER OF INCOME TAX, VADODARA 1
Versus
GUJARAT FLUOROCHEMICALS LTD.
======================================
Appearance:
MR.VARUN K.PATEL(3802) for the Appellant
MR B S SOPARKAR(6851) for the Opponent
======================================
CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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Date : 18/02/2020
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. Since these Tax Appeals are having common substantial questions of law, the same were heard analogously and are being disposed of by this common order.
2. For the sake of convenience Tax Appeal no.81 of 2020 is treated as lead matter.
3. This Tax Appeal is filed at the instance of revenue under Section 260A of the Income Tax Act, 1961 (for short "the Act, 1961") and is directed against the common order dated 20th June 2019 passed by the Income Tax Appellate Tribunal (for short "the ITAT") for the A.Y. 200506 to A.Y. 201112 consisting of 15 appeals filed by the revenue and the assessee.
4. The revenue has proposed the following questions of law for consideration of this Court so far as Tax Appeal No.81 of 2020 (A.Y. 200506) is concerned : Tax Appeal no.81 of 2020
(a) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in holding that surplus arising from sale of shares and securities constituted capital gain instead of business income?
(b) Whether on the facts and in circumstances of
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the case, the learned ITAT has erred in law and on facts in deleting the addition made under Section 14A merely on the basis that the relevant investments are out of assessee's old and own interest free funds, which exceeded tax free investments even though no material was placed on record by the assessee to establish that the said funds were available for investment at the relevant point of time?
(c) Whether on the facts and in circumstances of the case, the learned ITAT has erred in law and on facts in deleting the disallowance made u/s.14A of the Act of Rs.1,11,47,727/, without appreciating that the assessee was maintaining mixed funds and failed to established that it has its own surplus funds for investment in shares/securities?
5. The Assessing Officer has noted in the assessment order that the assessee had made total investment in shares and securities amounting to Rs.224.70 Crore and total investment in the business was of gas manufacturing was Rs.204.71/ Crore. According to the Assessing Officer, the total investment in shares and securities as on 31st March 2005 was more than the value of total assets for the manufacturing of gas business of the assessee. The Assessing Officer tabulated the investment in shares and securities for the financial year 200405 and earlier years and arrived at finding that the investment in shares and securities exceeded the investment in the business of gas manufacture by the assessee in all the three years. It was also found that the sales turnover of the gas produced by the assessee was much less than the sales turnover of the shares. The Assessing Officer also noted that the frequency of the transaction was very high for sales and purchase of shares and securities and profit on sale of securities was almost at par with the profit arising out of the gas manufacturing business of the Page 3 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT assessee. The Assessing Officer thereafter, relying upon the instruction no.1827 issued by the Central Board Of direct Taxes (CBDT) and the various decisions of the Supreme Court and the High Court, held that the share transactions were adventure in nature of trade and the assessee was engaged in the business of trading shares and security. The Assessing Officer therefore, treated the profits in respect of all the sale transactions on shares and securities received by the assessee in the year under consideration as business income and not as long term or short time capital gain as claimed by the petitioner and made an addition of Rs.16,59,53,272/.
6. The Assessing Officer also held alternatively on protective basis that if the profit on account of the sale transaction is to be considered as capital gain instead of business income disallowance under Section 14A with regard to the professional charges amounting to Rs.62,56,732/ and interest of Rs.1,11,47,727/ is required to be made.
7. The assessee being aggrieved and dissatisfied with the assessment order, preferred appeal before the CIT(A). The CIT(A) held that there was no commercial motive of the assessee in respect of shares and security transactions for trading to earn profit but the same were entered into with a view to have better utilization of surplus funds available from time to time with the assessee. The CIT(A) held that the Assessing Officer was not justified in treating Rs.16,59,53,272/ as income from business and the assessee was entitled to Long Term or Short Term Capital Gain as disclosed in the return of income.
8. The CIT(A) with regard to the alternate protective addition of disallowance under Section 14A out of professional fees and on account of interest expenses, confirmed the disallowance of professional Page 4 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT fees and so far as the disallowance on account of interest was concerned, the CIT(A) relying upon his decision for the A.Y. 200405 confirmed the disallowance of Rs.19,858/ workedout on the basis of direct nexus pertaining to investment utilizing borrowed fund out of the total disallowance made by assessing officer on account of the interest expenses claimed by the assessee.
9. Being aggrieved by the order of the CIT(A), the assessee as well as the revenue preferred appeals before the Tribunal. The Tribunal confirmed the order passed by the CIT(A) after taking into consideration that CIT(A) for the A.Y. 200809 had taken a contrary view holding that investment in shares as trading activity and the gains/loss was assessed as business income. The Tribunal reversed the findings of CIT(A) for A.Y. 200809 confirming that for A.Ys. 200506 to 200708 and subsequent years. The Tribunal has held as under : Capital Gain or business income:
"15. Next common issue involved in all appeals of the Revenue as well as of the assessee is, whether purchase and sale of shares is to be treated as trading activity or an investment activity. The assessee has treated its activity of sale and purchase of shares as an investment activity and on sale of shares/mutual fund etc., it has shown short term capital gain as well as long term capital gain. The ld. AO did not accept this treatment of the assessee, and treated its activity as trading in shares. It is ITA No.1379 and 1380/Ahd/2009 and 13 Others Gujarat Fluorochemicals Ltd. Vs. ACIT 10 pertinent to Page 5 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT observe that upto Asstt. Year 200708, the ld. CIT(A) did not concur with the AO and accepted the claim of the assessee. The ld. CIT(A) has upheld that on sale and purchases of shares and mutual funds gain/loss is to be assessed under the head "Short term capital Gain or Long Term Capital Gain/Short Term Capital Loss or Long Term Capital loss". From the Asstt.Year 200809, the ld. CIT(A) did not concur with his predecessor and took a contrary view, whereby the alleged investment in the shares has been treated as a trading activity. Gain/loss on sale of such shares has been assessed as business income. But on sale of mutual funds, the ld. CIT(A) has accepted the stand of assessee that this activity is to be considered as an investment and profit/loss on sale of mutual fund is to be assessed as long term capital gain/shortterm capital gain/loss. The Revenue is challenging this part of order in ground no.3 in Asstt. Year 200809, 200910 and ground no.1 in the Asstt. Year 2010
11. The ld. counsel for the assessee, for buttressing his claim, relied upon the orders of the ld. CIT(A) form the Asstt.Year 200506 to 200708. On the other hand, the ld. CITDR relied upon the orders of the ld. CIT(A) from the Asstt. Year 200809 to 2011
12.
16. During the course of hearing, we have directed the ld. counsel for the assessee to compile details in tabular form indicating various factors required to be visualized for forming the opinion, whether activities Page 6 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT of purchase and sales of shares is to be treated as business activity or simplicitor as investment. On our directions, the ld. counsel for the assessee filed such details in tabular form. The details are also on the record scattered in different orders of the Revenue authorities. They are also available in seven volumes of the paper book filed by the ld. counsel for the assessee. For the facility of reference, and taking into consideration the relevant details in more scientific manner, we have directed the assessee to submit such details in tabular forms. It is also pertinent to note that the facts on all vital points are common except variation in quantum. We will be taking up the facts mainly from the Asstt. Year 200506 and 200809 because order of the ld. CIT(A) in the Asstt. Year 200506 on this issue is in favour of the assessee, which has been followed upto the Asstt. Year 2007
08. However, in the Asstt. Year 200809, the ld. CIT(A) did not concur with his predecessor and given a different finding. Therefore, it is imperative upon us to look his point of view of reasoning before forming a consolidated opinion on this activity for all these years. At the time of hearing, the ld. CITDR pointed out that written note was submitted by the then CITDR, Shri Ravindra I Patel vide letter dated 22.9.2015. In this letter, the ld. CITDR relied upon a large number of decisions whose copies have been placed on record.
"20. In the light of the above, let us examine the Page 7 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT facts of the assessee's case. The first test propounded by the ITAT, Lucknow Bench as well as by the Hon'ble Gujarat High Court is, what was the intention of the assessee at the time of purchase of shares or any other time. The intention can be gathered from the treatment an assessee gives to such purchase in its books of accounts viz. whether it is to be treated as stockintrade or investment. On this account, the assessee has submitted as under :
21. The assessee has disclosed the purchase of shares as securities in its balance sheet under the head "investment" and not as purchase and sale of trading assets or as its stockintrade. The sale and purchase of investments are not routed through profit & and loss account, but only net gain/loss on such investments are reflected in the profit & loss account.
The fact that the shares/securities were held as non trading assets has been disclosed in Notes to the accounts in Schedule15 at item 1(d). The assessee has valued its closing stock at lower of cost or market value, whereas the investment in shares securities has been valued at cost only. It is further seen that the provisions made for diminution in value of investment has been added back in the computation of income. Thus, in the assessment years under consideration and respective previous assessment years, the following amounts have been added back to the total income on this count in the computation Page 8 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT and no deduction has been claimed under section 88E for the securities transaction tax paid during the year.
Asstt. Year Amount added back to Amount added back in the the total income total income in previous Asstt.
Year
200506 Rs.31,565/ Rs.6,02,99,64/
200607 Rs.NIL Rs.31,565/
200708 Rs.27,58,400/
200809 Rs.10,19,61,651/ Rs.27,58,400/
200910 Rs.2,68,08,789/ Rs.10,19,61,561/
201011 Rs.15,59,83,907/ Rs.2,68,08,789/
201112 Rs.60,75,000/ Rs.15,59,83,907/
22. It is further submitted that the assessee has made the investment without having recourse to borrowed funds. The entire funding for shares/securities has been made out of capital reserves and surplus available from time to time.
23. So far as frequency of purchase and sale of securities are concerned, it is submitted that the following details demonstrate bifurcation of total investment, purchase and sales in respect of shares and mutual funds etc. in the respective assessment years.
Investments in Total Purchase of Total Sales of Total
Asst - Mutual Strategic Shares Mutual Shares Strategic Mutual Strategics Shares Sales
Investments Purchase
Year Funds investme Funds Purchase Fund Investments
bonds nts and Bonds
Bonds
200506 124.79 76.91 23.01 224.71 507.03 45.31 552.35 551.35 5.19 51.2 608.48
200607 164.15 78.01 45.53 287.69 494.33 80.45 574.78 448.07 66.71 66.66 581.44
200708 333.98 84.99 111.56 530.53 950.97 180.80 29.81 1161.58 79.99 22.83 141.05 955.87
200809 166.52 139.33 240.63 546.48 583.75 444.38 62.75 1090.88 752.03 7.12 364.15 1123.31
200910 151.21 150.25 204.27 505.73 822.14 20.89 33.25 876.28 589.40 9.44 45.4 914.24
201011 395.75 204.49 148.44 748.67 1308.84 18.08 54.24 1381.16 1070.46 Nil 52.29 1122.75
201112 249.25 195.16 126.43 570.84 821.80 1.73 3.65 827.18 1005.65 17.51 24.40 1047.20
24. From the above table, it could be seen that out Page 9 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT of total investment in shares/securities, investment in shares is very low as compared to investment in mutual funds and bonds and strategic investment. As regards purchase and sales of units in mutual funds cannot be said to constitute trade, since such units cannot be sold in the open market but can only be redeemed by the entity issuing the units. Apart from such entity, there is no buyer for units of mutual funds. Further, as regards the volume of purchase and sales, it can be noticed that out of total purchases, substantial amounts have been utilized for purchase of mutual funds and only minimal holding was made in share. Similarly, in the case of sales also substantial chunk was in respect of mutual funds and only small quantity of shares was sold.
25. It is submitted that if the intention for purchase and sales of securities is for realization of profit, then it amounts to trade, whereas, the purpose is for appreciation of value, then it is in the nature of investment. In the case of shares, whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. In this regard, it is further submitted that where purchase and sale is entered into for realisation of the same, it constituted trade and where the purchase of the asset is made for retention and appreciation of value, the same would indicate investment. In the instant case, the assessee Page 10 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT has earned dividend income of Rs.5.37 crores, 5.33 crores, 8.20 crores, Rs.10.52 crores, Rs.7.35 crores, Rs.10.61 crores and Rs.4.85 crores for the Asstt. Years 200506 to 201112 respectively, and interest income on bonds of rs.3.07 crores, Rs.4.60 crores, Rs.6.47 crores, Rs.5.40 crores, Rs.3.15 crores for the Asstt. Years 200506 to 200910 respectively.
26. It is submitted that during the year, the company has earned capital gains from mutual funds, strategic investment and equity shares etc. Bifurcation of such capital gain is as under:
Asstt. Gain from Gain/Loss Gain from Total capital Year Mutual Fund from Equity gain Strategic Shares investment 200506 24.32 (including 7.61 2.98 19.69 LTG Rs.10.17) 200607 3.47 (including 52.81 8.07 64.63 LTG Rs.1.22) 200708 11.46 (including 26.67 38.12 LTG Rs.2.73) 200809 11.87 (including 48.04 59.91 LTG Rs.7.64) 200910 During the year, the company has incurred loss of Rs.7.33 crores on scale of investments.
201011 6.29 (including () 6.01 0.28
LTG Rs.6.29) Capital loss
201112 37.37 (including 5.67 43.04
LTG Rs.32.59)
27. The ld.counsel for the assessee submitted that in the books of accounts, the assessee has valued the shares/securities at cost and not at lower of cost or Page 11 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT market value. It is submitted that the main objects of the memorandum of association do not authorise the assessee to undertake business of purchase and sale of shares/securities unless the main objection of MOA permits, the company cannot do trading in shares and securities as business, being a listed company.
Subsequently also MOA was amended from time to time but above clause was not made in object clause. However, Article No.9 and 32 of the Memorandum, being Ancillary Objects of the company, permit the assessee to invest in or acquire shares, stock, debenture and other security from time to time. The assessee has passed resolution u/s.372A of the Companies Act authorizing the investment in shares/securities.
28. As regards accounting treatment, it is pleaded that the assessee has maintained a distinction between trading assets and nontrading assets. The latter have been valued at cost, and sale/purchase thereof has not been reflected in the P&L account. Only gains have been included in the other income. Provision for diminution in value of investment has been added back in the computation. Further, the assessee has itself added back Rs.20 lakhs u/s.14A on estimate basis in respect of tax free income earned on such investment. No deduction has been claimed under section 88E for the securities transaction tax paid during the year. The assesseecompany has Page 12 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT complied with the applicable legal provisions under the Companies Act, particularly, sections 149, 372A, 249, requirements of Schedule VI as well as the provisions of AS13 on investment. The assessee has maintained only one portfolio. It is further pleaded that during the year there was speculative loss of Rs.0.67 lakhs and Rs.1.08 lakhs for the Asstt. year 200506 and 200809 respectively. Such small amount involving only six transactions should not be determining factor.
29. The ld. counsel for the assessee further relied upon the following decisions:
i) ACIT Vs. Shah Investor's Home Ltd., ITA No.1424/Ahd/2010 (ITAT, Ahmedabad Bench)
ii) DCIT Vs. Tejas Securities, IT(SS)A.531, 532/Ahd/2011 dated 22.3.2016 (ITAT, Ahmedabad.
iii) CIT Vs. Nita M. Patel, 42 taxmann.com 125 (Gujarat)
iv) CIT Vs. Smt. Datta Mahendra Shah, 62 taxmann.com 325 (Bombay)
v) Seer Finlease P.Ltd. Vs. ACIT, Ahmedabad ITA No.3326/Ahd/2009 and others order dated 17.3.2015, ITAT, Ahmedabad.
vi) CIT Vs. Kapur Investments P.Ltd. 61 taxmann.com 91 (Kar)
vii) ITA No.1912/Ahd/2012 and others in the case of Alembic Ltd. Vs. DCIT, order dated 9.12.2016 (ITAT, Ahmedabad.) Page 13 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT
viii) Gajjala Madhusudhan Reddy Vs. ITO, 39 taxmann.com 157 (ITAT, Hyderabad)
ix) DCIT Vs. UMIL Share & Stock Broking Services Ltd., 96 taxmann.com 168 (KolTrib.)
x) PCIT Vs. Bhanuprasad D. Trivedi, HUF, 87 taxmann.com 137 (Gujarat)
xi) PCIT Vs. Bhhanuprasad D. Trivedi HUF, 94 taxmann.com 114 (SC) He has placed on record copies of the above decision.
30. We have duly gone through all these details. In the first test i.e. how to find out intention of the assessee that it has purchased shares for investment purpose, the assessee has pointed out that in the books of accounts, it has treated these shares in the investment account. It has not valued the shares at the end of the year at cost or market value whichever is less, rather it has valued them at the cost of acquisition. This treatment in the account is being given when the shares are being purchased in investment account. The assessee has also pointed out that provisions made for diminution in value of investment has been added back in the computation of income. While taking note of the assessee's submissions submitted in tabular form, we have specifically noted the figures. While differing with the conclusions of the CIT(A) in the Asstt. Years 200506 to 200708, the ld. CIT(A) in the Asstt. Year 2008 Page 14 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT 09 recorded that fact of recording transaction in the books of accounts etc. in a particular manner by the appellant was to justify the nature of transaction to be "investment". Merely because the assessee has given a particular treatment to the share transaction in its books of accounts, does not prove the nature of transaction to be a particular kind, and overall conduct of the assessee has to be seen. It appears that CIT(A) failed to appreciate the requirement for maintaining accounts and the assessee has to give a particular treatment, and that treatment is one of the corroborative factors for indicating its intention. The ld.CIT(A) just brushed aside these circumstances on the ground that these treatment for valuing the shares at cost at the end of the closing year was done by the assessee so that it can demonstrate its purchase and sale as investment. This is the basic requirement, which an assessee has to follow for maintaining investment portfolio. It has given that very treatment in the accounts. There is nothing with the ld.CIT(A) on this aspect to differ with the conclusions of the predecessor in earlier years."
10. Mr. Varun K. Patel, learned Senior Standing Counsel appearing for the revenue submitted that CIT(A) as well as the Tribunal committed an error in holding that there was no commercial motive of the assessee to transact in shares and securities which is contrary to the findings arrived at by the assessing officer, which clearly pointout that the volume of trade, frequency and regularity of trade in share Page 15 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT transactions carried on by the assessee is nothing but a nature of business activity. Mr. Patel, in support of his submissions relied upon the following decisions: (1). Manoj Kumar Samdaria Vs. CIT (228 Taxman 63 (Supreme Court)] Section 28(i), read with section 45 of the Income tax Act, 1961 Business income chargeable as (Business income v. Capital gains: Share transactions) Assessment year 200708 Assessee declared income arising from sale of shares as shortterm capital gain Tribunal found that assessee had regularly dealt in purchase and sale of share which indicated period of holding to be very short and that he earned only a meager amount of dividend while gains from sale of shares was Rs.65.45 lakhs High Court upheld order of Tribunal that income arising from sale of shares was assessable as business income Whether special leave petition filed against impugned order was to be dismissed Held, yes in favour of revenue.
(2). CIT Vs. Sutlej Cotton Mills Supply Agency Ltd. [100 ITR 706 (Supreme Court)Section 2(13) of the Income tax Act, 961 Business Adventure in nature of trade Assessment year 195657 Assessee company purchased shares and sold part of it Assessee claimed that shares were purchased by way of investment and profit amount to capital gains Tribunal found as of fact that assessee purchased shares out of borrowed fund and did not make sale on account of any pressing necessity Whether on facts dominant intention of assessee being to make profit by resale of shares and not to make investment. Tribunal was correct in holding that transaction was adventure in nature of trade Held, yes.
(3). Smt. Harsha N. Mehta Vs. DCIT 43 SOT 332
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(Mumbai)|Section 28(1), read with section 45, of the Income tax Act, 1061 Business income Chargeable as Assessment year 200506 During relevant assessment year, assessee filed her return showing income from sale and purchase of shares under head 'Capital Gains' Assessing Officer did not agree with treatment given by assessee and treated said income as business income On appeal, Commissioner (Appeals) partly accepted assessee's claim On instant appeal, it was seen that during relevant period assessee had made 37 transactions in 35 scripts It was also noticed that shares were held for a few days and in very few cases for a femur months but in no case period of holding was exceeding 200 days Whether activity of frequent buying and selling of shares over a short span of period had to be treated as business being adventure in nature of trade and, thus, income arising from said transactions was to be treated as business income and not as capital gain Held, yes."
11. Mr. Patel also relied upon the decision of this Court in case of Vaibhav J. Shah (HUF) in Tax Appeal nos.77 and 78 of 2010_ rendered on 27th June 2012 wherein the Court has reiterated the tests laid down by it in the case of Rewashankar A. Kothari reported in 2006 (283) ITR 338 as under : "[10] The tests laid down by various decisions of the Apex court indicate that, in each case, it is the total effect of all relevant factors and circumstances that determine the character of the transaction. Each case has to be determined on the total impression created on the mind of the Court by all the facts and circumstances disclosed in a particular case. One of the principal tests is whether the transaction is related to the business normally carried on by an Page 17 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT assessee. The nature of the commodity would also be a relevant factor. It is equally well settled that, merely because the original purchase was made with the intention to resell, if an enhanced price could be obtained, that by itself is not enough to infer that an assessee is carrying on business. However, though profit motive in entering into a transaction is not decisive, if the facts and circumstances indicate that the purchase of the asset was made solely and exclusively with an intention to resell the asset at a profit, it would be a strong factor for inferring that the transaction was in the nature of business.
[11] In the case of Pari MangaldasGirdhardas Vis. Commissioner of Income Tax, 1977 CTR (Guj.) 647, after analyzing various decisions of the Apex Court, this Court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business.
[a] The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline.
[b] The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.
[c] The third test, which is frequently applied, is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee. Has it been treated as stock intrade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant Page 18 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT is not conclusive.
[d] The fourth test is as to how the assessee himself has returned the income from such activities and how the department has dealt with the same in the course of preceding and succeeding assessments. This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in absence of any satisfactory explanation.
[e] The fifth test, normally applied in cases of partnership firms and companies, is whether the Deed of Partnership or the Memorandum of Association, as the case may be, authorises such an activity.
[f] The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business."
12. Learned counsel for the revenue further submitted that in the present case number of transaction of sale and purchase of shares and repetition and continuity coupled with magnitude of such transactions clearly shows that the activity of the assessee in transaction of shares and security was in nature of business.
13. Mr. Patel further submitted that the Tribunal erred in deleting the disallowance made under Section 14A of the Act,1961 with Page 19 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT regard to the interest expense without considering the fact that the assessee was maintaining mix funds and failed to establish that it has business surplus funds for investment in shares and securities. Reliance was placed on the decision of the Supreme Court in case of Maxopp Investment Ltd. & others Vs. CIT reported in 2018 (402) ITR 640, wherein the Apex Court has held as under: "Having regard to the language of section 14(2) of the Act, read with rule 8D of the Rules, before applying the theory of apportionment, the Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned the expenditure byt the Assessing Officer did not accept the assessee's apportionment. In that eventuality, he will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares or making the investment in shares is to be examined by the Assessing Officer."
14. In view of the above, it was submitted that the Tribunal failed to appreciate that borrowed funds on which interest was paid during the year and the surplus business funds were mixedup and it cannot be accepted that the funds deployed for earning tax free income were entirely out of interest free funds, moreover, the assessee did not maintain separate account for source of funds utilized for the investment activities. In such circumstances, it was submitted that, the disallowance made by the Assessing Officer under Section 14A of the Act, 1961 was required to be upheld.
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15. On the other hand, Mr. B. S. Soparkar, learned advocate appearing for the respondent assessee submitted that there are concurrent findings of fact arrived at by the CIT(A) and the Tribunal. Mr. Soparkar would submit that the CIT(A) has considered the facts of the case with regard to the intention of the assessee, borrowed funds of the assessee, frequency of transactions, retention and appreciation in the value of shares and securities, treatment in the balancesheet given by the assessee, authorization for transactions in sales and securities in the memorandum of association and articles of association of the assessee company in detail. It was further submitted that the Tribunal has confirmed the order of the CIT(A) in view of the test laid down in the decisions in case of Sadhana Infrastructure (2009) TTJ 226 and Rewashanker. The Tribunal has also considered that the intention of the assessee at the time of purchase of share and security was not to trade into shares but to invest in the same and the assessee has treated the same as investment and not stock in trade. It was further pointedout that the sale and purchase is not routed through profit and loss account, but only net gain on sale is reflected therein. Mr. Soparkar invited the attention to the findings given by the Tribunal that the shares and securities disclosed as nontrading assets and notes to accounts in the audited accounts in item 1(d) of Schedule15 and that the investment were valued at cost and not cost or market value, whichever is lower like valuation of stock in trade. Moreover, the respondent assessee has also made provision for diminution in value of investment and the same is given appropriate treatment in the profit and loss account. The Tribunal has also given finding of fact that the investments were made without having recourse to borrowed funds and out of total investment in shares and securities investment in shares was very low as compared to investment in mutual funds and bonds as strategic investment. The purchase and sale of mutual funds unit does not constitute as such units Page 21 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT cannot be sold in open market, but can only be redeemed.
16. Mr. Soparkar relied upon the Circular No.4 of 2007 dated 15th June 2007 issued by the CBDT laying down test for distinction between shares held as stock in trade and shares held as investment.
17. Reliance was also placed on Circular No.6 of 2016 dated 29th February 2016 with regard to the capital gains chargeable and issued of taxability of surplus of shares and security to be treated as other capital gain or business income. It was pointedout that the CBDT has clarified that the Assessing Officer is required to take into account the following issues : "(a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stockintrade, the income arising from transfer of such shares/securities would be treated as its business income.
(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different contrary stand in this Page 22 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT regard in subsequent years:
(c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT."
18. From the above instructions of CBDT, it was submitted that in the facts of the case as the assessee has treated the income arising from the transfer of sale and security as capital gain, the Assessing Officer could not have disputed the same as the assessee consistently followed such practice.
19. Mr. Soparkar, further relied upon the decision of Delhi High Court in case of Yama Finance Ltd. Vs. Assistant Commissioner of Income Tax, (2014) 46 Taxmann.com 349, wherein Delhi High Court has held as under: "9. One often underlined and widely used test is the "volume, frequency, continuity and regularity" of the transactions test. This is in addition to other indicia such as maintenance of separate portfolios in the same set of books of account for "investments" or maintenance of separate books of account for the two activities, and whether borrowed capital was used.
10. Having regard to these and the further fact that the assessee had kept these amounts separately in an investment account and held these mutual funds for about two years, this Court is of the opinion that the Tribunal clearly fell into error in holding that the amount of Rs.58,71,144/ was business income and not long term capital gains as was rightly Page 23 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT concluded and held by the CIT(A). For these reasons, the question of law framed is answered in favour of the assessee and against the Revenue."
20. Mr. Soparkar, further relied on the decision of coordinate bench in case of assessee itself in Tax Appeal No.11 of 2019 with Tax Appeal no.28 of 2019 rendered on 29th June 2019 with regard to the deletion of disallowance made by the Tribunal on account of the interest expenses under Section 14A of the Act, 1961. It was submitted that in view of the decision in the assessee's own case, the Tribunal has rightly deleted the disallowance of interest expenses under Section 14A of the Act.
21. Reliance was also placed on the decision of this Court in case of Principal Commissioner of Income Tax Vs. Gujarat State Fertilizers and Chemicals Ltd. reported in (2019) 416 ITR 13 (Guj), wherein the Court has held that the condition precedent of recording requisite satisfaction, which is safeguard provided under Section 14A should not be overlooked before applying Rule 8D of the Income Tax Rules, 1962. Mr. Soparkar would submit that the contention of revenue with regard to mix funds, Rule 8D cannot be attracted automatically unless the assessment officer assign the reasons for his not being satisfied having regard to the accounts maintained by the assessee.
22. In view of above decision, it was submitted that the Tribunal has rightly deleted the disallowance of interest expense under Section 14A of the Act, 1961.
23. Having heard learned advocates of the respective parties and having gone through the materials on record , we are of the opinion Page 24 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT that in view of concurrent findings of fact arrived at by the CIT(A) and the Tribunal and more particularly when the CIT(A) has treated the surplus on sale of shares and securities as capital gain instead of business income by giving cogent reasons with regard to (i) the intention of the assessee, (ii) showing purchase of shares and security under the head of investment in the balancesheet and not as stock in trade, (iii) the assessee has valued its investment and shares and securities not lower of cost or market value but at cost only,(iv) the assessee has not claimed any deduction under Section 88E of the Act, 1961 for security transaction tax paid during the year,(v) the assessee has made investment from its own funds and therefore, there is no involvement of borrowed funds for transaction in shares and securities carriedout by the assessee.
24. As against the observation made by the Assessing Officer with regard to the volume of trade frequency etc. of the transaction in shares and securities, it is found by the CIT(A) as well as the Tribunal that the majority investment was made in the mutual funds and bonds and in shares of group companies of strategic investment and only 23.01 Crore were invested in the shares of other companies out of total investment in shares and securities amounting to Rs.224.70 Crore. In such circumstances, the purchase and sale of units in mutual funds cannot be said to be constituted as trading in shares as the same cannot be sold in open market. Moreover, the memorandum of association of the assessee company clearly shows that the business of purchase and shares and securities is not the main object of the company. The assessee has also maintained distinction between trading assets and non trading assets in the books of accounts and only net surplus or loss arising out of the shares and securities is reflected in the profit and loss account. The assessee has also complied with legal requirement Page 25 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT applicable under the Companies Act read with Accounting Standard 13 with regard to investment in shares and securities by showing depreciation in value of shares and securities in the books of accounts.
25. The CBDT in the Circular no.4 of 2007 dated 15.06.2007 has made distinction between capital assets and trade assets as under: CIRCULAR NO. 4/2007 SECTION 28(1) OF THE INCOME TAX ACT, 1961 BUSINESS INCOME CHARGEABLE AS DISTINCTION BETWEEN SHARES HELD AS STOCK INTRADE AND SHARES HELD AS INVESTMENTS TESTS FOR SUCH A DISTINCTION CIRCULAR NO. 4/2007, DATED 1562007
1. The Income tax Act, 1961 makes a distinction between a "capital asset" and a "trading asset".
2. Capital asset is defined in section 2014) of the Act. Longterm capital assets and gains are dealt with under section 2(294) and section 2(29B), Shortterm capital assets and gains are dealt with under section 2042A) and section 2(42B).
3. Trading asset is dealt with under section 28 of the Act.
4. The Central Board of Direct Taxes (CBDT) through Instruction No. 1827, dated August 31, 1989 had brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital asset) and shares held as stockintrade (trading asset). In the light of a number of judicial decisions pronounced after the issue of the above instructions, it is proposed to update the above instructions for the information of assessees as well as for guidance of the Assessing Officers.
5. In the case of Commissioner of Incometax (Central), Calcutta v. Associated Industrial Development Co. (P) Ld. [197182 ITR 586, the Supreme Court observed that:
"Whether a particular holding of shares is by way of investment or forms part of the stock intrade is a matter Page 26 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stockintrade and those which are held by way of investment."
6. In the case of Commissioner of Incometax, Bombay v. H. Holck Larsen 1986160 ITR 67 the Supreme Court observed :
"The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were riding transactions or whether these were in the nature of investment was a question of law. This was a mixed question of law and fact."
7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the Assessing Officers:
8. The Authority for Advance Rulings (AAR) (288 ITR
641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles "(i) Where a company purchases and sells shares, il must be shown that they were held as stockintrade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii) ordinarily the purchase and sale of shares with the motive of earning a profit would result in the transaction being in the nature of trade/adventure in the nature of trade:
but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt"Page 27 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021
C/TAXAP/81/2020 JUDGMENT
9. Dealing with the above three principles, the AAR has observed in the case of Fidelity group as under:
"We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stockintrade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued held in the books of account. Te, whether they were valued as stockintrade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade, where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits.
10. CBDT also wishes to emphasise that it is possible for a taxpayer to have two portfolios. Les an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stockintrade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, Le capital gains as well as business income.
11. Assessing officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment and therefore giving to capital gains) or as stockintrade and therefore giving rise to business profits). The Assessing Officers are Page 28 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether in a given case, the shares are held by the assessee as investment or stockintrade.
12. These instructions shall supplement the earlier Instruction No. 1827, dated August 31, 1989."
26. Similarly, in Circular No.6 of 2016 dated 29.02.2016,the CBDT in order to reduce the litigation has given instructions as under : CIRCULAR NO.6/2016 [F.NO.225/12/2016ITAII] SECTION 45, READ WITH SECTION 28(), OF THE INCOME TAX ACT, 1961 CAPITAL GAINS, CHARGEABLE AS ISSUE OF TAXABILITY OF SURPLUS ON SALE OF SHARES AND SECURITIES CAPITAL GAINS OR BUSINESS INCOME INSTRUCTIONS IN ORDER TO REDUCE LITIGATION CIRCULAR NO.6/2016 [F.NO.225/12/2016ITAII), DATED 2922016
1. Subsection (14) of section 2 of the Income tax Act, 1961 (Act') defines the term "capital asset" to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stockin trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stockintrade/trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stockintrade, is essentially a factspecific determination and has led to a lot of uncertainty and litigation in the past.
2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stockintrade. The Central Board of Direct Taxes (CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.
3. Disputes, however, continue to exist on the application Page 29 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following
(a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stockintrade, the income arising from transfer of such shares/securities would be treated as its business income,
(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different contrary stand in this regard in subsequent years;
(c) In all other cases, the nature of transaction (ie. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital Loss or any other sham transactions.
5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and Page 30 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities."
27. The CIT(A) and the Tribunal both have come to the conclusion that the assessee has continuously treated the transaction in shares and securities as investment and in view of the aforesaid Circulars issued by the CBDT, when the assessee has opted to treat the shares and securities as investment and offered capital gains/loss arising from such transaction to tax then the Assessing Officer cannot dispute the same. When there are concurrent findings of fact that the assessee has maintained distinction between trading assets and nontrading assets and has treated the transaction in shares and securities as investment then, the Assessing Officer could not have treated the same as business transaction so as to treat the surplus as business income.
28. With regard to the deletion of disallowance of interest expenses under Section 14A of the Act is concerned, the Tribunal has held as under : "37. Brief facts of the case are that the assessee has shown dividend income of Rs.5,32,00,000/. The AO though treated the activity of the assessee of sale and purchase of shares as trading activity, he assessed the profit on share transaction as business income, but on protective basis, he disallowed expenditure of Rs.62,56,732/ out of professional fees and Rs.1,11,47,627/ on account of interest expenses. He observed that if at any appellate stage the same is held taxable under the heading "capital gain" then disallowance under section 14A should require to be made and this disallowance would be worked out accordingly. The ld.CIT(A) has held that profit on share transaction is to be assessed as capital gain. We have upheld this finding of the ld.CIT(A) while rejecting the ground of appeal taken by the Revenue Page 31 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT in the above discussion. Therefore, we are required to adjudicate what amount ought to be disallowed under section 14A of the Act. A perusal of the record would indicate that the ld.AO has made disallowance under two heads; (a) out of professional fees, and (b) out of interest expenses. As far as out of professional fee of Rs.62,56,732/ is concerned, this disallowance has been confirmed by the ld.CIT(A) at Rs.60 lakhs. It has been challenged by the assessee in ground no.4 of ITA No.1379/Ahd/2009. We have discussed this issue while dealing with the issue, whether the assessee was indulged in share trading or its activities were of investments. We have confirmed this disallowance, after taking note of the submissions made by the ld.counsel for the assessee. Out of interest expenditure, the ld.AO has worked out the disallowance at Rs.1,11,47,727/. He worked out this disallowance with help of the following formula:
Investment × Interest paid = Total Assets Rs.224,70,48,357 × 2,13,03,954 = 1,11,47,727 Rs.42942,39,902
38. The ld.CIT(A) has reappreciated this aspect and observed that the assessee was having sufficient amount of share capital, reserves & surplus. It has earned profit at Rs.45 crores. Hence, no direct interest expenditure was required to be disallowed. The ld.CIT(A) confirmed the addition at Rs.19,83,858/ on the ground that these interest expenditure has a direct nexus with investment. 39. With the assistance of the ld. representatives, we have gone through the record. We find that the ld.AO has worked out disallowance on the basis of a formula. He failed to note that interest free funds available with the assessee were far more than the gross investment. Gross investment in Asstt.Year 200506 was Rs.28,769 lakhs, whereas share capital, reserves & surplus available with the assessee was of Rs.49,379 lakhs. This fund is far more than the investment. It can safely be harboured that interest Page 32 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT bearing funds was not invested by the assessee. Apart from the above, the assessee has earned profit at Rs.45 crores. It has also received compensation under Montreal Protocol of Rs.8.96 crores. The ld.CIT(A) has observed that its borrowings decreased to the extent of Rs.40 crores, and also investment decreased by Rs.34 crores. In such situation interest expenses were not required to be calculated on the basis of an estimation using the above formula. While confirming the disallowance of Rs.19,83,858/ is concerned, the finding of the ld.CIT(A) is that it "it was fairly pointed out that on the basis of direct nexus the interest amount of Rs.19,83,858/ is in respect of investments. This amount worked out without prejudice to the stand that no disallowance is required out of interest on the basis of submissions made earlier." Though the ld.CIT(A) has observed that this expenses has a direct nexus, but it is neither discernible from the assessment order nor from the CIT(A)'s order. Major part of the expenses i.e. Rs.91,63,869/ has been deleted by the CIT(A) by following judgment of Hon'ble Bombay High Court in the case of Reliance Utilities and Powers P.Ltd. (supra) on the basis that the assessee was having more interest free funds, than the investment. In this situation, part expenditure cannot be culled out unless a direct nexus has been demonstrated. It is neither discernible in the assessment order nor in the CIT(A)'s order. We have extracted relevant finding of the ld.CIT(A). In view of the above discussion, we are of the view that this disallowance is not discernible. Consequently, ground of appeal raised by the Revenue is rejected, whereas ground of appeal raised by the assessee is allowed. The disallowance of Rs.19,83,858/ stands deleted. No other ground remained in the appeal of the Revenue for the Asstt.Year 2005 06. Therefore, ITA No.1661/Ahd/2009 stands dismissed."
29. The aforesaid findings arrived at by the Tribunal are in consonance with the decision of this Court in case of the assessee in Tax Appeal no.11 of 2019 with Tax Appeal no.28 of 2019 (supra) as well as Page 33 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT the decision in case of Gujarat State Fertilizers and Chemicals (supra), wherein the Court has held as under :
14. We had the occasion to consider the provision of Section14A of the Act as well as Rule8D of the Rules in the Tax Appeal No.100 of 2019 decided on 18/06/2019 [Principal Commissioner of Income Tax, Vadodara1 Vs. Gujarat State Fertilizers and ChemicalsLtd.]. The very same argument, which is sought to be canvassed by Mr. Patel in the present tax appeal, was canvassed in the Tax Appeal No.100 of 2019. We would like to quote the relevant observations made by us including the submissions, which were canvassed by Mr.Patel and noted by us.
"5. Mr. Patel submitted that the Assessing Officer rightly made the disallowance under Section 14A of the Act. He submitted that in a recent decision in the case of Maxopp Investment Limited (supra), the Supreme Court has reiterated that the purpose behind Section 14A of the Act is not to permit deduction of the expenditure incurred in relation to the income which does not form part of the total income. It is to ensure that the assessee does not get double benefit.
6. He further submitted that this Court, in the case of PCITII v. Shreno Limited, Page 34 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT (2018)409 ITR 401 (Gujarat), has referred to the decision of the Supreme Court in the case of S.A.Builders Limited v. CIT,(288) ITR 1 and observed that the exposition of law made by the Supreme Court in the case of S. A. Builders Limited (supra) and the observations made therein have been applied by this Court on various occasions particularly in connection with the disallowance to be made under Section 14A of the Act and it has been held that if the assessee can demonstrate the availability of the surplus interest free funds for making the investment generating tax free income, the disallowance under Section 14Aof the Act would not be justified.
7. Mr. Patel submitted that the decision of the Supreme Court in S. A. Builders Limited (supra)is not applicable to the issue involved in the present case as the decision in the case of S. A. Builders Limited (supra ) is with respect to Section 36(i)(iii) of the Income Tax Act, whereas in the present case the issue is with regard to the disallowance under Section 14A read with Rule 8D in the context of the assessee having mixed funds , i.e. interest free as well as interest bearing funds. In the case of S. A. Builders Page 35 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT Limited (supra), the relevant assessment years were Assessment Years 199091 and 199192, i.e. prior to the insertion of Rule 8D in the Income Tax Rules by the Income Tax (Fifth Amendment) Rules, 2008 w.e.f. 24th March 2008. It is also submitted that Section 14A has been inserted in the Income Tax Act by the Finance Act, 2001,with retrospective effect from 1st April 1962.
8. It is further submitted that after the insertion of Rule 8D, in all the cases of mixed funds, i.e. interest free as well as interest bearing funds, the subsequent decision of the Supreme Court in the case of Maxopp Investment Limited (supra), more particularly para42 regarding the case of M/s. Avon Cycles Limited, would be applicable for disallowance under Section 14A and such disallowance is required to be assessed as per the provisions of Rule 8D only. The decision of this Court in the case of Shreno Limited, which is based on the prior decision of the Supreme Court in the case of S.A.Builders Limited (supra) is, therefore,not applicable to the cases of mixed funds.
9. On the other hand, this Tax Appeal has Page 36 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT been vehemently opposed by Mr. Manish Shah, the learned counsel appearing for the respondent assessee. Mr. Shah submitted that the decision of the Supreme Court in the case of Maxopp Investment Limited(supra) should not be understood as clinching the issue with regard to the interpretation of Section14A of the Act and Rule 8D of the Rules. He submitted that in the case of Maxopp Investment Limited(supra), the question before the Supreme Court was, whether the disallowance of expenditure under Section14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control over the said company and incidentally tax free dividend income was generated. He would submit that such an issue does not arise in the present case so as to make the dictum of Maxopp Investment Limited (supra) applicable to the case on hand. He submitted that Maxopp Investment Limited (supra) should not be understood as laying down a proposition of law that the requirement of sub rule (1) of Rule8D of the satisfaction to be arrived at by the Assessing Officer before applying the formula given in subrule (2) of Rule 8D is done away. He submitted that the Page 37 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT decision of the Supreme Court in Maxopp Investment Limited(supra) does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds, i.e. interest free as well as interest bearing funds, and utilized them for making investments into securities earning tax free income and the rest applicability of Section 14A read with Rule 8D would be automatic."
15. In Maxopp Investment Limited (supra), the Supreme Court has clarified that the satisfaction has to be recorded by the Assessing Officer to show that the voluntary disallowance of the expenditure made by the assessee on the expenditure incurred for earning exempt income is not in order. The Assessing Officer, in such circumstances, is obliged to assign reasons for he not being satisfied having regard to the accounts maintained by the assessee and the suomotu disallowance made by the assessee under Section 14A of the Act. We may reproduce the relevant observations of the Supreme Court in this regard thus:
"Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, before applying the theory of apportionment, the Assessing Officer needs Page 38 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned the expenditure but the Assessing Officer did not accept the assessee's apportionment. In that eventuality, he will have to record its satisfaction to this effect. Further, while recording such a satisfaction, the nature of the loan taken by the assessee for purchasing the shares or making the investment in shares is to be examined by the Assessing Officer."
16. We also refer to and rely upon a decision of this Court in the case of Principal Commissioner of Income Tax v. Shreno Limited, reported in (2018) 409 ITR 401 (Gujarat), more particularly paragraphs 16 and 17, which read thus :
"16. The primary question which the Supreme Court considered in case of Maxopp Investment Ltd., (Supra) was whether disallowance of expenditure under Section 14A of the Act would be applicable in a case where shares or stocks of a company were purchased for the purpose of gaining control Page 39 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT over the said company and incidentally tax free dividend income was generated. The assessee had contended that the dominant intention for purchasing the shares was not for earning the dividend but to gain control over the business in the company in which the shares were purchased. The Supreme Court held that the purpose for which the shares were purchased was inconsequential. As long as such investment generated tax free income, disallowance of expenditure for making such investment would be justified. This issue does not arise in the present case. However, it is true that while disposing of bunch of appeals by the said judgment the Supreme Court also considered the correctness of the view of the Punjab & Haryana High Court in case of Avon Cycles Ltd. It was the case in which the Assessing Officer had invoked Section 14A read with Rule 8D and apportion the expenditure between investments made for earning tax free income and the rest. The CIT(Appeals) had deleted the entire disallowance upon which in the appeal filed by the Revenue the Tribunal restored portion of the disallowance observing that the funds utilized by the assessee being mixed funds, the disallowance is confirmed in view of the Page 40 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT provisions under Rule 8D(2) of the Rules.
This decision of the Tribunal was challenged before the High Court. The Court held that the funds utilized by the assessee were mixed funds and the interest paid by the assessee is also an interest on the investments made, was the finding of fact and therefore, no substantial question of law arises. This judgment was carried in appeal by the assessee. The Supreme Court dismissed the appeal confirming the decision of the High Court.
17. We do not find that this portion of the judgment of the Supreme Court in case of Maxopp Investment Ltd., can be seen as fundamentally changing the understanding and interpretation of Section 14A and Rule 8D of the Rules adopted by this Court and various Courts, noted above. This judgment does not lay down a proposition that the requirement of subrule (1) of Rule 8D of the satisfaction to be arrived by the Assessing Officer before applying the formula given in subrule (2) of Rule 8D is done away with. In other words, the judgment in case of Maxopp Investment Ltd., does not lay down a proposition that the moment it is demonstrated that the assessee had availed of Page 41 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT mixed funds i.e. interest free as well as interest bearing funds and utilized them for making investments into securities earning tax free income and the rest applicability of the Section 14A read with Rule 8D would be automatic. We are conscious that neither in M/s. Max India Ltd., Punjab & Haryana nor in Gujarat State Fertilizer and Chemicals case, this High Court had noticed the judgment of the Supreme Court in case of Maxopp Investment Ltd. Nevertheless in view of the discussion above, in our opinion the situation would not change on account of the said judgment of the Supreme Court."
17. This Court, in Shreno Limited (supra), has taken the view that Maxopp Investment Limited (supra) cannot be seen or understood to be fundamentally changing the understanding and interpretation of Section14A and Rule 8D. It went on to hold that the judgment of the Supreme Court does not lay down the proposition that, the requirement of subrule (1)of Rule 8D of recording the satisfaction by the Assessing Officer before applying the formula given in sub rule (2) of Rule 8D is done away with. It clarifies that the judgment in the case of Maxopp Investment Limited does not lay down a proposition that the moment it is demonstrated that the assessee had availed of mixed funds and utilized Page 42 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT them for making investment into securities earning tax free income, Section 14A read with Rule 8D would be attracted automatically. The assessee has further relied on the judgment in the case of Principal Commissioner of Income Tax v. Gujarat State Financial Services Limited in the Tax Appeals Nos.1252, 1253 and 1255 of 2018 decided on 15th August 2018, which has followed the decision in the case of Shreno Limited (supra) dealing with the same issue and also an identical argument taken by the department.
18. The language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the Assessing Officer is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. To put it in other words, the condition precedent of recording the requisite satisfaction which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances we are not impressed by the submission canvassed on behalf of the Revenue that once there are mixed funds, Rule8 would be attracted automatically.
18. We are of the view that the ITAT rightly relied on Page 43 of 44 Downloaded on : Sun Feb 14 06:15:39 IST 2021 C/TAXAP/81/2020 JUDGMENT the decision of the Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.)."
30. In the overall view of the matter, we are of the view that the Tribunal committed no error in passing the impugned order. The issues raised in these Tax Appeals are covered by various decisions of the Supreme Court as well as this Court.
31. We are of the view that none of the questions proposed by the revenue could be termed as substantial questions of law arising in these appeals.
32. In the result, these tax appeals fail and are hereby dismissed.
(J. B. PARDIWALA, J.) (BHARGAV D. KARIA, J.) AMAR RATHOD...
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