M/s Pace Education (P) Ltd,, New Delhi v. DCIT,, New Delhi

ITA 1895/DEL/2009 | 2004-2005
Pronouncement Date: 22-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 189520114 RSA 2009
Assessee PAN AAACP3469K
Bench Delhi
Appeal Number ITA 1895/DEL/2009
Duration Of Justice 2 year(s) 2 month(s) 16 day(s)
Appellant M/s Pace Education (P) Ltd,, New Delhi
Respondent DCIT,, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 22-07-2011
Date Of Final Hearing 14-07-2011
Next Hearing Date 14-07-2011
Assessment Year 2004-2005
Appeal Filed On 06-05-2009
Judgment Text
ITA NOS. 1752-1753 & 1895-1896/DEL/2009 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH B NEW DELHI BEFORE SHRI A.D. JAIN JUDICIAL MEMBER AND SHRI SHAMIM YAHYA ACCOUNTANT MEMBER I.T.A. NOS. 1752 & 1753/DEL/2009 A.YRS. : 2004-05 & 2005-06 A SSTT. COMMISSIONER OF INCOME TAX CIRCLE 14(1) ROOM NO. 415 4 TH FLOOR C.R. BUILDING NEW DELHI VS. M/S PACE EDUCATION (P) LTD. FLAT NO. 22-A 1 ST FLOOR SHANKAR MARKET CONNAUGHT PLACE NEW DELHI (PAN/GIR NO. : AAACP3469K) (APPELLANT ) (APPELLANT ) (APPELLANT ) (APPELLANT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) AND ITA NOS. 1895 & 1896/DEL/2009 A.YRS. 2004-05 & 2005-06 M/S PACE EDUCATION (P) LTD. FLAT NO. 22-A 1 ST FLOOR SHANKAR MARKET CONNAUGHT PLACE NEW DELHI (PAN/GIR NO. : AAACP3469K) VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 14(1) NEW DELHI (APPELLANT (APPELLANT (APPELLANT (APPELLANT ) )) ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) (RESPONDENT ) ASSEESSEE BY : S/ SH. AJAY VOHRA / ROHIT JAIN DEPARTMENT BY : SH. SALIL MISHRA SR. D.R. ORDER ORDER ORDER ORDER PER PER PER PER SHAMIM YAHYA : AM SHAMIM YAHYA : AM SHAMIM YAHYA : AM SHAMIM YAHYA : AM THESE APPEALS BY THE REVENUE AND ASSESSEE FOR ASSE SSMENT YEARS 2004-05 & 2005-06. SINCE THE APPEALS WERE HEA RD TOGETHER THESE APPEALS ARE BEING DISPOSED OF BY THIS COMMON O RDER FOR THE SAKE OF CONVENIENCE. ITA NOS. 1752-1753 & 1895-1896/DEL/2009 2 REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL REVENUES APPEALS SS S 2. THE ISSUE RAISED IS THAT LD. COMMISSIONER OF INCOM E TAX (APPEALS) ERRED IN DELETING THE ADDITION OF ` 23 5 6 392/- (FOR A.Y. 2004- 05) AND ` 18 79 666/- (FOR A.Y. 2005-06) MADE BY TH E ASSESSING OFFICER BY TREATING INCOME FROM SALE OF MUTUAL FUNDS AS INCO ME FROM BUSINESS. 3. THE FACTS ON THE ISSUE ARE IDENTICAL IN BOTH TH E YEARS. HOWEVER WE DEAL WITH THE ISSUE BY TAKING THE FIGURES FROM A .Y. 2004-05. FROM THE COMPUTATION OF INCOME FILED ALONGWITH THE RETURN OF INCOME THE AO OBSERVED THAT ASSESSEE CLAIMED A LOSS OF ` 4 91 505 /- AS LONG TERM CAPITAL LOSS FOR AY 2004-05. DURING THE PREVIOUS YE AR THE ASSESSEE COMPANY WAS ENGAGED IN THE BUSINESS OF INVESTMENT AND MADE INVESTMENT IN MUTUAL FUNDS EQUITY INVESTMENTS IN NII T AS ONE OF THE PROMOTERS OF THE INVESTEE COMPANY; IT DERIVED INCOME FROM INTEREST DIVIDEND ETC. THE AO REQUIRED THE ASSESSEE COMPANY T O EXPLAIN AS TO WHY THE INCOME FROM SALE OF MUTUAL FUNDS ETC. SHOULD NOT BE TREATED AS BUSINESS INCOME OF THE ASSESSEE COMPANY AS THE ASS ESSEE COMPANY IS AN INVESTMENT COMPANY. THE ASSESSEE COMPANY SUBMITTED BEFORE THE AO THAT THE MAIN OBJECTS OF THE COMPANY W ERE AS UNDER: 'TO ACQUIRE AND HOLD SHARE STOCKS DEBENTURE DEBE NTURE STOCK BONDS OBLIGATIONS AND SECURITIES ISSUED OR GUARANT EED BY ANY COMPANY CONSTITUTED OR CARRYING ON BUSINESS IN INDIA OR ELSEWHERE AND DEBENTURE' DEBENTURE STOCK BONDS OB LIGATIONS AND SECURITIES ISSUED OR GUARANTEED BY ANY GOVERNMEN T MUNICIPALITY PUBLIC BODY OR OTHER LOCAL AUTHORITY A ND ALSO TO ACQUIRE ANY SUCH SHARES DEBENTURES DEBENTURE STOC K BONDS OBLIGATIONS OR SECURITY BY ORIGINAL SUBSCRIPTION T ENDER PURCHASE EXCHANGE OR OTHERWISE AND TO SUBSCRIBE FOR SAME EIT HER ITA NOS. 1752-1753 & 1895-1896/DEL/2009 3 CONDITIONALLY OR OTHERWISE AND TO GUARANTEE THE SUB SCRIPTION THEREOF AND TO EXERCISE AND ENDORSE ALL RIGHTS AND POWERS CONFERRED BY OR INCIDENTAL TO THE OWNERSHIP THEREOF AND ANY SUCH SHARES DEBENTURES DEBENTURE STOCK BONDS OBLIGAT IONS OR SECURITIES TO SELL OR OTHERWISE DISPOSE OF.' 3.1 THE ASSESSEE COMPANY ALSO STATED BEFORE THE AO T HAT THE ASSESSEE COMPANY IS ALSO REGISTERED AS NBFC (NON BANKING FINAN CIAL CO.) WITH RESERVE BANK OF INDIA VIDE REGISTRATION NO.B-14-025 77 DT.14.03.2002 AND SINCE INCEPTION ASSESSEE COMPANY HELD ALL ITS P LACEMENT OF FUNDS AS INVESTMENTS AND NOT AS STOCKS IN TRADE. THE ASSE SSEE COMPANY ALSO PLACED RELIANCE ON NUMBER OF JUDICIAL PRONOUNCEMENTS T O SUPPORT HIS CONTENTION BEFORE THE AO. 3.2. HOWEVER IT IS SEEN THAT THE CONTENTION OF TH E ASSESSEE DID NOT FIND FAVOUR FROM THE AO IN VIEW OF THE FOLLOWING FI NDINGS GIVEN BY HIM: THE CASE LAWS CITED BY THE ASSESSEE ARE DISTINGUISH ABLE IN FACTS. IN REALITY THE ISSUE INVOLVED IS A MIXED QUESTION OF LAW WHETHER THE ASSESSEE'S RECEIPTS ARE NORMAL BUSINESS RECEIPTS OR CAPITAL RECEIPTS. THIS ASPECT CAN BE EXAMINED BY GOING INTO THE NATURE OF THE ACTIVITIES CARRIED ON BY THE ASSESSEE COMPANY I TS OBJECTIVE AND OVERALL FACTS AND CIRCUMSTANCES OF THE CASE. THE OBJECTIVE OF THE COMPANY AS OUTLINED IN THE MEMORANDUM OF ASSOCIAT ION OF THE COMPANY IS RESTATED AS UNDER:- 'TO ACQUIRE AND HOLD SHARE STOCKS DEBENTURE DEBE NTURE STOCK BONDS OBLIGATIONS AND SECURITIES ISSUED OR GUARANTEED BY ANY COMPANY CONSTITUTED OR CARRYING ON BUSINESS IN INDIA OR ELSEWHERE AND DEBENTURE DEBEN TURE STOCK BONDS OBLIGATIONS AND SECURITIES ISSUED OR ITA NOS. 1752-1753 & 1895-1896/DEL/2009 4 GUARANTEED BY ANY GOVERNMENT MUNICIPALITY PUBLIC BODY OR OTHER LOCAL AUTHORITY AND ALSO TO ACQUIRE ANY SU CH SHARES DEBENTURES DEBENTURE STOCK BONDS OBLIGATIONS OR SECURITY BY ORIGINAL SUBSCRIPTION TENDER PURCHASE EXCHANG E OR OTHERWISE AND TO SUBSCRIBE FOR SAME EITHER CONDITIO NALLY OR OTHERWISE AND TO GUARANTEE THE SUBSCRIPTION THEREOF AND TO EXERCISE AND ENDORSE ALL RIGHTS AND POWERS CONFERRE D BY OR INCIDENTAL TO THE OWNERSHIP THEREOF AND ANY SUCH SH ARES DEBENTURES DEBENTURE STOCK BONDS OBLIGATIONS OR SECURITIES TO SELL OR OTHERWISE DISPOSE OF.' THOUGH THE MEMORANDUM OF ASSOCIATION IS NOT THE SOL E INDICATOR OF THE NATURE AND KIND OF ACTIVITIES ENGA GED IN BY A COMPANY BUT THE FACT REMAINS THAT IT IS A GUIDE TO TH E NATURE OF THE ACTIVITIES AND ON THE MOTIVE OF THE AS SESSEE COMPANY. THE OBJECT OF THE COMPANY AS OUTLINED ABOVE CLEARLY SHOWS THAT THE ASSESSEE COMPANY INTENDS TO D EAL IN SHARES MANUFACTURING ETC. WITH A PROFIT MOTIVE. THIS PROFIT MOTIVE ITSELF INDICATES THAT THE NATURE OF PURCHASE & SALE OF SHARES IS OF ADVENTURE IN THE NATURE OF TRADE. 3.3. THE AO ALSO DISTINGUISHED THE FOLLOWING CASE LAWS RELIED UPON BY THE ASSESSEE COMPANY: (I) DALHOUSIE' INVESTMENT TRUST COMPANY LTD. VS. CIT CENTRAL CALCUTTA 68 ITR 486 SUPREME COURT (II) CIT V SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. (1 975) 100 ITR 706 (SC) (II) RAJA BAHADUR VISHESHWAR SINGH V. CIT (1961) 41 ITR 685 (SC) ITA NOS. 1752-1753 & 1895-1896/DEL/2009 5 THE AO THUS IN VIEW OF THE ABOVE DISCUSSION HELD TH E INCOME DECLARED FROM SALE OF SHARES AS BUSINESS INC OME INSTEAD OF CAPITAL GAIN DECLARED BY THE ASSESSEE COMPANY. IT IS ALSO SEEN THAT THE AO WAS OF THE VIEW THAT AS THE SAME WAS BE ING ASSESSED AS BUSINESS INCOME THE BENEFIT OF INDEXED COST OF ACQUISITION WAS NOT ALLOWABLE. THE PROFIT ON SALE OF INVESTMENT WAS COMPUTED BY THE AO AS UNDER: REDEMPTION AMOUNT OF MUTUAL FUNDS COST PRICE OF SHARES RS. 2 79 11 674/- COST OF SHARES RS. 2 60 46 287/- PROFIT RS. 18 64 887/- 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE ISSUE AND OBSERVED THAT TH E IDENTICAL ISSUE WAS DECIDED BY HIS PREDECESSOR IN APPEAL NO. 35/06 -07 FOR A.Y. 2003- 04 IN FAVOUR OF THE ASSESSEE WHEREIN IT HAD BEEN H ELD AS UNDER:- '4.4 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND HAVE GONE THROUGH THE ORDER OF THE AO AND THE SUBMIS SIONS OF THE APPELLANT. THE FACTS THAT EMERGE ARE THAT THE APPELLANT HAS OVER THE YEARS MADE INVESTMENT IN SH ARES WITH A VIEW TO ACQUIRE CONTROLLING INTEREST IN CERT AIN COMPANIES AS ALSO WITH A VIEW TO EARN DIVIDEND INCO ME THERE FROM. THE APPELLANT DECLARED LONG TERM CAPITAL GAINS AFTER CLAIMING THE BENEFIT OF INDEXATION ON ACCOUNT OF REDEMPTION OF UNITS OF VARIOUS MUTUAL FUNDS WHICH WE RE ACQUIRED BY THE APPELLANT AS PER THE PROVISIONS OF SECTION 54EA OF THE ACT TO SAVE TAX ON CAPITAL GAINS ON THE SALE OF 17000 SHARES OF NIIT LTD IN EARLIER YEAR. ON THESE FACTS THE VIEW OF THE AO HAS BEEN THAT THE PURCHASE AND SALE OF ITA NOS. 1752-1753 & 1895-1896/DEL/2009 6 SHARES CONSTITUTED BUSINESS ACTIVITY. ON THE OTHER HAND THE CLAIM OF THE APPELLANT IS THAT THE PROVISIONS OF SEC TION 54EA OF THE ACT PERMIT INVESTMENT OF ONLY LONG TERM CAPITA L GAINS; ONCE THE SHARES OF NIIT LTD. WERE HELD TO BE CAPIT AL ASSETS AND NOT STOCK-IN-TRADE THE UNITS OF MUTUAL FUNDS AC QUIRED IN ORDER TO MITIGATE CAPITAL GAINS TAX LIABILITY COULD NOT BE CONSIDERED DIFFERENTLY. I FIND SUFFICIENT FORCE IN THE SUBMISSION OF THE APPELLANT THAT IT CANNOT BE REGAR DED AS CARRYING ON THE BUSINESS OF TRADING IN THE UNITS OF MUTUAL FUNDS IN VIEW OF THE FACT THAT THE INVESTMENTS IN S ECURITIES SPECIFIED U/S 54EA WAS MADE WITH A VIEW TO SAVE CAPI TAL GAINS TAX ON THE SHARES SOLD IN EARLIER YEARS; THE SAID SECTION ITSELF PLACES A RESTRICTION THAT THE AMOUNT INVESTED CANNOT BE REDEEMED WITHIN A PERIOD OF THREE YEARS F ROM THE DATE OF ACQUISITION. THERE IS ALSO MERIT IN THE CONT ENTION THAT THE UNITS WERE NOT TRADED IN THE OPEN MARKET BUT WE RE SIMPLY SURRENDERED TO THE MUTUAL FUND COMPANIES FOR REDEMPTION ON MATURITY AND THAT THE PRICES OF SUCH UNITS DO NOT FLUCTUATE TO PROVIDE ANY INCENTIVE OF TRADING I N SUCH SECURITIES. ACCORDINGLY I SEE MERIT IN THE CLAIM OF THE APPELLANT THAT IT COULD NOT BE SAID TO BE TRADING I N UNITS WHICH WERE ANYWAY SUBJECT TO A LOCK-IN PERIOD OF TH REE YEARS HAD NO MARKET FOR TRADING AND WERE SIMPLY SURRENDERED FOR REDEMPTION AT THE END OF THE MATURIT Y PERIOD. 4.4.1 NO DOUBT THE APPELLANT IS AN INVESTMENT COMPA NY WITH THE MAIN OBJECT OF ACQUIRING AND HOLDING SHARES AS INVESTMENT BUT THE SAME WOULD NOT AUTOMATICALLY MAK E THE ITA NOS. 1752-1753 & 1895-1896/DEL/2009 7 APPELLANT A DEALER IN SHARES/SECURITIES/UNITS. I FI ND THAT EVEN THE SHARES OF NIIT LTD. WERE ACQUIRED BY THE APPELL ANT AS PROMOTER WITHOUT AN INTENTION TO RESELL THE SAME AT PROFIT; THESE SHARES WERE HELD BY THE APPELLANT WITH A VIEW TO EXERCISE CONTROL OVER NIIT LTD. AS A PROMOTER. FURT HER THE INVESTMENT IN THE UNITS OF VARIOUS MUTUAL FUNDS WER E MADE TO SAVE CAPITAL GAINS TAX ON SALE OF SHARES OF NIIT IN AN EARLIER YEAR AND IN SUCH CIRCUMSTANCES I AM OF THE VIEW THAT IT CANNOT BE SAID THAT THE UNITS REDEEMED WERE HELD BY THE APPELLANT AS STOCK-IN-TRADE AT ANY POINT OF TIME. 4.4.2 I HAVE ALSO CAREFULLY GONE THROUGH THE VAR IOUS JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE AO. THE DECISION IN THE CASE OF SUTLEJ COTTON MILLS SUPPLY L TD (SUPRA) WAS RENDERED BY THE APEX COURT BASED ON THE FACTS T HAT THE DOMINANT INTENTION OF THE ASSESSEE ITSELF WAS OF ADV ENTURE IN TRADE FOR MAKING PROFIT AND NOT TO MAKE AN INVEST MENT; ON THESE FACTS THE COURT LAID DOWN THE PRINCIPLE T HAT THE DOMINANT NATURE OF TRANSACTION AND THE DOMINANT INTEN TION FOR HOLDING AN ASSET IS THE DECISIVE FACTOR. SIMILAR IS THE VIEW TAKEN BY THE APEX COURT IN THE CASE OF RAJA BAH ADUR VISHESHWAR SINGH (SUPRA) WHERE ON FACTS IT WAS FOU ND THAT THE ASSESSEE WAS A DEALER IN SHARES WHICH WERE HELD AS STOCK-INTRADE. APPLYING THE RATIO OF THESE DECISIO NS TO THE FACTS OF THE APPELLANT'S CASE IT CANNOT BE SAID TH AT THE DOMINANT INTENTION WAS TO MAKE PROFIT OR TO HOLD THE MUTUAL FUND UNITS AS STOCK-IN- TRADE; IN FACT AS HELD ABO VE THE APPELLANT DID NOT .TRADE IN THESE UNITS AND MERELY SURRENDERED THE SAME TO THE MUTUAL FUND COMPANIES FO R ITA NOS. 1752-1753 & 1895-1896/DEL/2009 8 REDEMPTION ON MATURITY AFTER THE LOCK-IN PERIOD. THE RATIO OF THESE DECISIONS OF THE APEX COURT ACCORDINGLY DOE S NOT SUBSTANTIATE THE VIEW TAKEN BY THE AO. 4.4.3 COMING TO THE RELIANCE PLACED BY THE AO ON T HE DECISION OF THE APEX COURT IN THE CASE OF DALHOUSIE INVESTMENT (SUPRA) I FIND THAT THE SAID DECISION W AS RENDERED ON FACTS THAT THE ASSESSEE HAD GIVEN NO EV IDENCE TO PROVE THAT THE SHARES WERE ACQUIRED TO ATTAIN TH E CONTROLLING INTEREST AND THAT THE OBJECT OF THE SAL E OF SHARES WAS TO TRANSFER THE CONTROLLING INTEREST; ON THE OT HER HAND THE FACTS SHOWED THAT THE PURCHASES OF SHARES WERE MADE WITH THE OBJECT OF SELLING THEM SUBSEQUENTLY AT A PRO FIT. IN THE APPELLANT'S CASE THERE IS AMPLE EVIDENCE INDICA TING THE FACT THAT THE UNITS OF VARIOUS MUTUAL FUNDS WERE AC QUIRED BY THE APPELLANT AS INVESTMENT AND THAT TOO FOR SAVIN G CAPITAL GAINS TAX LIABILITY ARISING ON THE SALE OF SHARES O F NIIT LTD.; THERE WAS NO CONTINUOUS OR REGULAR COURSE OF PURCHA SE AND SALE OF SHARES/UNITS AND THE SAME WERE NOT HELD AS STOCK-IN- TRADE. THERE IS NO INDICATION THAT THE UNITS WERE S OLD AS STOCK-IN-TRADE. IN THIS VIEW OF THE MATTER I AM OF THE VIEW THAT THE RATIO OF THE APEX COURT'S DECISION DOES NO T SUPPORT THE VIEW TAKEN BY THE AO IN THE APPELLANT'S CASE. 4.4.4 COMING FINALLY TO THE RELIANCE PLACED BY THE AO ON THE DECISION OF THE AAR IN THE CASE OF FIDELITY ADVI SORS SERIES (SUPRA) I FIND THAT THE PRINCIPLE REITERATE D BY THE AAR IS THAT WHERE A COMPANY PURCHASES AND SELLS SHARES IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THAT THE ITA NOS. 1752-1753 & 1895-1896/DEL/2009 9 CONTENTS OF THE MEMORANDUM OF ASSOCIATION ARE NOT DECISIVE OF THE NATURE OF TRANSACTION. I FIND THAT THE AAR HAS REITERATED THE SAME PRINCIPLES AS LAID DOWN BY THE A PEX COURT IN THE ABOVE CITED DECISIONS. AS BROUGHT OUT HEREINABOVE THE FACTS OF THE APPELLANT'S CASE DO N OT SUPPORT THE VIEW THAT THE UNITS OF MUTUAL FUNDS WER E HELD AS STOCK-INTRADE OR WERE TRADED WITH THE MOTIVE OF EAR NING PROFIT. 4.4.5 I HAVE ALSO GONE THROUGH THE VARIOUS DECIS IONS RELIED UPON BY THE APPELLANT IN THE CASES OF G. VENKATESHW AMI NAIDU AND. CO. VS. CIT (35 ITR 594) SUTLEJ COTTON MILLS SUPPLY AGENCY LTD. (SUPRA) RAJA BAHADUR KAMAKHYA NA RAIN SINGH VS. CIT (77 ITR 253) AND CENTAL & ASSAM INVEST ORS LTD VS. CIT (59 ITR 547) APART FROM A LARGE NUMBER OF DE CISIONS RENDERED BY THE IT AT. THE PRINCIPLES LAID DOWN IN THESE CASES RENDER SUPPORT TO THE CASE OF THE APPELLANT CONSIDERING THE FACTS ALREADY BROUGHT OUT ABOVE AND AS PER DETAILED SUBMISSIONS OF THE ID. AR DISCUSSED HEREINA BOVE. 4.4.6 ON AN OVERALL CONSIDERATION OF THE FACTS IN THE APPELLANTS CASE AND THE PRINCIPLES LAID DOWN BY VA RIOUS JUDICIAL PRONOUNCEMENTS I AM OF THE CONSIDERED VIEW T HAT IT IS NOT A CASE WHERE THE SHARES/ SECURITIES / UNITS WERE ACQUIRED AS ADVENTURE IN THE NATURE OF TRADE; THE S AME WERE ACQUIRED WITH A VIEW TO HOLD THEM FOR EXERCISIN G MANAGEMENT CONTROL OVER OTHER COMPANIES. THEREFORE THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE APPEL LANT. ITA NOS. 1752-1753 & 1895-1896/DEL/2009 10 4.1 LD. COMMISSIONER OF INCOME TAX (APPEALS) HELD THA T AS THE FACTS AND CIRCUMSTANCES IN THE PRESENT CASE ARE QUITE IDE NTICAL. HE FOUND NO REASON TO DEVIATE FROM THE ABOVE SAID ORDER. HE THEREFORE HELD THAT PROFIT/LOSS ON THE INVESTMENT OF SHARES AND MUT UAL FUNDS IS TAXABLE UNDER THE HEAD CAPITAL GAINS. 5. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. WE FIND THAT TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 427/DEL/2007 FOR A.Y. 2003-04 VIDE ORDER DATED 26.5.2008 HAS CONSIDERED AN ANALOGICAL ISSUE AND HELD AS UNDER:- 5. WE HAVE HEARD BOTH THE PARTIES. THE ISSUE BEFO RE US AS TO WHETHER THE REDEMPTION OF UNITS OR BONDS ACQUIRED UNDER SCHEME OF SECTION 54EA ARE ASSESSABL E AS CAPITAL GAINS OR BUSINESS INCOME. THE INCOME EARNED FROM SUCH INVESTMENTS WILL BE LIABLE TO TAX DEPENDING UPON THE NATURE OF INCOME DERIVED THEREFROM. IF THE INCOME IS ASCERTAINABLE AT THE TI ME OF INVESTMENT IT WILL BE ASSESSABLE AS INCOME FROM BUSINESS OR UNDER THE HEAD OTHER SOURCES DEPENDING UPON THE CONDITIONS WHETHER THE INVESTMENTS WERE HELD AS INVESTMENTS OR AS STOCK IN TRADE. IN A CAS E WHERE THE INCOME EARNED WAS NOT ASCERTAINABLE AT TH E TIME OF INVESTMENT AND WAS DEPENDENT ON MARKET FORCES SUCH INCOME WILL BE ASSESSABLE EITHER AS CAPITAL GAINS OR UNDER THE HEAD BUSINESS DEPENDING ON THE MANNER IN WHICH INVESTMENTS WERE HELD I.E. ITA NOS. 1752-1753 & 1895-1896/DEL/2009 11 INVESTMENT OR STOCK IN TRADE. WE FIND THAT ITAT DELHI BENCH D IN THE CASE OF ACIT VS. M/S PACE INDUSTRIES PVT. LTD. IN ORDER DATED 23 RD JANUARY 2007 IN ITA NO. 1106 (DEL) OF 2004 HAS DECIDED THE IDENTICAL ISSUE I N FAVOUR OF THE ASSESSEE WHILE HOLDING THAT THE PR OFIT DERIVED FROM TRANSFER OF MUTUAL FUND UNITS AS ASSESSABLE UNDER THE HEAD CAPITAL GAINS OBSERVED AS UNDER:- 11. NOW COMING TO THE ISSUE OF PROFITS FROM TRANSFER OF UNITS OF MUTUAL FUND INVOLVED IN GROUND NO. 3 OF THE APPEAL OF THE REVENUE WE FIND THAT AGAIN THE ASSESSING OFFICER HAS ASSESSED THE SAME UNDER THE HEAD BUSINESS INCOME AGAINST THE ASSESSEES CLAIM FOR ASSESSING THE SAME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS. WE AGAIN FIND THAT IN HIS ORDER BECAUSE THE FACTS AND ISSUE WAS IDENTICAL REGARDING THE TREATMENT TO BE METED OUT TO HE SALE OF SHARES HELD BY THE ASSESSEE SO THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN HIS ORDER AGAIN HELD THESE PROFITS DERIVED BY THE ASSESSEE FROM THE TRANSFER OF MUTUAL FUND AS ASSESSABLE UNDER THE HEAD CAPITAL GAINS LOSSES BY MAKING LOSSES OBSERVATION OF PAGE . IN PARA 3.3 OF ITS ORDER AS UNDER:- I HAVE PERUSED THE INVESTMENTS MADE IN BY THE APPELLANT IN THE MUTUAL FUNDS AND ALSO ITA NOS. 1752-1753 & 1895-1896/DEL/2009 12 THE OBSERVATION OF THE ASSESSING OFFICER AND THE ARGUMENTS OF THE APPELLANT RELATING TO GROUND NO. AND 5 DISCUSSED ABOVE. THE APPELLANT HAS NOT DEALT .. FREQUENT SALE OR PURCHASE OF MUTUAL FUNDS EXCERPT THAT THE APPELLANT HAS RESHUFFLED HIS PORTFOLIO ON THE EXPERT ADVICE. ONCE THE APPELLANT IS NOT A DEALER TRANSFER IN THE MUTUAL FUNDS IT CANNOT BE HELD THAT THE PROFITS DERIVED FROM THE REALIZATION OF PROFITS FROM MUTUAL IS A TRADING RECEIPT. ALL THE MUTUAL FUNDS PURCHASES ARE SHOWN BY THE APPELLANT IN ITS BALANCE SHEET AS INVESTMENTS AND NOT AS STOCK- IN-TRADE. 12. SINCE ARGUMENTS ADVANCED BY BOTH THE PARTIES ON THE ISSUE INVOLVED IN THIS GROUND OF APPEAL ARE ALSO IDENTICAL TO THE ARGUMENTS ADVANCED ON THE ISSUE OF SALE SHARES HENCE IN OUR OPINION ON THE BASIS OF THE FINDING RECORDED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) IN HIS ORDER HE HAS RIGHTLY HELD THAT THE PROFITS DERIVED FROM THE TRANSFER TO MUTUAL FUND WAS ALSO ASSESSABLE UNDER THE HEAD CAPITAL GAINS/ LOSSES BY FOLLOWING HIS REASONING RECORDED IN RESPECT OF HIS FINDINGS ON THE PROFITS DERIVED FORM THE SALE OF SHARES. HENCE THE WELL REASONED AND WELL DISCUSSED ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) DOES NOT CALL FOR ANY INTERFERENCE FROM OUR SIDE AND THE ITA NOS. 1752-1753 & 1895-1896/DEL/2009 13 SAME IS UPHELD AND THE GROUND NO. 3 OF THE APPEAL OF THE REVENUE IS REJECTED. 6. THE FACTS OF THE CASE BEFORE US SEEMS TO BE IDENT ICAL TO THE FACTS OF THE CASE OF M/S PACE INDUSTRIES PVT . LTD. THE UNITS WERE ACQUIRED UNDER SCHEME OF SECTION 54EA TO SAVE TAX ON CAPITAL GAINS AND WERE LOCKED IN FOR A PERIOD OF THREE YEARS. THUS THE UNITS WERE HELD AS INVESTMENTS AND THEREFORE THE INCOME ON SALE OF SUCH UNITS WILL NOT BE ASSESSABLE UNDER THE HEAD BUSINESS INCOME. TO THIS EXTENT WE DO NOT FIND AN Y REASON TO DIFFER WITH THE VIEW TAKEN ON IDENTICAL F ACTS BY ITAT DELHI BENCH D IN ORDER DATED 23 RD JANUARY 2007. HOWEVER FROM THE ASSESSMENT ORDER WE FIND THAT ASSESSING OFFICER HAS NOT EXAMINED THE NATURE OF THE UNITS WHETHER THEY CARRY FIXED RATE OF INTEREST INCOME OR THE INCOME DERIVED WAS DEPENDENT ON MARKET FORCES. IF THE INCOME AT THE TIME OF INVESTMENT MADE IN UNITS WAS DETERMINABLE THE SAME WILL BE ASSESSABLE AS INCOME UNDER THE HEAD OTHER SOURCES. ON THE OTHER HAND IF THE GAIN ARISEN WAS DEPENDENT ON MARKET FORCES THE SAME WILL BE ASSESSABLE UND ER THE HEAD CAPITAL GAINS. WE THEREFORE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXA MINE THE MATTER IN LIGHT OF ABOVE OBSERVATIONS AND DE CIDE THE ISSUE ACCORDINGLY. THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NOS. 1752-1753 & 1895-1896/DEL/2009 14 7. SINCE THE FACTS OF THE PRESENT CASE ARE IDENTICA L FOLLOWING THE ABOVE PRECEDENT WE SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO EXAMINE THE MATTER IN LIGHT OF THE ABOVE SAID OBSERVATIONS AND DECIDE THE ISSUE ACCORDINGLY. 8. IN THE RESULT BOTH THE APPEALS FILED BY THE REVENUE STAND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ASSESSEES APPEALS ASSESSEES APPEALS ASSESSEES APPEALS ASSESSEES APPEALS 9. THE ISSUE RAISED IN THE ASSESSEE APPEALS IS TH AT LD. COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ENHANC ING THE INCOME OF THE APPELLANT BY DIRECTING THE DISALLOWANCE OF ` 2 06 264/- AGAINST ` 77 162/- (FOR A.Y. 2004-05) AND ` 2 26 445/- AGAINS T ` 1 58 094/- (FOR A.Y. 2005-06) DISALLOWED U/S 14A OF THE IT ACT. 10. ON THIS ISSUE THE LD. COMMISSIONER OF INCOME TAX (APPEALS) NOTED THAT ASSESSEE HAS RECEIVED EXEMPT INCOME DURI NG THE YEAR FOR WHICH AN AMOUNT OF ` 77162/- FOR A.Y. 2004-05 AND ` 1 59 094/- FOR A.Y. 2005-06 WAS ITSELF DISALLOWED U/S. 14A OF THE IT ACT. THE ASSESSING OFFICER HAD ALSO TAKEN THE SAME AMOUNT OF DISALLOWANCE FOR COMPUTING THE INCOME. 10.1 IN THIS CASE LD. COMMISSIONER OF INCOME TAX (APP EALS) REFERRED THE DECISION OF THE SPECIAL BENCH MUMBAI ITAT IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. AND HELD THAT CORRECT AMO UNT OF DISALLOWANCE U/S 14A IS REQUIRED TO BE WORKED OUT A S PER RULE 8D. ACCORDINGLY LD. COMMISSIONER OF INCOME TAX (APPEALS) PROCEEDED TO ITA NOS. 1752-1753 & 1895-1896/DEL/2009 15 DIRECT THE ASSESSING OFFICER TO COMPUTE THE INCO ME OF THE ASSESSEE BY DISALLOWING A SUM OF ` ` 2 06 264/- (FOR A.Y. 20 04-05) AND ` 2 26 445/- (FOR A.Y. 2005-06) U/S. 14A OF THE IT AC T BY APPLYING THE METHOD PRESCRIBED UNDER RULE 8D OF THE IT RULES. 11. AGAINST THE ABOVE ORDER THE ASSESSEE IS IN APPE AL BEFORE US. 12. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. 13. WE FIND THAT ADMITTEDLY RULE 8D IS NOT APPLICABLE IN THE CURRENT ASSESSMENT YEAR. WE FIND THAT HONBLE MUMBAI HIGH COURT IN THE CASE OF GODREJ BOYCE MFG. CO. LTD. VS. DCIT IN ITA N O. 626 OF 2010 234 CTR 1 328 ITR 81 HAS OVERRULED THE ITAT DECIS ION OF DAGA CAPITAL MANAGEMENT (SUPRA) AND HELD THAT RULE 8D HAS BEEN N OTIFIED ON 24.3.2008 AND WILL BE APPLICABLE ONLY FROM ASSESSMEN T YEAR 2008-09. 14. RESPECTFULLY FOLLOWING THE ABOVE PRECEDENT WE HOLD THAT RULE 8D IS NOT APPLICABLE IN THE PRESENT CASE. HOWEVER AS HELD BY THE HONBLE MUMBAI HIGH COURT THE EXPENDITURE WHICH WAS INCURRED IN RELATION TO EARNING THE EXEMPT INCOME HAS TO BE APP ORTIONED AND DISALLOWED U/S 14A. HENCE WE REMIT THIS ISSUE TO THE FILES OF THE ASSESSING OFFICER TO CONSIDER THE ISSUE AFRESH IN LIGHT OF THE ABOVE SAID HONBLE MUMBAI HIGH COURT DECISION. ITA NOS. 1752-1753 & 1895-1896/DEL/2009 16 15. IN THE RESULT BOTH THE APPEALS FILED BY THE AS SESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT ALL THE APPEALS FILED BY THE REV ENUE AND ASSESSEE STAND PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22/7/2011. SD/ SD/ SD/ SD/- -- - SD/ SD/ SD/ SD/- -- - [ [[ [A.D. JAIN] A.D. JAIN] A.D. JAIN] A.D. JAIN] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 22/7/2011 SRB COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR ITAT TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT DELHI BENCHES