Sagar Drugs & Pharmaceuticals P. Ltd. v. Jt. CIT, Range-8, Ahmedabad
[Citation -2016-LL-1013-6]

Citation 2016-LL-1013-6
Appellant Name Sagar Drugs & Pharmaceuticals P. Ltd.
Respondent Name Jt. CIT, Range-8, Ahmedabad
Court ITAT-Ahmedabad
Relevant Act Income-tax
Date of Order 13/10/2016
Assessment Year 2007-08
Judgment View Judgment
Keyword Tags administrative expenditure • disallowance of interest • income from business • interest expenditure • management expenses • business activity • illegal business • interest payment • stock exchange • stock-in-trade • profit on sale • share capital • demat account • equity share • capital gain • primary onus • market value • surplus fund
Bot Summary: Of the view that looking to the quantum of investment and the regular transaction round the year which includes sale of mutual funds and shares, dividend and profit from sale of shares/mutual funds, apart from Rs.5,28,123/- incurred by assessee towards managing mutual funds, a further disallowance of Rs.178689/- by ld. Ld. CIT(A) in the course of adjudication of assessee s appeal came across following income disclosed by assessee in its income- tax return relating to purchase and sale of shares and mutual funds and future option :- SI. Nature Shares / Mutual fund Capital Gain No. 1 Short term Shares 48,56,402/- 2 Long Term Shares 23,42,897/- 3 Short Term Mutual Fund 33,11,806/- 4 Short Term Mutual Fund 2,64,91,241/- 5 Long Term Mutual Fund 60,53,782/- 6 Loss on shares Futures Options 3,59,409/- futures Total 4,26,96719/- 18. Ld. CIT(A) on his close examination found that assessee is incurring losses in the main business activities and has put in majority of its funds in investment in shares and mutual funds and the transactions are in large number being entered upon round the year which seems to be carried on as regular business activities. CIT(A) in the course of his adjudication of the appeal of assessee came across these transactions of purchase/sale of shares and mutual funds and on the basis of his observation about the regularity of transactions round the year, denied the claim of assessee of long term and short term capital gain and treated the income from transactions of shares and mutual funds as business income. 18.2 We further observe that assessee is having sufficient interest free funds in the form of share capital and reserve and surplus, part of which has been diverted towards investment in mutual funds and equity shares. Along with carrying on the business assessee has occasion to utilize its interest free funds for the purpose of investments in shares and mutual funds as being a prudent business man. In the given facts and circumstances namely investments in shares and mutual funds are being separately shown at cost price in the audited balance sheet; claim of assessee of short term and long term capital gain from sale of shares and mutual funds being regularly accepted by the Revenue in past and also in subsequent years; main business activity of dealing in dyes and chemicals being regularly carried out and specially in the year under appeal the business turnover has increased; and applicability of CBDT Circular No.6/2016 dated 29.2.1016, we are of the view that ld.


IN INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH AHMEDABAD Before Shri S. S. Godara, JM, & Shri Manish Borad, AM. ITA No. 914/Ahd/2012 Asst. Year: 2007-08 Sagar Drugs & Vs. Jt. CIT, Range-8, Pharmaceuticals P. Ltd., Ahmedabad. Sagar, Opp. Kamdhenu Complex, Nr. Sahajanand College, Ambawadi, Ahmedabad. Appellant Respondent PAN AADCS 9311E AND ITA No.2631/Ahd/2013 Asst. Year: 2006-07 Dcit, Circle-8, Ahmedabad. Vs. Sagar Drugs & Pharmaceuticals P. Ltd., Sagar, Opp. Kamdhenu Complex, Nr. Sahajanand College, Ambawadi, Ahmedabad. Appellant Respondent Appellant by Shri S. N. Soparkar, AR Respondent by Smt. Vibha Bhalla, CIT, DR & Shri Prasoon Kabra, Sr.DR Date of hearing: 28/7/2016 Date of pronouncement: 13/10/2016 ORDER PER Manish Borad, Accountant Member. ITA No. 914 A-12 & 2631 A-13 2 Asst. Year 2007-08 & 2006-07 These two appeals by assessee and Revenue for Asst.Year 2007-08 and Asst. Year 2006-07 are directed against orders of ld. CIT(A)-XIV, dated 16.03.2012 and 19.8.2013 vide appeal nos.CIT(A)- XIV/JtCIT.R.8/306/2009-10 and appeal no.CIT(A)-XIV/ACIT(OSD) Cir.8/66/2011-12 which were passed against orders u/s 143(3) of IT Act, 1961 (in short Act) framed on 15/12/2009 by Jt.CIT, Range-8 and order u/s 143(3) r.w.s. 147 of Act framed by ACIT(OSD), Cir.8, Ahmedabad respectively. Since these appeals relate to same assessee and issues raised are common they were heard together and are being disposed of by this common order for sake of convenience. 2. First we take up assessee s appeal in.ITA 914/Ahd/2012 wherein assessee has raised following grounds :- 3. Briefly stated facts of case are that assessee is limited company engaged in business of manufacturing of dyes intermediates & fine chemicals. Return of income was filed on 31.10.2007 declaring total income at Rs.2,91,58,060/- followed by revised return on 28.09.2008 declaring total income of Rs.2,90,56,185/-. case was selected for scrutiny assessment and notice u/s 143(2) of Act followed by notice u/s 142(1) of Act along with detailed questionnaire and was duly served on assessee. Necessary details were furnished as and when called for. ld. AO assessed income at Rs.3,12,43,540/- after making ITA No. 914 A-12 & 2631 A-13 3 Asst. Year 2007-08 & 2006-07 disallowance of Rs.21,86,013/- u/s 14A of Act, and disallowance of Rs.1342/- u/s 94(7) of Act. 4. Aggrieved assessee is now in appeal before Tribunal. 5. Now we take up ground No.1 which reads as under :- (1) Learned Commissioner (A) erred in confirming disallowance 1/10th of average investment of Rs. 17,86,88,108/- as administrative expenditure u/s 14A of Income Tax Act, 1961. 6. During course of assessment proceedings ld. AO observed that assessee is earned dividend income of Rs.38,03,741/- and total investment in shares and mutual fund at end of year stood at Rs.18,22,81,903/- and interest expenditure of Rs.26,04,774/- was debited to profit and loss account. Ld. AO accordingly applied rule 8D of IT Rules r.w.s. 14A of Act and calculated disallowance at Rs.21,86,013/- which comprised of direct expenditure disallowed by assessee at Rs.5,28,123/-, disallowance of interest expenditure of Rs.12,92,573/- and 0.5% of average investment at Rs.8,93,441/-. 7. On appeal before first appellate authority disallowance was restricted to 0.1% of total average investment at Rs.17,86,88,108/-. 8. Now assessee is in appeal before Tribunal. ITA No. 914 A-12 & 2631 A-13 4 Asst. Year 2007-08 & 2006-07 9. Ld. AR submitted that assessee has sufficient interest free reserve in form of share capital, reserve surplus which were sufficient to cover total investments in shares and mutual funds. There are no borrowed funds used for purpose of investment. Majority of transactions are in relation to purchase and sale of mutual funds for which assessee suo moto disallowed Rs.5,28,123/- which was sufficient to cover cost incurred for managing investments. Ld. AR referred and relied on decision of Co- ordinate Bench in assessee s own case for Asst. Year 2006-07 vide ITA No.3179/Ahd/2009. 10. On other hand, ld. DR supported orders of lower authorities. 11. We have heard rival contentions and perused material on record and also gone through decision of Co-ordinate Bench . Through this ground assessee has challenged order of ld. CIT(A) sustaining disallowance u/s 14A of Act of Rs.178688/- as against Rs.2186,013/- disallowed by ld. Assessing Officer u/s 14A of Act. 12. We find that ld. CIT(A) has sustained disallowance u/s 14A of Act by observing as below :- 3.3 Decision; I have carefully perused assessment order and written submission filed by Id.AR of appellant. A. O. has made disallowance u/s. 14A by applying provisions of Rule 8D. appellant has submitted that provisions of Rule 8D are not applicable for current assessment year and ITA No. 914 A-12 & 2631 A-13 5 Asst. Year 2007-08 & 2006-07 are applicable from 01/04/2008 i.e. A. Y. 2008-09. submission of appellant is* accepted. It has now been judicially settled that provisions of Rule 8 D are applicable from A. Y. 2008-09 (Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT) [328 ITR 81] and accordingly disallowance made by A. O. by is directed to be deleted. However, it is seen that appellant has made huge investment in equities and shares and has also shown considerable income from dividend. appellant has not made any disallowance u/s. 14A. It is also observed that A. O. has given finding in assessment order that no separate account has been maintained by appellant for earning of exempt income and availability of funds for making investment in purchase of tax exempt assets is also not clear. Accordingly, appellant was given show cause as to why disallowance u/s. 14A be not made. After taking into account interest expenses incurred by appellant and other administrative expenses incurred by appellant for earning exempt income. appellant has submitted in reply that investment in tax exempt assets have been made by tax free funds and borrowed funds have not been invested for investment in shares and units. interest expenses that have been incurred by appellant are for specific purpose and has nothing to do with investment in shares and units. appellant has also submitted that position of reserves and surplus, owner funds, investment, loans taken and loans and advances from year 2003-04 clearly show that appellant had sufficient interest free funds available with him for making investment in shares and units. position of funds given by appellant is reproduced hereunder: A.Y.2007-08 A. Y. Share Reserve & Owners Investment Loans Loans & Gross Interest Capital Surplus Fund Taken Advances interest received paid 03-04 25 2428.23 2453.23 1033.13 78.67 762.64 2.17 5.06 04-05 25 2740.83 2765.83 1500.71 47.69 1028.95 3.08 15.21 05-06 25 2932.27 2957.27 1790.77 389.92 1034.62 13.94 12.85 06-07 25 3093.74 3118.74 1822.82 432.12 1127.93 25.85 12.76 07-08 25 3371.67 3396.67 1 750.94 254.26 1125.38 26.05 7..45 From above data, it is clear that appellant had sufficient interest free funds for making investment in equities and units. It is also observed that interest payment that have been made by appellant during year are for specific purpose and no general purpose loan has been taken by ITA No. 914 A-12 & 2631 A-13 6 Asst. Year 2007-08 & 2006-07 appellant. It is further observed that there is reduction of borrowed funds as compared to earlier years and availability of reserves and surplus and owners fund have increased in present assessment year. Since interest free funds available to appellant are more than investment it can be presumed that investment were from interest free funds available [Reliance Utilities and Power Limited [313 ITR 340] (Mumbai)]. In view of these facts, no disallowance out of interest payment made by appellant can be made u/s. 14A. However, it is observed that appellant has shown receipt of dividend amounting to Rs.38,03,741/- during year. appellant has himself disallowed fund management expenses amounting to Rs.5,28,123/- in return of income. appellant has claimed that apart from fund management expenses, no other administrative expenses have been incurred by it for earning exempt income. claim of appellant is not acceptable as it is not possible that earning of such huge dividend income is without any intervention by directors of company or other employees of company. fund managers must have been interacting with directors and other employees of company for making investment decisions. It is seen that frequency of sale and purchase of shares and units is very high and this must have required sufficient administrative input from company's administration. Therefore, it cannot be said that no other administrative expenditure has been incurred in earning exempt income from shares and units. appellant has made average investment of Rs. 17, 86,88,108/- in shares and units which have given exempt income during year, it would meet ends of justice, if disallowance u/s. 14A on account of administrative expenditure incurred by company in earning exempt income is taken as 1/10% of average investment. rate of 1/10% has been taken after considering fact that appellant has taken help of fund manager for share market activities and, therefore, time and administrative requirement on behalf of company would be considerably less. A. O. is accordingly directed to work out disallowance u/s. 14A of Act. ground of appeal is accordingly partly allowed. 13. We further observe that Co-ordinate Bench has dealt similar issue of disallowance u/s 14A of Act for Asst. Year 2006-07 vide ITA No.3179/Ahd/2009 and has deleted disallowance by observing as under :- ITA No. 914 A-12 & 2631 A-13 7 Asst. Year 2007-08 & 2006-07 6. We have heard rival parties. In our considered view position of law in relation to disallowance of administrative expenses is now clear. Such disallowance cannot be made prior to Asst. Year 2007-08 unless there is direct nexus established by AO. It has been held that rule 8D. is not retrospective and would be applicable for and from Asst. Year 2007-08 and, therefore, it cannot be applied in Asst. Year 2006-07 which j is before us and, therefore, calculation as per rule 8D cannot be done for disallowance of administrative expenses, unless of course direct nexus is established which has not been done in present case. Accordingly, addition made by AO and enhanced by Id. CIT(A) is deleted and appeal filed by assessee is allowed. 14. We further find that in total disallowance worked out u/s 14A of Act by Assessing Officer with application of Rule 8D of IT Rules at Rs.27,14,136/-, sum of Rs.5,28,123/- has already been offered to tax by assessee, interest disallowance of Rs.12,92,573/- has been deleted by first appellate authority and 0.5% of average investment of Rs.17.87 crores calculated at Rs.8,93,441/- has been sustained to Rs.178689/-. 15. We are therefore, of view that looking to quantum of investment and regular transaction round year which includes sale of mutual funds and shares, dividend and profit from sale of shares/mutual funds, apart from Rs.5,28,123/- incurred by assessee towards managing mutual funds, further disallowance of Rs.178689/- by ld. CIT(A) towards administrative cost of managing investment in equity shares is justified. We therefore, find no reason to interfere with order of ld. CIT(A) and uphold same and accordingly this ground of assessee is dismissed. 16. Now we take ground no.2 which reads as under :- (2) Learned Commissioner (A) erred in fact and in law in treating profit of Rs. 4,30,56,128/-earned by appellant through purchase and sale of shares and ITA No. 914 A-12 & 2631 A-13 8 Asst. Year 2007-08 & 2006-07 units of mutual funds as income from business against capital gain assessed by assessing officer. learned CIT (A) had no jurisdiction to enhance income of assessee in this manner. 17. Ld. CIT(A) in course of adjudication of assessee s appeal came across following income disclosed by assessee in its income- tax return relating to purchase and sale of shares and mutual funds and future & option :- SI. Nature Shares / Mutual fund Capital Gain (Rs.) No. 1 Short term Shares 48,56,402/- 2 Long Term Shares 23,42,897/- 3 Short Term Mutual Fund 33,11,806/- 4 Short Term Mutual Fund 2,64,91,241/- 5 Long Term Mutual Fund 60,53,782/- 6 Loss on shares Futures & Options (-) 3,59,409/- futures Total 4,26,96719/- 18. Ld. CIT(A) on his close examination found that assessee is incurring losses in main business activities and has put in majority of its funds in investment in shares and mutual funds and transactions are in large number being entered upon round year which seems to be carried on as regular business activities. Accordingly ld. CIT(A) enhanced addition by treating short term and long term capital gain of Rs.43056128/- as business income as against long term and short term capital gain offered by ITA No. 914 A-12 & 2631 A-13 9 Asst. Year 2007-08 & 2006-07 assessee in return of income. Ld. CIT(A) observed following in order to enhance addition :- In case of Sarnath Infrastructure Pvt. Ltd. Vs. ACIT (2010) [124 ITD 71, Luck], Hon'ble bench has laid down 11 criteria's which are reproduced as under: "l. What is intention of assesses at time of purchase of shares for any other item)? This can be found out from treatment that it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether it is shown in opening/closing stock or shown separately as investment or non-trading asset. 2.Whether assessee has borrowed money to purchase and paid interest thereon? Normally money is borrowed to purchase goods for purposes of trade and not for investing in asset for retaining. 3.Whaf is frequency of such purchases and disposal In that particular item? if purchase and sale are frequent, or there are substantial transactions of that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly ratio between purchases and sales and holdings may show whether assessee is trading or investing, thigh transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). 4. Whether purchase and sale are for realizing profit or purchases are made for retention and appreciation in value? Former will indicate intention of trade and latter investment. In case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. commercial motive is essential ingredient of trade. 5.How value of items has been taken in balance sheet? If items in question are valued at cost, it would indicate that they are investment or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. 6.How company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment. If authorized only for trade, then whether there are separate resolutions of board of directors to carry out investments in that commodity and vice versa. 7.lt is for assessee to adduce evidence to show that his holding is . for investment or for trading and what distinction he has kept in records or ITA No. 914 A-12 & 2631 A-13 10 Asst. Year 2007-08 & 2006-07 otherwise, between two types of holdings. If assessee is able to discharge primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to revenue to prove that apparent is not real. 8Jhe mere fact of credit of sale proceeds of shares for for that matter any other item in question) in particular account or not so much frequency of sale and purchase will alone be not sufficient to say that assessee was holding shares (or items in question) for investment. 9.One has to find out what are legal requisites for dealing as trader in item in question and whether assessee is complying with them. Whether it is argument of assessee that it is violating those legal requirements if it is claimed that it is dealing as trader in that item? Whether it had such intention (to carry on illegal business in that item) since beginning or when purchases were made? 10. It is permissible as per CBDT's Circular No. 4 of 2007, dated 15-6-2007, that assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate accounts for each type, there are distinctive features for both and there is no intermingling of holdings in two portfolios. 11.Not one or two factors out of above alone will be sufficient to come to definite conclusion but cumulative effect of several factors, has to be seen. [Para 13]" perusal of various guidelines laid down by Hon'ble Tribunal show that out of 10 factors, appellant is covered by many factors which show that appellant has not made investment but transactions were for realizing profit i.e. motive was commercial. first condition regarding treatment in books of accounts, third condition regarding frequency of sale and purchase, habitual dealing and also dealings in futures and options, fourth condition regarding purchase and sale for realizing profit, fifth condition regarding value of items in balance sheet, sixth condition regarding authorization in Memorandum and Articles of Association clearly show that the. appellant is not investor but is trader and doing business. appellant-has in his reply dated 30/01/2012 raised issue that 84% of short term capital gains relates to mutual fund and investment in units and mutual fund are not same as investment in shares. appellant has also mentioned certain judgments of ITAT, Mumbai and Hon'ble Supreme Court and other courts in which it has been held that transactions in shares and mutual fund were as investor and not as trader. I have carefully perused judgments mentioned by appellant. However, facts of present case are unique and are different to facts of cases ITA No. 914 A-12 & 2631 A-13 11 Asst. Year 2007-08 & 2006-07 decided by Hon'ble Courts. Therefore, judgments mentioned by appellant are respectfully distinguished. Regarding issue of income from mutual fund, mutual fund units are similar to shares in all respects. companies which issue units of mutual fund purchase and sale equity shares of companies in order to have maximum profits, qualified technical persons are employed to keep close watch on market and performance of various companies and accordingly decision to purchase or sale of equity shares are taken. income earned by them is reflected in price of unit which is called Net Asset Value (NAV). NAV of various funds are declared on daily basis and is published in all newspapers on page where equities are mentioned. units of various mutual funds are listed in stock exchange and can also be purchased and sold on floor of stock exchange. units can also be dematerialized and are held in DEMAT account in similar manner as equity share. Therefore, units have all ingredients of equity share and income from sale and purchase thereof have to be treated at par with that of equity shares. Further, transactions carried out by appellant in units also have high volume, low holding period and organized manner of trading. characteristics of dealings in mutual funds are similar to dealings in equity shares done by appellant which have been discussed in detail in preceding paragraphs. Therefore, contention of appellant that mutual funds and equity shares should not be treated at par is not accepted. appellant has also mentioned judgment of Hon'ble Mumbai ITAT in case of Gopal Purohit [122 TTJ 87]. He has mentioned that claim of appellant of showing income from purchase and sale of shares as short term capital and long term capital gain have been allowed on identical facts in earlier assessment years. I have carefully perused judgment. First of all, in case of Gopal Purohit, assessment of only one year was made by treating income as business and earlier years were accepted as such. However, in case of appellant, it is noted that assessment for A. Ys. 2006-07 & 2008^)9 have been completed by rejecting claim of appellant. It is also settled law that mistake once committed cannot be allowed to be perpetuated (Distributors Baroda Vs. Union of India [155 ITR 120] [SC]). appellant cannot claim that all assessments have been completed after accepting his claim as assessments have been disturbed in certain years. Detailed analysis of facts clearly show that appellant is in fact doing business of purchase and sale of shares and units, and therefore, it is justified to treat income as that from business. In view of above mentioned discussion, profit earned by appellant by purchase and sale of shares and units of mutual fund is treated as income ITA No. 914 A-12 & 2631 A-13 12 Asst. Year 2007-08 & 2006-07 from business. As per statements submitted by appellant during course of appeal, it is seen that appellant has earned following capital gain during year. SI. Nature Shares / Mutual fund Capital Gain (Rs.) No. 1 Short term Shares 48,56,4027/- 2 Long Term Shares 23,42,897/- 3 Short Term Mutual Fund 33,11,806/- 4 Short Term Mutual Fund 2,64,91,2417- 5 Long Term Mutual Fund 60,53,782/- 6 Loss on shares Futures & Options (-) 3,59,409/- futures Total 4,26,96,719/- Accordingly, income of Rs.4,30,56,128/- is treated as income from business and income is enhanced. 15. Aggrieved, assessee is now in appeal before Tribunal. 16. Ld. AR submitted that assessee s main business is manufacturing of dyes intermediates, fine chemicals and turnover of Rs.13.82 crores which also includes export of Rs.9.5 crores. Further assessee has been regularly declaring short term and long term capital gain from shale of shares and mutual funds since Asst. Year 2003-04 and Revenue has allowed claim in Asst. Year 2003-04 to 2005-06 in its assessment order passed u/s 143(3) of Act and similarly in subsequent year also i.e. Asst. year 2008-09 & 2009- 10 claim of assessee for short term and long term capital gain from sale of shares and mutual funds has been allowed. Ld. AR referred to CBDT Circular No.6/2016 dated 29.2.2016 and submitted that it is directly applicable to facts of assessee. Ld. AR also referred and relied on following decisions and judgments :- ITA No. 914 A-12 & 2631 A-13 13 Asst. Year 2007-08 & 2006-07 1. Tribunal decision in case of Smruti Shreyans Shah in ITA No.3214, 3180, 32,95 & 3296/Ahd/2009 & CO No.3/Ahd/2010 (Asst. Years 2004-05 to 2006-07) 2. Tribunal s decision in case of Shah Investor s Home Ltd. in ITA No.1424/ahd/2010 (Asst. Year 2006-07) 3. Judgement of Hon. Gujarat High Court in case of Nita M. Patel 42 taxmann.com 125. 4. Tribunal s decision in case of Smruti Shreyans Shah in ITA Nos. 170 & 2692/Ahd/2011 & CO No.43/Ahd/2011 (Asst. Years 2007-08 & 2008-09). 5. Judgment of Hon. Bombay High Court in case of Smt. Datta Mahendra Shah 178 ITR 304. 6. Tribunal s decision in case of Tejas Securities. 7. Judgment of Hon. Delhi High Court in case of Yama Finance Ltd. (2014) 46 taxmann.com 349 (Delhi). 17. On other hand ld. DR supported orders of lower authorities. 18. We have heard rival contentions and perused material placed before us including judgments/decisions referred by ld. AR. Through this ground assessee has challenged order of ld. CIT(A) for enhancing addition by way of treating long term and short term capital gain from sale of shares and mutual funds as business income. We observe that at assessment stage claim of assessee of treating gain from sale of shares and mutual funds ITA No. 914 A-12 & 2631 A-13 14 Asst. Year 2007-08 & 2006-07 as short term and long term capital gain has been accepted and also loss on shares on account of future and options has been accepted as business loss. Thereafter ld. CIT(A) in course of his adjudication of appeal of assessee came across these transactions of purchase/sale of shares and mutual funds and on basis of his observation about regularity of transactions round year, denied claim of assessee of long term and short term capital gain and treated income from transactions of shares and mutual funds as business income. 18.1 From going through facts narrated before lower authorities and paper book placed before us, we find that assessee s main object as per Memorandum of Association is of business of manufacturing and purchase and sale of dyes intermediates and fine chemicals and this business is running since 26th February, 1985. During year under appeal assessee has achieved business turnover for sale of dyes and chemicals Rs.13.82 crores (approx.) as per Annual Report at page 23 of paper book. In immediately preceding Asst. Year business turnover of assessee was Rs.7.87 crores (approx.) which means that there is increase in sales of dyes and chemicals. 18.2 We further observe that assessee is having sufficient interest free funds in form of share capital and reserve and surplus, part of which has been diverted towards investment in mutual funds and equity shares. Further assessee has been regularly claiming profit from sale of shares and mutual funds as short term and long term ITA No. 914 A-12 & 2631 A-13 15 Asst. Year 2007-08 & 2006-07 capital gain since Asst. Year 2003-04 and position of year wise assessment of surplus on sale of shares and mutual funds in assessment year prior to year under appeal and in subsequent year is as under :- Assessment Nature Rupees Assessed Remark year of Gain under head 2003-04 Short Term 32,206 Capital Accepted at Long Term 962,508 Gain Assessment stage U/s. 143(3) 2004-05 Short Term 1,815,704 Capital Accepted at Long Term 5,266,721 Gain Assessment stage U/s. 143(3) 2005-06 Short Term 9,011,045 Capital Accepted at Long Term 7,998,826 Gain Assessment stage U/s. 143(3) 2006-07 Short Term 41,951,456 Business Reassessment made Long Term Income vide on basis of Audit 13616336 order it/s. note and 143(3) subsequent A.O. has r.w.s. 147 changed opinion on same facts on records. ITA No. 914 A-12 & 2631 A-13 16 Asst. Year 2007-08 & 2006-07 Reassessment is challenged in appeal before C1T(A)-XIV, Ahmedabad 2007-08 Short Term 34,659,437 Capital Accepted at Long Term 8,396,681 Gain Assessment stage U/s. 143(3) 2008-09 Short Term 361,98,102 Less than Assessment made on Long Term 7463111 30 Days basis of holding as Honorable Business Ahmedabad ITAT's Income & decision in case of Others Sugamchand C. Shah. under Assessment is Capital challenged before Gain C1T(A) X1V, 'bad 2009-10 Short Term -91,43,491 Capital Accepted at Long Term -18,28,476 Gain Assessment stage U/s. 143(3) 19. From going through above table, we find that assessee has been claiming gain/loss from transactions of sale/purchase of shares and mutual funds as short term and long term capital gain since last many years and Revenue has been regularly accepting ITA No. 914 A-12 & 2631 A-13 17 Asst. Year 2007-08 & 2006-07 same. Further we observe that CBDT Circular No.6/2016 dated 29.2.1016 has been issued in relation to such type of cases where assessee is having capital gain from sale of shares & securities and it reads as under :- Circular No.6/2016 Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi, 29tf1 of February, 2016 Sub: Issue of taxability of surplus on safe of shares and securities - Capital Gains or Business Income - Instructions in order to reduce litigation - reg.- Sub-section {14} of Section 2 of Income-tax Act, 1961 ('Act') defines term "capital asset" to include property of any kind held by assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, same can be held either as capital assets or stock-in-trade/ trading assets or both. Determination of character of particular investment in shares or other securities, whether same is in nature of capital asset or stock-in-trade, is essentially fact- specific determination and has led to lot of uncertainty and litigation in past. 2. Over years, courts have laid down different parameters to distinguish shares held as investments from shares held as stock-in-trade. Central Board of Direct Taxes ('C8DT') has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized said principles for guidance of field formations. 3. Disputes, however, continue to exist on application of these principles to facts of individual case since taxpayers find it difficult to prove intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be Said down to decide character of income from sale of shares and securities (i.e. whether same is in nature of capital gain or business income), C8DT realizing that major part of shares/securities transactions takes place in respect of listed ones and with view to reduce litigation and uncertainty in matter, in partial modification to aforesaid Circulars, further instructs that Assessing Officers in holding whether surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business income, shall take into account following- a) Where assessee itself, irrespective of period of holding listed shares and securities, opts to treat them as stock-in-trade, 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 period of more than 12 months immediately preceding date of its transfer, if assessee desires to treat income arising from transfer thereof as Capital Gain, same shall not be put to dispute by Assessing Officer, However, this stand, once taken by assessee in particular Assessment Year, shall remain applicable in subsequent Assessment Years also and taxpayers shall not be allowed to adopt different/contrary stand in this regard in subsequent years, c} In all other cases, nature of transaction (i.e. whether same is in nature of capital gain or business income) shall continue to be decided keeping in view aforesaid Circulars issued by CBDT. ITA No. 914 A-12 & 2631 A-13 18 Asst. Year 2007-08 & 2006-07 4. It is, however, clarified that above shall not apply in respect of such transactions in shares/securities where genuineness of transaction itself is questionable, such as bogus claims of Long Term Capita! Gain / Short Term Capita! Loss or any other sham transactions. 5. It is reiterated that above principles have been formulated with sole objective of reducing litigation and maintaining consistency in approach on issue of treatment of income derived from transfer of shares and securities. All relevant provisions of Act shall continue to apply on transactions involving transfer of shares and securities. 20. We observe that clause 3(b) of above Circular is applicable to facts of case of assessee more particularly for listed shares and securities held for more than 12 months. It reads that assessee if desires to treat income arising from transfer of shares and securities as capital gain same shall not be put to dispute by Assessing Officer. 21. Further on examination of financial statements, we find that shares and mutual funds have been shown under head investment and have been valued at cost price. Majority of investments is mutual funds so much so that out of total investment of Rs.17.51 crores gross Rs.11.30 crores is in mutual fund. Summarizing this fact, we find that assessee is regularly carrying on business activities as enumerated in Memorandum of Association and is consistently making sales and earning profits there. Along with carrying on business assessee has occasion to utilize its interest free funds for purpose of investments in shares and mutual funds as being prudent business man. All investments have been shown in balance sheet and all necessary details are available. ITA No. 914 A-12 & 2631 A-13 19 Asst. Year 2007-08 & 2006-07 22. We find that similar issues came up before Co-ordinate Bench, Ahmedabad in case of DCIT vs. Tejas Securities in IT(SS)A Nos.531, 532 & CO No.205/Ahd/2011 for Asst. Year 2008-09 to 2009-10 wherein it has been held that such gain from purchase and sale of shares and mutual funds not as business income but short term and long term capital gain by observing as under :- 9. We have heard both parties. Case file perused. sole issue on merits is as to whether assessee profits of Rs. 2,59,43,473/- are to be treated as short term capital gains arising from investments or business income. We have already narrated relevant facts in preceding paragraphs. There is no dispute that assessee has not used any borrowed funds in its share transactions. Hon'ble jurisdictional high court in tax appeal 77 to 78 of 2010 CIT vs. Vaibhav J. Shah decided on 27-06-2012 holds that this issue has to be adjudicated in view of no. of shares sale/purchase transactions, volume, frequency, continuity and regularity followed by necessary inference to be drawn from magnitude of transactions and holding period etc. perusal of case file reveals that assessee has always been treated as investor and not trader. Case records contained CIT(A)'s different orders; all dated 07-07-2011 in assessment years 2003-04 to 2007-08 treating assessee's short term capital gains/losses of Rs. 2,12,522/-, Rs. 1,45,680/-, Rs. 3,10,332/-, Rs. 9,63,528/- and Rs. 17,32,831/- not as business losses. Revenue does not point out any exception in impugned I.T(SS).A Nos.531 to 532 & CO No. 201/Ahd/2011 A.Y. 2008-09 to 2009-10 Page No 10 DCIT vs. M/s. Tejas Securities assessment year. It also does not indicate that same have not attained finality till date or any litigation therefrom is pending in any higher forum. It is further to be seen from case file pages 51-60 that assessee's partnership deed contains negative covenant that its business shall not include trading in equity shares and mutual funds units as under:- "The business of partnership shall not include trading in equity shares and units issued by mutual funds. partnership, can however, invest funds of partnership into equity shares through primary or secondary market or through any portfolio management schemes recognized by Securities and Exchange Board of India and/or in units of mutual funds and such equity shares/units shall constitute investment portfolio of partnership and not stock in trade" 10. We proceed further and find that assessee has always valued its investments at cost price and not market price. Its short term capital gains read ITA No. 914 A-12 & 2631 A-13 20 Asst. Year 2007-08 & 2006-07 impugned sums of Rs. 2,59,43,473/- comprising sum of Rs. 2,95,48,114/- from single scrip namely M/s. Reliance Natural Resources Ltd. purchased on 5th April, 10th May, 23rd May and 2nd July 2007 (this last day involves three transactions). This followed sale of scrip involving all shares on 04-03-2008. same makes it clear that assessee's holding period of these shares ranging from 8 to 11 months during which not even single share was sold. If we exclude this scrip, what is left is net result of loss of Rs. 36 lacs approximately. We confronted Revenue with all this factual evidence. It fails to controvert lower I.T(SS).A Nos.531 to 532 & CO No. 201/Ahd/2011 A.Y. 2008-09 to 2009-10 Page No 11 DCIT vs. M/s. Tejas Securities appellate authorities' findings that assessee has always been treating its shares and mutual funds in question as investments by maintaining separate account accepted for last many years. This is not Revenue's case that assessee has been engaged in any intra-day sale/purchase transactions. We repeat that assessee has carried out 85 purchase transactions and 67 sale transactions during relevant previous year. Meaning thereby that there is no transaction carried out in more than of relevant previous year. We conclude in these peculiar facts and circumstances that CIT(A) has rightly treated assessee's profits of Rs. 2,59,43,473/- short term capital gain and not business income. We reject Revenue's contentions seeking to revive Assessing Officer's finding hereinabove. Its ITA 531/Ahd/2011 fails. Our these findings on merits render assessee's CO No.205/Ahd/2011 as to have become infructuous accordingly. 23. Further in case of ACIT vs. Shah Investor s Home Ltd. in ITA No.1424/Ahd/2010 for Asst. Year 2006-07, while deciding similar issue, Tribunal has observed as under :- 7. We have heard rival submissions .and perused material on record. issue in present case is whether profit earned on sale of shares is required to be treating as "capital gains" or "business income". We find that Id. CTT(A) while deciding issue in favour of Assessee has held profit earned to be as '"capital gains1' and has noted that Assessee has history of being investor and claiming short terms capita! gains and activity of transactions were related to 5 scrips and transactions were delivery based. He has further given finding that it is not case where Asscssee has done transactions of sale and purchase on every day basis. He has further noted that shares were considered by Assessee as investment in its books of accounts, had not borrowed any finance to acquire shares and out of total gains earned by Assessee, around 2/3 of profits were earned from shares which were held for over 60 days. He thereafter relying on ratio of decision rendered by Hon'ble Bombay High Court in case of Gopal Purohit reported in 228 CTR 582 (Bom) held that only short term capital gains to extent of Rs. 27,1937- earned on transactions which were not transacted through Demat account is to be attributed to business of share trading. Before us, Revenue has not placed any material on record to controvert findings of Id. ITA No. 914 A-12 & 2631 A-13 21 Asst. Year 2007-08 & 2006-07 CIT(A), Further, it is also fact that in earlier assessment years, Assessee had offered profits as short terms capital gains and same was also accepted by Revenue. In view of aforesaid facts, we find no reason to interfere with order of Id. CIT(A) and thus ground of Revenue is dismissed. 24. Further we observe that similar issue has been adjudicated by Hon. Delhi High Court in case of Yama Finance Ltd. vs. ACIT, (2014) 46 taxmann.com 349 (Delhi) vide judgment dated 1st April, 2014 and held such gain as long term and short term capital gain and not as business income; relevant portion of judgment is reproduced below :- 1. assessee/appellant is aggrieved by order of ITAT dated 30.03.2010 whereby its appeal was rejected. question of law urged which this Court formulates hereby is- ''Did Tribunal fall into error in holding that sum of Rs. 58,71,144/- reported as long term capital gain by assessee was to be treated as its business income ?" 2. facts briefly for purpose of this appeal are that assessee deals in shares. It declared total income of Rs. 83,78,279/-. During scrutiny, it was discerned that assessee had also invested and sold mutual funds apart from shares. AO also found that assessee derived income from interest, dividend and surplus realized on sale of shares and mutual funds. As to precise issue of sale of mutual funds, facts appearing on record are that assessee had invested in these funds and shown them in its investment account and had not characterized it as stock-in-trade. This position apparently had been reported and accepted for previous years. Furthermore, it appears that assessee held its mutual funds for about two years before eventually redeeming them. assessee had contended that surplus from sale of these mutual funds had to be treated as long term capital gain and not business income. AO had rejected this. 3. CIT (A), however, after analyzing transactions involved allowed appeal. 4. ITAT, however, allowed Revenue's appeal holding that profits from sale of these mutual funds amounted to business income. 5. Learned counsel highlights that apart from fact that mutual funds were held for almost two years, other indicators clearly showed that transactions did not result in business income. It was submitted that mutual funds units were not tradable and had to be redeemed from issuing concern or fund house. Furthermore, submitted learned counsel, that no borrowed funds had been used and right through accounts kept in these mutual funds have been clearly demarcated as investments. Tribunal's undue emphasis on infrastructure was wholly irrelevant factor. ITA No. 914 A-12 & 2631 A-13 22 Asst. Year 2007-08 & 2006-07 6. Learned counsel for Revenue supported findings of Tribunal and stated that mere circumstance that assessee showed mutual funds in investment account could not be conclusive of these aspects. It was also submitted that there was some doubt as to whether assessee was even authorized in terms of its Memorandum of Association to deal in mutual funds. Having regard to these, conclusions arrived at by ITAT were justified. 7. CIT (A) in his order recorded as follows: "(i) Assessee has employed its own funds out share capital and accumulated free reserves that there was no borrowing at any time. (ii) Assessee's is lacking proper infrastructure and is only holding Rs.2.02 lacs (WDV Rs.1.39 lacs) worth of fixed assets. (iii) Assessee has only one employee to whom aggregate salary of Rs.60,000 has been paid. (iv) Assessee's treatment of mutual fund as investment is consistent since 2002-03, even when no special privileges of any tax concession was available. Merely because subsequently assessee is entitled to some benefits/tax concessions, whole transaction cannot be now pulled under umbrella of Business. (v) Auditors report and balance sheet as per schedule VI to companies has identified units of mutual fund as 'investments' categorically stating that company is not holding any stock-in-trade. (vi) Units of mutual funds are not freely transferable nor tradable and thus cannot be categorized as Business. These units can be bought or redeemed with mutual fund itself. It cannot be gifted or transferred in any other manner. (vii) key decision making authority rest with fund manager of respective mutual fund and assessee do not have any say as to when to buy, what to buy, when to sell and what to sell. (viii) Assessee's case of transactions in Mutual Funds resulting in capital gains has already been held in its favour in AY 2004-05 in appeal no.112/2006-07 by my predecessor. (ix) Most of investments in mutual fund schemes have been held for considerable time and as far as 27 months, thus frequency is restricted." 8. This Court also notices that CIT (A) noted in order that Income Tax Act itself recognized units of mutual funds as special category of "investments" as far as trusts were concerned, u/s. 11 (5) which placed this in entirely separate class. He, therefore, reasoned that investments in mutual funds are of entirely different kind and cannot be clubbed with sale of shares or commodities. This Court is inclined to agree with this finding and conclusions expressed on application of clearly recognised tests to determine whether profits or amounts received are business income or short/long term capital gains. ITA No. 914 A-12 & 2631 A-13 23 Asst. Year 2007-08 & 2006-07 9. One often underlined and widely used test is "volume, frequency, continuity and regularity" of transactions test. This is in addition to other indicia such as maintenance of separate portfolios in same set of books of account for ''investments" or maintenance of separate books of account for two activities, and whether borrowed capital was used. 10. Having regard to these and further fact that assessee had kept these amounts separately in investment account and held these mutual funds for about two years, this Court is of opinion that Tribunal clearly fell into error in holding that amount of Rs. 58,71,144/- was business income and not long term capital gains as was rightly concluded and held by CIT (A). For these reasons, question of law framed is answered in favour of assessee and against Revenue. 11. appeal is accordingly allowed in above terms. 25. Respectfully following judgment of Hon. Delhi High Court in case of Yama Finance Ltd. vs. ACIT(supra) and decision of Co-ordinate Bench, we find that ratio of judgment/decision is applicable to case of assessee. Therefore, in given facts and circumstances namely (i) investments in shares and mutual funds are being separately shown at cost price in audited balance sheet; (ii) claim of assessee of short term and long term capital gain from sale of shares and mutual funds being regularly accepted by Revenue in past and also in subsequent years; (iii) main business activity of dealing in dyes and chemicals being regularly carried out and specially in year under appeal business turnover has increased; and (iv) applicability of CBDT Circular No.6/2016 dated 29.2.1016, we are of view that ld. CIT(A) has grossly erred in treating income of Rs.4,30,56,128/- earned from purchase and sale of shares and mutual funds as business income rather than treating same as short term and long term capital gain as disclosed by assessee. We accordingly set aside order of ld. CIT(A) and allow this ground of assessee. ITA No. 914 A-12 & 2631 A-13 24 Asst. Year 2007-08 & 2006-07 26. Now we take up ground no.3 which reads as under :- (3) Alternatively, without prejudice to ground no 2 regarding assessment of capital gain under head business income, (a) Learned Commissioner (A) erred in fact and in law in considering unit of mutual fund as tradable security on stock exchange and treating par with that of equity shares and thereby directing to assess profit of Rs. 3,58,56,829/- on redemption of units of mutual funds as business income against capital gain assessed by assessing officer. (b) Learned Commissioner (A) erred in fact and in law in considering profit of Rs. 83,86,679/- on shares and mutual fund held for long term as business income against Long term capital gain assessed by assessing officer. (c) Learned Commissioner (A) erred in fact and in law in considering profit realized on sale of investments in current year as business income though investments had been accepted as investments in earlier year. 27. As we have already allowed ground no.2 of assessee accepting claim of purchase and sale of shares other than future & options as capital gain (short term/long term) it would be just academic to deal with ground no.3. We, therefore, dismiss this ground. 28. Ground Nos.4 & 5 are of general nature, which need no adjudication. 29. In result, assessee s appeal is partly allowed. 30. Now we take Revenue s appeal in ITA No.2631/Ahd/2013, wherein following grounds of appeal have been raised :- ITA No. 914 A-12 & 2631 A-13 25 Asst. Year 2007-08 & 2006-07 1) Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in holding re-asessment proceedings as invalid. 2) Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in treating transactions of shares and mutual fund as STCG instead of business income as treated by Assessing Officer. 3) On facts and in circumstances of case, Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld order of Assessing Officer. 4) It is therefore, prayed that order of Ld. Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-a-side and that of order of Assessing Officer be restored. 31. Solitary grievance of Revenue in this appeal is that ld. CIT(A) has erred in treating transactions of shares and mutual fund as STCG instead of business income as treated by Assessing Officer. 32. Since we have decided issue in favour of assessee after detailed discussion from para 16 to 25 above of this order, we find no merit in appeal of Revenue and dismiss same. 33. Other grounds of appeal are of general nature, which need no adjudication. 34. In result, assessee s appeal is partly allowed and Revenue s appeal is dismissed. ITA No. 914 A-12 & 2631 A-13 26 Asst. Year 2007-08 & 2006-07 Order pronounced in open Court on 13th October, 2016 Sd/- sd/- (S. S. Godara) (Manish Borad) Judicial Member Accountant Member Dated 13/10/2016 Mahata/- Copy of order forwarded to: 1. Appellant 2. Respondent 3. CIT concerned 4. CIT(A) concerned 5. DR, ITAT, Ahmedabad 6. Guard File BY ORDER Asst. Registrar, ITAT, Ahmedabad 1. Date of dictation: 10/10/2016 2. Date on which typed draft is placed before Dictating Member: 13/10/2016 other Member: 3. Date on which approved draft comes to Sr. P. S./P.S.: 4. Date on which fair order is placed before Dictating Member for pronouncement: 5. Date on which fair order comes back to Sr. P.S./P.S.: 6. Date on which file goes to Bench Clerk:13/10/160. 7. Date on which file goes to Head Clerk: 8. date on which file goes to Assistant Registrar for signature on order: 9. Date of Despatch of Order: Sagar Drugs & Pharmaceuticals P. Ltd. v. Jt. CIT, Range-8, Ahmedabad
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