DEPUTY COMMISSIONER OF INCOME TAX (IT)-3(1)(1), MUMBAI V. M/S J.P MORGAN FUND , MUMBAI

ITA 2862/MUM/2022

AI Insights

The case involves M/s. J.P. Morgan Fund, a non-resident entity and Foreign Institutional Investor, which appealed against the order of the Assistant Commissioner of Income Tax regarding the assessment year 2016-17. The primary issue was the treatment of debentures issued by NTPC Ltd in lieu of dividends, which the assessee claimed as the cost of acquisition while computing capital gains. The Revenue contested this, arguing that the debentures were 'bonus' debentures and thus should have a 'Nil' cost as per Section 55(2)(aa)(iiia) of the Income Tax Act. The Tribunal, referencing a similar case and judicial precedents, upheld the CIT(A)'s decision in favor of the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 302480 (ITAT-MUMBAI)
• Duration Of Justice: 4 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 27-02-2023
• Assessment Year: 2016-2017
• Appeal Filed On: 10-11-2022
• Other Referred Cases: J.P. Morgan Funds vs. DCIT for A.Y.2015-16, Montgomery Emerging Markets Fund, ADIT(International Taxation)-4(1) vs. Legg Mason Asia (Ex Japan) Analyst Fund
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Source of fund; Cost of acquisition; Set aside; Capital Gains
• Section: 2; 143(3); 144C; 48

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘I‘ BENCH MUMBAI BEFORE: SHRI M.BALAGANESH, ACCOUNTANT MEMBER & SHRI SANDEEP SINGH KARHAIL, JUDICIAL MEMBER ITA No.2862/Mum/2022 (Asse ssment Year :2016-17) Dy. Commissioner of Income Tax (IT)-3(1)(1) Room No.1628, 16 th Floor Air India Building Nariman Point Mumbai – 400 021 Vs. M/s. J.P. Morgan Fund C/o. Ernst and Young LLP 14 th Floor, The Ruby 29 Senapati Bapat Marg Dadar (W), Mumbai – 400 028 PAN/GIR No.AABCJ4972E (Appellant) .. (Respondent) Assessee by Shri Anish Tacker & Shri Hemen Chandaria Revenue by Shri Soumendu Kumar Dash Date of Hearing 28/02/2023 Date of Pronouncement 21/03/2023 आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in ITA No. 2862/Mum/2022 for A.Y.2016-17 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-57, Mumbai in appeal dated 26/08/2022 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 11/02/2019 by the ld. Asst. Commissioner of Income Tax-3(1)(1), Mumbai (hereinafter referred to as ld. AO). ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 2 2. The Revenue has raised the following grounds of appeal:- “Whether considering the facts and circumstances of the case. Ld. CITIA) is correct in holding the dividend that was never directly received by the assessee as cost of acquisition of the debentures issued by M/s NTPC Whether considering the facts and circumstances of the case, L. CITIA) is correct in holding that debentures issued by NTPC will not be covered by the provision of section SS2Naan) of the IT Act 1961 even though the assessee was issued these debentures on account of it being an existing shareholder in the company and wherein the assessee incurred no cost in acquiring the debentures. Whether considering the facts and circumstances of the case, the Ld. CITA) is correct in holding that the set-off of Short-Term Capital Losses can be carried out against income/gain not arrived from similar computation and which are taxable at different rates of taxes. The Appellant prays that the order of the Ld.CMA) on the above ground(s) be set aside and that of the Assessing Officer be restored. The Appellant craves leave to amend or alter any ground or add a new ground which may be necessary. 3. We have heard rival submissions and perused the materials available on record. The assessee is a non-resident entity registered with Securities and Exchange Board of India (SEBI) as a Foreign Institutional Investor (FII) for carrying out investment activity in Indian capital markets. The return of income for the A.Y.2016-17 was filed by the assessee on 26/09/2016 declaring total income of Rs.36,66,26,730/-. During the year under consideration, the assessee disclosed its income as short term capital gains and income from other sources in the computation of income. The ld. AO observed that the assessee had submitted the copy of computation of total income with relevant annexures, NSDL transaction statement, bank statement and custodian statement for securities transacted during the year, among others. The income disclosed by the assessee in the sum of Rs.36,66,26,731 represent interest income from ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 3 companies u/s.194LD of the Act chargeable to tax @5%. We find that assessee was holding investment in shares in NTPC Ltd for which it was entitled for dividend. In lieu of dividend, debentures were issued by NTPC Ltd to the assessee. Hence, the dividend receivable from NTPC Ltd by the assessee was converted into investment in debentures by the assessee. These debentures held by the assessee were sold during the year under consideration. The assessee took the dividend receivable from NTPC originally which was converted into debentures as cost of acquisition of debentures while computing capital gains on sale of debentures. This treatment of claiming deduction for cost was denied by the ld. AO on the ground that assessee was issued only bonus debentures by NTPC for which there is no cost attributed and hence in terms of Section 55(2)(aa)(iiia) of the Act, the cost has to be taken as „Nil‟. For the sake of convenience, the provisions of Section 55(2)(aa)(iiia) of the Act are reproduced hereunder:- 55(2) For the purposes of sections 48 and 49, "cost of acquisition",— (a).................................................................................................. (aa) in a case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee— (A).................................................................................................. (B).................................................................................................. (i) ............................................................................................. (ii) ............................................................................................. (iii) ............................................................................................. (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee ;” 3.1. We find during the financial year ended 31/03/2015, a total of 8245464400 debentures were issued by NTPC Ltd to the shareholders for the company under the scheme of arrangement approved by the Ministry of Corporate Affairs and approved by the shareholders on 10/02/2015, out of which 19491492 debentures were allotted to the assessee. On ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 4 01/04/2015, the assessee sold 19483893 debentures for Rs.24,76,68,038.34. The assessee pleaded that given that the amount of dividend which was subjected to Dividend Distribution Tax (DDT) was re- invested towards cost of debentures and hence, the same represent the cost of acquisition of debentures for the assessee. The computation of capital gains made by the assessee in this regard are as under:- (i) Sale proceeds from sale of debentures of NTPC - Rs.24,76,68,038.34 (ii) Less cost of acquisition (being amount of dividend Received from NTPC subjected to DDT -Rs.24,35,48,662.50 (iii) Capital Gains -Rs. 41,19,375.84 3.2. The assessee pleaded that where the dividend amount is not deducted as cost of acquisition, the same will lead to taxation of the same income i.e. dividend twice – that is to say , once as dividend and again as capital gains. 3.3. We find that the same issue was subject matter of adjudication by this Tribunal in the case of J.P. Morgan Funds vs. DCIT for A.Y.2015-16 which is reported in 196 ITD 114 dated 24/06/2022, the operative portion of the said judgment is reproduced below:- “8. Quite clearly, an amount of Rs. 13,85,580/- was indeed received on behalf of the assessee and this amount has been reinvested in the debentures. The debentures were not 'bonus' debentures and the nomenclature given by the Assessing Officer is thus incorrect. The taxes were duly paid on the deemed dividend in question, and it did constitute income of the assessee, even though received by a merchant banker on behalf of the assessee. The scheme under which the amount is received by the merchant banker, on behalf of the shareholders-including the assessee, and reinvested on behalf of these shareholders, is duly approved ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 5 by the Hon'ble High Court, vide order dated 19th September 2014. The fact of, and bonafides of, the transaction cannot thus be disputed. The amount of Rs. 13,85,580/- so reinvested, out of dividend, was the consideration paid for debentures. In the light of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee that the Assessing Officer erred in declines the claim of the assessee with respect to cost of acquisition of Rs. 13,85,580/- in respect of these debentures. The assessee, therefore, must get the relief accordingly. We order so.” 3.4. We find that the ld. CIT(A) had relied on this decision of this Tribunal by reproducing the operative portion supra. Hence, we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the ground Nos. 1 & 2 raised by the Revenue are dismissed. 4. During the financial year under consideration, investments by the assessee in the Indian capital markets resulted in net short-term capital loss of Rs. 98,24,23,558/-. The detailed break-up of which is tabulated below: Particulars Amount (INR) Short-term capital gains arising from transaction chargeable to Securities Transaction Tax (STT) i.e taxable at the rate of 15% 45 94,68,698 Add. Short-term capital gains arising from transaction not chargeable to STT Le taxable at the rate of 30% 73,36,251 Less Short-term capital loss (after disallowing loss as per section 94(7) of the Income-tax Act 1961 (Act)] (1,44,92,28,507) ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 6 Net Short-term capital loss (98,24,23,558) 4.1. Given the above and in the absence of any specific provisions under the Act in relation to the manner of set-off of loss against the gains earned by the assessee during the financial year under consideration, the assessee has set-off its short-term capital loss first against the short-term capital gains chargeable to tax at the rate of 30%, amounting to Rs.73,36,251/-, and the balance has been then set-off against the short- term capital gains chargeable to tax at the rate of 15%. Further, the balance short-term capital loss after set-off against long- term capital gains chargeable to tax have been carried forward to subsequent A.Y.s. 4.2. However, the ld. AO rejected the said manner of set-off of short-term capital loss adopted by the assessee in the assessment order passed under section 143(3) read with section 144C(3) of the Act and brought to tax short-term capital gains of Rs. 73,36,251/- at the rate of 30%. 4.3. Aggrieved by the said order, the assessee had preferred an appeal before the ld. CIT(A). 4.4. The ld. CIT(A), for the year under consideration, relying on his predecessor's findings in the assessee's own case for the A.Y. 2015-16 and on the decision of Special Bench of Jurisdictional Mumbai Tribunal in the case of Montgomery Emerging Markets Fund [(2006) 100 ITD 217] accepted the manner of set-off of short-term capital loss adopted by the assessee and accordingly passed an order in favour of the assessee for the A.Y. 2016-17. ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 7 4.4. Aggrieved by the said order of Ld. CIT(A), the Revenue had preferred an appeal before the Tribunal. 4.5. The ld. DR before us vehemently argued that Section 70(2) of the Act uses the word “computation”. The tax computation is also part of it and it does not talk only about the computation of income. Per contra, the ld. AR stated that the computation of short term capital gain is similar irrespective of the fact whether it is chargeable to special rate of tax @15% or chargeable to tax normal rate of tax @30%. Hence, there is no difference in manner of computation of short term capital gains irrespective of the variation of percentage of tax. We find that assessee in the instant case has duly complied with the provisions of Section 70(2) of the Act in as much as the computation of short term capital gain is similar and only the rate of tax is different. Infact the provisions of Section 70(2) of the Act uses the expression “similar computation”. This goes directly in favour of the assessee. Hence, the decision of the special Bench of this Tribunal reported in 100 ITD 217 is squarely applicable to the case. In this regard, the relevant portion of the said judgment is reproduced hereunder:- “42. The law is very simple and straight in its declaration. Section 70 deals with set off of loss under the same head of income. In other words, it deals with intra-head set off of loss. The question of intra-head set off pointed out by the Assessing Officer is dealt in by the provisions of law contained in section 71. Therefore, the distinction drawn by the assessing authority between inter-head and intra-head set off in the context of section 70 does not arise at all. In the amended provisions of law contained in section 70, the option is given to an assessee to set off any loss arising from any source falling under any head of income against his income from any other source under the same head. As argued by the learned senior counsel, the most important issue to be considered is „what is source of income‟? Long term capital gains as well as short term capital gains and the losses also are considered for taxation under a common head "capital gains". The law states that under a particular head, there could be a number of sources of income out of which assessee may incur loss in respect of some source and ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 8 assessee may earn income from other source. There can be a bundle of sources under a particular head of income. Out of that particular head of income, the assessee is free to set off loss against income from another source. There is no distinction between short term capital asset or long term capital asset as far as the head of income "capital gains" is concerned. The Allahabad High Court in the case of Seth Shivprasad (supra) has held that a source of income may be described as the spring or fount from which a clearly definite channel of income flows. It is that which by nature and incidents constitute a distinct and separate origin of income capable of consideration as such in isolation from other source of income and which by the manner of dealing adopted by the assessee can be treated so. As per the above judgment, any definite channel through which income flows is to be treated as a source of income. That is why in fact section 70 recognises that there can be a number of sources of income under a particular head of income. The Madhya Pradesh High Court in the case of Lady Kanchanbai‟s (supra) had an occasion to consider source of income for the purpose of section 2(11) of the Income- tax Act, 1922. The court held therein that each branch of a business could be a separate source and, therefore, assessee could have separate previous years for its different offices. Even in a single business, the court has visualized the scope of different sources of income, and obviously all such business income fall under the same head of income. The above decision has been later confirmed by the Supreme Court in Lady Kanchanbai‟s case (supra) where the Supreme Court has held that a particular source of income, profits and gains means the income from a particular source which has been brought to tax under the Act and not which has been taken into consideration for computing the total world income of the assessee. The Supreme Court held that it is possible for an assessee to have a different previous year for each separate source of income, profits and gains. The Bombay High Court in the case of Fort Properties (P.) Ltd. (supra) considered the same issue. The court on pages 253 and 254 has held as under : "...In our opinion, no such controversy can arise as previous year is related to source of income and not head of income. These are two independent expressions which have been used in the Income-tax Act in different sections for different purposes. They convey two different ideas. In section 3, dealing with the previous year, the expression used is source of income - not head of income. .....Once the assessee opts for a previous year different from the financial year for a particular source of income, it will not change with the change of head under which income from the said source is assessed. Section 14 of the Act classifies the income of the assessee under different heads only for the purpose of charge of income-tax and computation of total income. Income falling under the same head may be derived from various sources and even in respect of income from different source falling under the same head, subject to provisions of section 3, an assessee may have different previous years. It is thus clear that the ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 9 source of income is different from head of income. Source means the real source of income. Every income must have a source which cannot change. In a given case, there may be a controversy about the head under which income from a particular source would be assessable. Determination of that controversy will affect the charge of tax and the computation of income. It will in no way affect the previous year in which income from such source is assessable. .....In the instant case, the source of income is the transfer of the property....." 43. When we consider the relevant decisions of the courts of law rendered in Seth Shivprasad‟s case (supra), Lady Kanchanbai‟s case (supra) and Fort Properties (P.) Ltd.‟s case (supra), we find that every spring of income is a different source of income for an assessee and for that matter, the transfer of one property may be one source of income different from the transfer of another property which would be again another source of income. 44. Therefore, it is very apparent that source of income does not mean head of income. The Assessing Officer has proceeded on a hypothesis as if the source of income is the head of income itself. This is not a proper construction of law provided in section 70. Short term capital gains/loss as well as long term capital gains/loss both are computed under the head "capital gains" for the aggregation of income culminating into total income which is taxable under the Income-tax Act. What is taxed by the Income-tax Act is not different sources of income independently, but income from different sources clubbed under respective heads and finally aggregated into the total income. The classification of income under different heads for computing the total income does not interfere with the independent character of different sources of income available to an assessee. Both, short term capital gains/loss and long term capital gains/loss are different sources of income, falling under the same head "capital gains". Even under short term capital gains, different transactions will be different sources of income resulting in short term capital gains/loss. Likewise, different transactions of long term capital assets will be different sources of income for an assessee to arrive at long term capital gains/loss. This is reflected in the scheme of computation of capital gains provided in section 48 where gains or loss is computed on the basis of individual asset and transaction and not on the basis of class of assets. Therefore, we have to agree with the argument of the learned senior counsel that every transaction of a property is a different source of income for the assessee. Head of income is not the source of income. Source of income is having the direct nexus with the stream or fountain out of which the income springs to the assessee. Head of income is provided for clubbing purpose of those like minded incomes derived from different sources for the purpose of aggregation and allowable deductions. ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 10 45. We, therefore, find that there is no basis in grouping short term capital assets as a separate source of income and long term capital assets as a separate source of income. Not only short term and long term assets are different sources of income, but even the different short term assets and different long term assets involved in the respective transactions are again different sources of income. When section 70 provides that a loss falling under a source of income can be set off against income from any other source under the same head, it means that the long term capital loss being a separate source can be set off against short term capital gains, which is another separate source of income. Within the provisions of law contained in section 70, there is no further identification of sources of income against which alone loss of a particular source can be set off. What is mentioned in the law is only source of income. As far as the head of income "capital gains" is concerned, the sources could be transfer of short-term capital asset as well as transfer of long term capital assets and transfer of different assets will be different sources of income. There is no further identification or qualification with respect to any source so that the law would presume any sort of restriction on set off of loss arising from one source against income arising from any other source. Therefore, the contention of the assessee that irrespective of the identity of the source of income, it is possible for the assessee to set off the loss of a particular source against income from another source, both falling under the same head of income is tenable in law. Accordingly, the computation made by the assessee by setting off the long term capital loss against short term capital gains and in that way saving the differential tax benefit available to long term capital gains is supported by law. 46. This position is highlighted by the CBDT Circular No. 8 of 2002 dated 28-7-2002 issued as explanatory notes on provisions relating to direct taxes brought in by the Finance Act, 2002. At paragraph 40.1 of the circular, modifications relating to set off of long term capital loss brought in by the Finance Act, 2002 with effect from assessment year 2003-04 has been discussed. The circular has stated that the existing provision contained in section 70 of the Income-tax Act provides that where the net result for any assessment year in respect of any source falling under any head of income is a loss, the assessee shall be entitled to have the amount of such loss set off against his income from another source under the same head. Further, section 74 of the Income-tax Act provides that loss under the head "Capital gains" can be carried forward and set off against capital gains in the following eight assessment years. The Legislature found that this position has created an anomaly inasmuch as assessee can get the benefit of concessional rate of tax in respect of long term capital gains coupled with the freedom to choose the mode of set off of capital loss. Therefore, the amendment has been brought in and the circular continued to state that since long term capital gains are subjected to lower incidence ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 11 of tax, the Finance Act, 2002 has rectified the anomaly by amending the said sections to provide that while losses from transfer of short term capital assets can be set off against any capital gains, whether short term or long term, losses arising from transfer of long term capital assets will be allowed to be set off only against long term capital gains. 4.6. Though this Special Bench judgment referred to supra has been rendered in the context of pre-Securities Transaction Tax (STT) era, still the analogy drawn thereon would be applicable to the facts of the instant case. In fact post STT regime, we find that this Tribunal in the case of ADIT(International Taxation)-4(1) vs. Legg Mason Asia (Ex Japan) Analyst Fund reported in 38 taxmann.com 12 had addressed the very same issue wherein the arguments advanced by the ld. DR before us is also addressed. The relative operative portion of the said order is reproduced hereunder:- “4. We have heard the parties, and perused the material on record. The issue that basically arises is as to whether the assessee has an option to adjust the loss arising on a STCA against the income arising from such assets for the same year, irrespective of whether the transactions are categorized as 'off market transactions' or 'on market transactions'. This, to our mind, would be so as 'loss' is only negative 'income', and is, in any case, assessable under the same head of income; any taxable income under the Act being required to be classified and assessed to tax under a particular head of income. That is, the Act draws no distinction with reference to the said (or for that matter any other) categories of income, or even with reference to the tax rate that the different types of transactions, as where undertaken on or before a particular date (30/9/2004) vis-a-vis that after the said date, as far as its assessability, and consequently aggregation under Chapter VI, there-under is concerned. Sub-section (1) of sec. 70, referred to by the Revenue in its ground of appeal, refers to a source of income (under a head), and is in any case not applicable to income assessable as 'capital gains'. Reference thereto is therefore be to no moment; rather, would if at all signify that income on transfer of STCAs is regarded as one category or source of income u/s. 70(2). As explained by the tribunal in the case of First State Investments (Hong Kong) Ltd. (supra), the computation of income is a process anterior to the application of the tax rate, so that the differential in the tax rates is rendered as of no relevance. ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 12 We, accordingly, find no infirmity in clarifying that the option to set off the loss arising under the same class of income, i.e., on STCA, notwithstanding the words 'similar computation' in section 70(2), would lie with the assessee, as explained by the tribunal in the case of Fidelity Investment Trust Fidelity Overseas Fund (supra). The words 'similar computation', to which our attention was drawn by the ld. DR, seeking to draw a distinction between the different types of transactions on that basis, would only mean the computation as made u/ss. 48 to 55 of the Act, and nothing more. Further, the same is again to be with reference to any asset other that a STCA. The argument is thus without merit. We decide accordingly.” 4.7. The ld. AR made a statement from the Bar that for the A.Yrs 2018-19 and 2021-22, similar manner of set off of loss was made by the assessee while filing the return of income and the same was accepted by the ld. AO in the assessments framed u/s.143(3) of the Act. In view of the above observations and respectfully following the judicial precedents relied upon hereinabove, we find no infirmity in the order of the ld. CIT(A) granting relief to the assessee in this regard. Accordingly, the ground No.3 raised by the Revenue is dismissed. 5. The ground No.4 & 5 raised by the Revenue are general in nature and does not require any specific adjudication. 6. In the result, appeal of the Revenue is dismissed. Order pronounced on 21/03/2023 by way of proper mentioning in the notice board. Sd/- (SANDEEP SINGH KARHAIL) Sd/- (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 21/03/2023 KARUNA, sr.ps ITA No.2862/Mum/2022 M/s. J.P. Morgan Fund 13 Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. The PCIT. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy//