DCIT, New Delhi V. M/s Sak Industries Ltd., New Delhi

ITA 2807/DEL/2011

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1525 (ITAT-DELHI)
• Duration Of Justice: 8 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 22-06-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 31-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SARAS KUMAR
• Assessee Lawyers: ROHIT JAIN; SHAILE Y GUPTA
• Keywords: Capital asset; Business income; Rule 8D; Set aside; Capital Gains
• Section: 14A

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G, NEW DELHI , !'# $% . & , ( ) ! BEFORE MS. SUSHMA CHOWLA, V.P & DR. B.R.R. KUMAR, A .M. * / ITA NO. 2807/DEL/2011 / ASSESSMENT YEAR: 2006-07 THE DCIT, CIRCLE-7(1), ROOM NO.312, 3 RD FLOOR, C.R.BUILDING, I.P.ESTATE, NEW DELHI. ............. /APPELLANT VS M/S. SAK INDUSTRIES LTD., CHANDIWALA ESTATE, MAA ANAND MAI MARG, KALKAJI, NEW DELHI. PAN-AAGCS3326Q . / RESPONDENT * / ITA NO. 2861/DEL/2011 / ASSESSMENT YEAR: 2006-07 M/S. SAK INDUSTRIES LTD., B-1, GULMOHAR PARK, NEW DELHI-110049. PAN-AAGCS3326Q . ............ /APPELLANT VS THE ACIT, CIRCLE-7(1), NEW DELHI. . / RESPONDENT / APPELLANT BY: SH. SARAS KUMAR, SR. DR / RESPONDENT BY: SH. ROHIT JAIN, ADV. & MS. SHAILE Y GUPTA, CA / DATE OF HEARING : 06.01.2020 / DATE OF PRONOUNCEMENT: 12.03.2020 / ORDER PER SUSHMA CHOWLA, VP THE PRESENT CROSS APPEAL FILED BY REVENUE AND THE A SSESSEE IS AGAINST ORDER OF CIT(A)-X, NEW DELHI DATED 14.02.2011 RELAT ING TO ASSESSMENT YEAR 2006-07 AGAINST THE ORDER PASSED UNDER SECTION 143( 3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 2. THE REVENUE AND THE ASSESSEE HAVE RAISED FOLLOWING GROUNDS IN THIS APPEAL:- * / ITA NO. 2807/DEL/2011 / ASSESSMENT YEAR: 2006-07 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LD.CIT(A) ERRED IN LAW AND ON FACTS OF THE CASE IN TREATING THE INCOME OF RS.22261306/- AS SHORT TERM CAPITAL GAINS AND NOT AS BUSINESS INCOME AS TREATED BY THE ASSESSING OFFICER. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D.CIT(A) ERRED IN LAW AND ON FACTS OF THE CASE IN DIRECTING TO TREAT ENHANCED BY HIM OF RS.2002285/- U/S 94(7) AND RS.965493/- (STT PAID) A S SHORT TERM CAPITAL GAINS INSTEAD OF BUSINESS INCOME. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D.CIT(A) ERRED IN LAW AND ON MERIT OF THE CASE IN DELETING THE DISALL OWANCE OF RS1626200/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF DIVERSI ON OF BORROWED FUNDS. 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D.CIT(A) ERRED IN LAW AND MERIT OF THE CASE IN GIVING A RELIEF OF RS. 3919162/- OUT OF TOTAL ADDITION OF RS.5049639/- MADE BY THE ASSESSING OFFI CER U/S 14A BY APPLYING RULE 8D. * / ITA NO. 2861/DEL/2011 / ASSESSMENT YEAR: 2006-07 1. THAT THE ORDER OF LEARNED CIT(A) PARTLY SUSTAIN ING THE ORDER OF THE LEARNED ASSESSING OFFICER IS BAD IN LAW AND ON FACT S AND IS LIABLE TO BE SET ASIDE. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE ACTION OF LD.AO IN CONSIDERING SHORT TERM CAPITAL G AIN OF RS.44,37,140/- AS BUSINESS INCOME. 3. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN MAKING AN ADDITION TO THE SHORT TERM CAPITAL GAIN ON MUTUAL F UNDS UNITS BY RS.29,67,778/-. 4. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DISALLOWING RS.11,30,477/- U/S 14A OF THE INCOME TAX ACT, 1961 OUT OF DIVIDEND INCOME IN ADDITION TO RS.14,48,604/- DISALLOWED BY THE APPELLANT IN COMPUTATION OF INCOME. 3. GROUND OF APPEAL NO.1 RAISED BY THE ASSESSEE IS GENERAL IN NATURE HENCE, THE SAME IS DISMISSED. 4. GROUND OF APPEAL NOS. 3 & 5 RAISED BY THE ASSESS EE ARE NOT PRESSED AND THE SAME ARE DISMISSED. 5. GROUND OF APPEAL NO.2 RAISED BY THE ASSESSEE WH ICH IS AGAINST THE ACTION OF AUTHORITIES BELOW IN HOLDING THE SHORT T ERM CAPITAL GAIN OF RS.44,37,140/- AS BUSINESS INCOME OF THE ASSESSEE. 6. BRIEFLY IN THE FACTS OF THE CASE THE ASSESSEE WA S INCORPORATED IN 1962 AND AS PER ITS MEMORANDUM OF ASSOCIATION, HAD AUTHORIZE D ITS DIRECTORS TO INVEST SURPLUS FUNDS AND SECURITIES. THE INVESTMENT MADE IN SHARES WERE SHOWN AS CAPITAL ASSET AND WERE DISCLOSED AS BALANCE SHEET A S INVESTMENT IN CAPITAL ASSET. THE ASSESSEE COMPANY HAD NOT BORROWED FUNDS FOR THE AFORESAID INVESTMENT. THE ASSESSEE AT THE END OF THE YEAR HA D VALUED THE CAPITAL ASSET AT COST AS AGAINST THE TRADING ASSET WHICH WERE TO BE VALUED AT COST OR MARKET PRICE, WHICHEVER IS LESS. THE ASSESSEE UPTO ASSESS MENT YEAR 2004-05 HAD CONSISTENTLY FOLLOWED THE SAID PRINCIPLE AND THE SU RPLUS WAS DECLARED BY THE ASSESSEE AS CAPITAL GAIN, WHICH WERE ACCEPTED BY TH E REVENUE AUTHORITIES. IN ASSESSMENT YEAR 2005-06, THE AO TREATED THE SAID I NCOME AS BUSINESS INCOME AS AGAINST CAPITAL GAINS INCOME SHOWN BY THE ASSESS EE. FURTHER, THE CIT(A) HELD THE ASSESSEE TO BE AN INVESTOR AND NOT DEALER IN SHARES. THE ASSESSEE WAS ALSO INVESTING IN MUTUAL FUNDS. HOWEVER, IN ASSES SMENT YEAR 2006-07, I.E YEAR UNDER APPEAL THE SURPLUS SHOWN BY THE ASSESSEE WAS HELD TO BE BUSINESS INCOME AND NOT CAPITAL GAINS. THE ASSESSING OFFICE R AND THE CIT(A) OBSERVED THAT THE SHORT TERM INVESTMENT MADE BY THE ASSESSEE ON WHICH NO DIVIDEND WAS CLEARLY BUSINESS TRANSACTION UNDERTAKEN BY THE ASSE SSEE WITH THE INTENTION OF EARN PROFITS FROM THEIR SALE. ACCORDINGLY, SHORT T ERM CAPITAL GAIN SHOWN AT EQUITY FUNDS OF RS.2,66,95,852/- WAS HELD TO BE TAX ABLE AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE @ 30%. THE LONG TERM CAP ITAL GAIN SHOWN ON SALE OF EQUITY FUNDS WAS ACCEPTED AS SUCH AND WAS NOT TREAT ED AS BUSINESS INCOME. SIMILARLY, BOTH THE LONG TERM CAPITAL GAIN AND SHOR T TERM CAPITAL GAIN SHOWN BY THE ASSESSEE ON DEBT FUNDS WAS ACCEPTED AS SUCH BY THE AO. 7. THE CIT(A) AFTER ELABORATING, GOING THROUGH THE PORTFOLIOS AND THE METHOD OF OPERATION OF THE ASSESSEE, HELD THAT THE ASSESSEE WAS HOLDING TWO TYPES OF SHARES WHICH WAS IN THE NATURE OF STOCK I N TRADE AND UNITS OF MUTUAL FUNDS WHICH WERE IN THE NATURE OF INVESTMENTS. T HE CIT(A) DID NOT AGREE WITH THE CONTENTION OF THE ASSESSEE THAT BOTH THESE PORT FOLIOS WERE INVESTMENTS. VIDE PARA 2.38 AT PAGE 36 OF THE APPELLATE ORDER, T HE CIT(A) HELD THAT THE GAINS ARISING ON TRANSACTION OF MUTUAL FUNDS (EQUITY ORIE NTED) OF RS.2,32,26,799/- TO THE EXTENT OF (RS.2,22,61,306/- + RS.9,65,493/-) WA S INCOME FROM CAPITAL GAINS. THE AO WAS FURTHER DIRECTED TO ADD STT PA ID OF RS.9,65,493/- AND DISALLOW LOSS OF RS.20,02,285/- U/S 94(7) OF THE AC T. THE CIT(A) CONCLUDED THAT THE TREATMENT OF SHORT TERM CAPITAL GAINS ON SALE O F SHARES OF RS.44,37,140/- WAS TO BE TREATED AS BUSINESS INCOME IN THE HANDS O F THE ASSESSEE. THE CONCLUSION IS MENTIONED VIDE PARA 2.46 AT PAGES 40 & 41 OF THE APPELLATE ORDER. 8. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF T HE CIT(A) IN CONSIDERING THE SHORT TERM CAPITAL GAIN OF RS.44,37,140/- AS BU SINESS INCOME BEFORE US. 9. THE CASE OF THE ASSESSEE BEFORE US IS THAT THE I NVESTMENT HAD BEEN MADE BY THE ASSESSEE COMPANY IN ITS SUBSIDIARIES COMPANI ES. HOWEVER, OUT OF SURPLUS, IT WAS MAKING INVESTMENT IN MUTUAL FUNDS AND SHARES FOR WHICH, NO BORROWED FUNDS WERE UTILIZED AND THE INVESTMENT TIM E AND AGAIN HAD BEEN SHOWN AS CAPITAL ASSETS. OUR ATTENTION WAS DRAWN T O THE DECLARATION MADE IN THE BALANCE SHEET IN THIS REGARD AND IT WAS POINTED OUT THAT SAME METHOD HAS BEEN FOLLOWED FROM YEAR TO YEAR AND THE INCOME SHOW N BY THE ASSESSEE SHOULD BE ASSESSED UNDER THE HEAD CAPITAL GAINS. 10. THE LD.DR FOR THE REVENUE PLACED RELIANCE ON T HE ORDERS OF THE AUTHORITIES BELOW. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES VIDE GROUND NO.2 IS AGAINST THE TREATM ENT OF CAPITAL GAIN SHOWN BY THE ASSESSEE ON SALE OF SHARES ON SHORT TERM BAS IS. THE CAPITAL GAIN EARNED ON SHARES WHICH WERE HELD FOR MORE THAN 12 MONTHS I .E. LONG TERM ASSETS WAS HELD TO BE INCOME FROM CAPITAL GAINS. HOWEVER, THE GAIN ON SHORT TERM BASIS WAS HELD TO BE BUSINESS INCOME BY THE AUTHORITIES B ELOW. THE ASSESSEE IS IN EXISTENCE IN 1962 AND AFTER MAKING INVESTMENT IN IT S SUBSIDIARIES COMPANIES, IT HAS BEEN MAKING THE INVESTMENT IN MUTUAL FUNDS AND SHARES OUT OF THE SURPLUS INCOME. THE ASSESSING OFFICER HAD TREATED BOTH THE CAPITAL GAINS ARISING ON SALE OF INVESTMENT ON MUTUAL FUNDS AND S HARES AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE. HOWEVER, THE CIT(A) HELD THAT THE CAPITAL GAIN ARISING ON MUTUAL FUNDS WAS TO BE ASSESSED @ 10% IN THE HANDS OF THE ASSESSEE AND CAPITAL GAIN ARISING ON SALE OF SHARES ON SHORT TERM BASIS WAS TO BE ASSESSED AS BUSINESS INCOME. 12. THE ASSESSEE IS IN APPEAL AGAINST THE TREATMENT OF SHORT TERM GAINS AND THE REVENUE IS IN APPEAL VIDE GROUND NO.1 AGAINST T HE ASSESSMENT OF GAIN ARISING ON SALE OF MUTUAL FUNDS @ 10%. 13. ON PERUSAL OF THE ORDER OF THE CIT(A), WHO HAS ELABORATELY CONSIDERED THE INVESTMENT MADE BY THE ASSESSEE WITH REGARD TO THE MUTUAL FUNDS, WE FIND NO MERIT IN GROUND NO.1 RAISED BY THE REVENUE WHERE TH E INVESTMENT HAS TIME AND AGAIN SHOWN AS CAPITAL ASSETS IN THE HANDS OF T HE ASSESSEE. IT MAY ALSO BE NOTED THAT ONE OF THE OBJECTS OF THE ASSESSEE COMPA NY WAS TO INVEST ITS SURPLUS IN SHARES AND MUTUAL FUNDS. THE REVENUE HAS FAILED TO CONTROVERT THE FINDINGS OF CIT(A) HENCE, GROUND NO.1 RAISED BY REVENUE IS D ISMISSED. 14. NOW COMING TO THE SECOND ASPECT OF THE ISSUE I. E. SHARES HELD BY THE ASSESSEE ON SHORT TERM BASIS. T HE ASSESSEE HAD INVESTED IN THE SHARES, WHERE SOME SHARES WERE HELD ON LONG TER M BASIS AND SOME ON SHORT TERM BASIS. THE SAID INVESTMENT HAS BEEN MADE OVE R THE PERIOD OF YEARS AND THE INCOME DECLARED BY THE ASSESSEE HAS BEEN ACCEPT ED FROM YEAR TO YEAR. IN SUCH A SCENARIO WHERE THERE IS NO CHANGE IN FACTS, THE POSITION ACCEPTED IN THE HANDS OF THE ASSESSEE SHOULD NOT BE DISTURBED MEREL Y BECAUSE THE SHARES WERE HELD FOR A SHORT TERM PERIOD I.E EQUITY FUNDS, CANN OT BE SEGREGATED TO BE BUSINESS INCOME IN THE HANDS OF THE ASSESSEE. THE SHARES ON ALL DEBT FUNDS BOTH ON LONG TERM AND SHORT TERM BASIS WERE ASSESSE D AS CAPITAL GAINS IN THE HANDS OF THE ASSESSEE. ACCORDINGLY, WE FIND NO MER IT IN HOLDING THAT THE INCOME FROM SALE OF SHARES IN SHORT TERM BASIS IS T O BE ASSESSED AS BUSINESS INCOME IN THE HANDS OF THE ASSESSEE. WE REVERSE TH E ORDERS OF CIT(A) IN THIS REGARD AND DIRECT THE ASSESSING OFFICER TO ASSESS T HE SAME AS INCOME FROM CAPITAL GAINS. THUS, GROUND NO.2 RAISED BY THE ASS ESSEE IS ALLOWED AND GROUND NO.1 RAISED BY THE REVENUE IS DISMISSED. 15. THE ISSUE RAISED IN GROUND NO.4 BY THE ASSESSEE IS AGAINST THE DISALLOWANCE MADE IN THE HANDS OF THE ASSESSEE U/S 14A OF THE ACT. 16. IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT C ASE, THE TOTAL DIVIDEND EARNED BY THE ASSESSEE WAS RS.4.22 CRORES, OUT OF W HICH THE DISALLOWANCE U/S 14A OF THE ACT WAS MADE AT RS.11,30,477/-, WHICH WE RE IN ADDITION TO RS.14,48,604/- DISALLOWED BY THE ASSESSEE IN ITS CO MPUTATION OF INCOME. 17. THE LD.AR FOR THE ASSESSEE POINTED OUT THAT THE PROVISIONS OF RULE 8D ARE NOT APPLICABLE FOR THE YEAR UNDER CONSIDERATION . THE AO HAD MADE THE DISALLOWANCE UNDER RULE 8D WHICH WAS RESTRICTED BY THE CIT(A) TO RS.11,30,477/- ON THE GROUND THAT RULE 8D WAS NOT A PPLICABLE. HE FAIRLY POINTED OUT THAT THE INVESTMENT WAS THROUGH PMS AND THE SAID PMS CHARGES WERE SUO MOTTO DISALLOWED BY THE ASSESSEE. 18. IN THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT SUM OF RS.5 LACS TO BE DISALLOWED U/S 14A OF THE AC T. THUS, GROUND NO.4 RAISED BY THE ASSESSEE IS PARTLY ALLOWED. 19. NEXT ISSUE IN GROUND NO.2 RAISED BY THE REVENUE IS AGAINST TREATMENT OF INCOME OF RS.20,02,285/- U/S 94(7) OF THE ACT AND RS.9,65,493/- (STT PAID) AS SHORT TERM CAPITAL GAINS INSTEAD OF BUSINESS INCOME . WHILE DECIDING GROUND NO.2 OF THE ASSESSEE, WE HAVE HELD THAT EVEN GAIN O N SHORT TERM BASIS IS TO BE ASSESSED AS CAPITAL GAIN AND FOLLOWING THE SAME PAR ITY OF REASONING, WE FIND NO MERIT IN GROUND NO.2 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 20. NOW, COMING TO THE GROUND NO.3 RAISED BY THE RE VENUE AGAINST THE DISALLOWANCE MADE U/S 36(1)(III) OF THE ACT. THE A O WAS MADE DISALLOWANCE OF RS.16,26,200/- ON ACCOUNT OF DIVERSION OF BORROWED FUNDS. 21. THE CIT(A) DELETED THE SAID DISALLOWANCE ON THE GROUND THAT THE ASSESSEE HAD SURPLUS OWN FUNDS AND HENCE, THERE WAS NO MERIT IN THE SAID DISALLOWANCE VIDE PARA 3.3 OF THE APPELLATE ORDER. THE REVENUE HAS FAILED TO CONTROVERT THE FINDINGS OF THE CIT(A) HENCE, THERE IS NO MERIT IN GROUND NO.3 RAISED BY THE REVENUE WHICH IS DISMISSED. 22. NEXT ISSUE VIDE GROUND NO.4 RAISED BY THE REVEN UE IS LINKED TO GROUND NO.4 RAISED BY THE ASSESSEE AND WE HAVE ALREADY HEL D THAT THERE IS NO MERIT IN THE ORDER OF THE AO IN APPLYING THE PROVISION OF RU LE 8D WHICH ARE TO BE APPLIED FROM ASSESSMENT YEAR 2008-09. THE CIT(A) IN SUCH CIRCUMSTANCES, HELD THAT THE WORKING OF DISALLOWANCE UNDER RULE 6D OF INCOME TAX RULES BY ASSESSING OFFICER IS INCORRECT. ACCORDINGLY, WE FIND NO MERI T IN THE GROUND NO.4 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 23. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH MARCH, 2020. SD/- SD/- SD/- (DR. B.R.R. KUMAR) (SUSHMA CHOWLA) /ACCOUNTANT MEMBER /VICE PRESIDENT / # DATED : 12 TH MARCH, 2020 * AMIT KUMAR * +,-./0121/3 COPY OF THE ORDER IS FORWARDED TO : 1. 45 / THE APPELLANT 2. -645 / THE RESPONDENT 3. 7/ 8 9 / THE CIT(A) 4. : 7/ / THE PR. CIT 5. 6. ;$<=3 GUARD FILE. + / BY ORDER , 61/-./ // TRUE COPY // ASSISTANT REGISTRAR, ITAT, DELHI