G2 Corporate Services LLP, (formerly M/s. G2 Corporate Services Ltd), Sec'bad, Hyderabad V. DCIT, Circle-2(3), Hyderabad, Hyderabad

ITA 832/HYD/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6093 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-06-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 21-05-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 02-06-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M SITARAM
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Capital asset; Business income; Business expenditure; Earning of tax free income; Advance ruling
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. ASST. YEAR APPELLANT RESPONDENT 832/HYD/16 2009-10 M/S. G2 CORPORATE SERVICES LLP, (FORMERLY M/S. G2 CORPORATE SERVICES LTD) SECUNDERABAD [PAN: AABCD2471J] DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(3), HYDERABAD 833/HYD/16 2011-12 FOR ASSESSEE : SHRI K.A. SAI PRASAD, AR FOR REVENUE : SHRI M. SITARAM, DR DATE OF HEARING : 21-05-2018 DATE OF PRONOUNCEMENT : 08-06-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THESE TWO APPEALS ARE BY ASSESSEE AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS)-2, HYDERABA D. IN THE AY. 2009-10, THERE WAS AN ISSUE IN TREATING THE CAP ITAL GAINS AS BUSINESS INCOME, WHEREAS IN BOTH THE ASSE SSMENT YEARS, THE COMMON ISSUE IS WITH REFERENCE TO DISALLOWA NCE U/S. 14A OF THE INCOME TAX ACT [ACT]. SINCE THE ISSUES ARE COMMON, THESE APPEALS ARE HEARD TOGETHER AND DECIDED BY THIS CO MMON ORDER. ITA NOS. 832 & 833/HYD/2016 :- 2 - : ISSUE OF TREATING CAPITAL GAINS AS BUSINESS INCOME: 2. THIS ISSUE ARISES IN AY. 2009-10. ASSESSEE HAS DECLARED SHORT TERM CAPITAL GAIN OF RS. 1,89,980/- ON SALE OF SHARES AND LONG TERM CAPITAL GAIN OF RS. 10,54,32,17 2/- ON SALE OF UN-LISTED SHARES IN THE COMPANY, INDU TEKZONE PRIVATE LIMITED. AO WAS OF THE OPINION THAT ASSESSEES TRANSACTI ONS ARE TO BE CONSIDERED AS BUSINESS AND AFTER DISCUSSI ON ON THE ISSUE, HE HAS TREATED THE CAPITAL GAINS DECLARED BY AS SESSEE AS BUSINESS INCOME. LD.CIT(A) AFTER EXTRACTING ASSESSEE S CONTENTIONS BOTH FACTUAL AND LEGAL , HOWEVER IN THE BRIE F ORDER, HAS UPHELD THE ACTION OF AO. THE SUBMISSIONS AND THE ORDER IS AS UNDER: 5.2. ON THE OTHER HAND, THE AR CONTENDS AS UNDER: '1. DURING AY 2009-10 THE APPELLANT HAS DECLARED SH ORT TERM CAPITAL GAINS OF RS 1,89,980 FROM SALE OF LISTED EQUITY SHA RES AND LONG TERM CAPITAL GAINS OF RS 10,67,54,573 FROM SALE OF SHARE S OF M/S INDU TECH ZONE PVT LTD, AN UNLISTED COMPANY. THESE GAINS WERE TREATED AS BUSINESS INCOME BY THE ASSESSING OFFICER. THE APPEL LANT HAS CONSISTENTLY, BEEN TREATING ALL THE INVESTMENTS AS CAPITAL ASSETS BEING LONG TERM INVESTMENTS, AS THEY WERE ACQUIRED WITH A N INTENTION TO BE HELD FOR LONGER TERMS. THE INVESTMENTS ARE REFLECTE D IN THE BALANCE SHEET AS LONG TERM INVESTMENTS ONLY. (AS REFERRED F ROM PAGES GIVEN BELOW FOR EACH ASST. YEAR). THEY ARE NOT BEING REFL ECTED AS PART OF ITS STOCK IN TRADE. THE INVESTMENTS WERE VALUED AT COST ONLY AND THE SURPLUS/(LOSS) ON TRANSFER OF THE INVESTMENTS ARE C ONSISTENTLY BEING SHOWN UNDER THE HEAD 'CAPITAL GAINS' WHICH WAS ACCE PTED BY THE DEPARTMENT, EXCEPT FOR THE YEAR UNDER APPEAL. THE P ARTICULARS OF CAPITAL GAINS OFFERED AND THE ASSESSMENT STATUS IS PRESENTED IN THE TABLE BELOW FOR PERUSAL BY YOUR HONOURS: ITA NOS. 832 & 833/HYD/2016 :- 3 - : SL. NO ASST.YEAR PAPER BOOK PAGE NO. SOURCE OF CAPITAL GAINS/(LOSS) ASSESSMENT STATUS 1 2006 - 07 13 & 14 SALE OF SHARES OF MATRIX LABS LTD- LONG TERM CAPITAL GAINS ASSESSMENT U/S. 143(1)(A) 2 2007 - 08 29 & 30 SALE OF SH ARES OF MATRIX LABS LTD- LONG TERM CAPITAL GAINS ASSESSMENT U/S. 143(1)(A) 3 2008 - 09 50 SALE OF SHARES OF INDU TEC ZONE PVT LTD SHORT TERM CAPITAL GAINS ASSESSMENT U/S. 143(1)(A) 4 2010 - 11 102 SALE OF SHARES OF SILICON BUILDER PVT LTD AND GREEN INFRASTRUCTURE PVT LTD LONG TERM CAPITAL GAIN ASSESSMENT U/S. 143(3), ASSESSED AS CAPITAL GAINS ONLY (PAGES 179 TO 184) 5 2012 - 13 158 SALE OF SHARES OF QUALITY CARE INDIA LTD LONG TERM CAPITAL GAINS ASSESSMENT U/S. 143(3), ASSESSED AS CAPITAL GAINS ONLY (PAGES 185 TO 191) (FOR ASST. YEAR 2009-10 PAGE 73 OF THE PAPER BOOK) (FOR ASST. YEAR 2011-12 PAGE 132 OF THE PAPER BOOK) 2. THE ASSESSING OFFICER RELIED ON THE RULING OF TH E HON'BLE SUPREME COURT IN THE CASE OF INVESTMENT LTD. VS COMMISSIONE R OF INCOME TAX 77 ITR 533. (COPY PLACED AT PAGES 175 TO 178 OF THE PAPER BOOK.) HE RELIED ON THE OBSERVATION OF THE HON'BLE COURT 'THA T THE DESCRIPTION OF SHARES AND SECURITIES IN THE BALANCE SHEET AS 'INVE STMENT'IS NOT DECISIVE'. IT IS RESPECTFULLY SUBMITTED THAT THE AO HAS NOT BROUGHT OUT FULLY THE FACTS OF THAT CASE RELIED UPON WHICH ARE AS FOLLOWS- (A) IN THAT CASE THE APPELLANT CLAIMED CERTAIN LOSS ES FROM SECURITIES AS BUSINESS LOSSES WHICH WAS REJECTED BY THE ASSESSING OFFICER ON THE FOLLOWING GROUNDS: I) THE ASSESSEE WAS REFLECTING THE SECURITIES UNDER THE HEAD INVESTMENTS II) THE SECURITIES ARE VALUED AT MARKET VALUE ALTHO UGH THE MARKET VALUE WAS LESS III) THERE IS NO FREQUENCY OF TRANSACTIONS B) THE ASSESSEE LOST ALL THE APPEALS TILL THE HIGH COURT. ON APPEAL, THE SUPREME COURT HELD THAT THE ASSESSEE'S CLAIM OF BUSINESS LO SS CAN BE ALLOWED ON THE FOLLOWING BASIS: A) THAT REVENUE ACCEPTED ASSESSEE'S CLAIM AS BUSINE SS LOSS FROM SECURITIES IN IMMEDIATELY PRECEDING AND SUCCEEDING YEARS ITA NOS. 832 & 833/HYD/2016 :- 4 - : B) TAX PAYER CAN VALUE HIS STACK AT COST OR MARKET VALUE. C) A METHOD OF ACCOUNTING ADOPTED BY THE TRADER CON SISTENTLY AND REGULARLY CANNOT BE DISCARDED BY THE DEPARTMENTAL AUTHORITIES ON THE VIEW THAT HE SHOULD HAVE ADOPTED A DIFFERENT METHOD OF KEEPING ACCOUNT OF OR VALUATION D) THE METHOD OF ACCOUNTING REGULARLY EMPLOYED MAY BE DISCARDED ONLY IF IN THE OPINION OF THE TAXING AUTHORITIES INCOME OF THE TRA DE CANNOT BE PROPERLY DEDUCED THEREFROM. E) VALUATION OF STOCK AT COST IS ONE OF THE RECOGNI SED METHODS. NO INFERENCE MAY THEREFORE ARISE FROM THE EMPLOYMENT BY THE COMPANY OF THE METHOD OF VALUING STOCK AT COST, THAT THE STOCK VALUED WAS NOT STOCK-IN-TRA DE. F) THE DESCRIPTION OF STOCK IN THE BALANCE-SHEET AS 'INVESTMENTS' IS NOT DECISIVE. (C) IN THE CASE BEFORE THE SUPREME COURT, THE ASSES SEE CLAIMED THE LOSSES FROM THE SALE OF SECURITIES AS BUSINESS LOSSES WHILE SUCH SE CURITIES WERE REFLECTED AS INVESTMENTS IN ITS BALANCE SHEET. IT IS BASED ON SUCH FACTS THA T THE SUPREME COURT HELD THAT THE DESCRIPTION OF SHARES AND SECURITIES IN THE BALANCE SHEET AS INVESTMENT IS NOT DECISIVE. 3. IN CONTRAST, THE APPELLANT HAS CONSISTENTLY BEEN REFLECTING THE SHARES AS INVESTMENTS AND CONSEQUENTLY THE SURPLUS/ LOSS ON SALE THEREOF WERE BEING REFLECTED AS CAPITAL GAINS. IN F ACT THE SUPREME COURT WAS QUITE CATEGORICAL IN DECLARING THAT METHO D REGULARLY EMPLOYED BY THE ASSESSEE CANNOT BE DISCARDED. IT IS FURTHER SUBMITTED THAT THE ASSESSING OFFICER ARRIVED AT THE SAME FIGURE OF INCOME IN EITHER OF THE COMPUTATIONS, IMPLYING THAT THERE IS NO DIFFICULTY IN CALCULATING THE INCOME AS PER METHOD EMPLOYED BY THE ASSESSEE (AS STATED AT POINTED ABOVE). HENCE THERE IS NO REASON TO DISCARD THE CONSISTENT APPROACH OF THE APPELLANT. T HE AO HAS NOT APPLIED THE LAW AS DECIDED BY THE SUPREME COURT AS MENTIONED AT (A) TO (F) ABOVE. 4. THE APPELLANT BRINGS TO YOUR KIND ATTENTION THE FOLLOWING RULINGS OF THE HON'BLE SUPREME COURT SUPPORTING THE APPELLANT' S STAND THAT THE ASSESSING OFFICER ERRED IN TREATING APPELLANT'S INV ESTMENTS AS BUSINESS ASSETS: (A) THE HON'BLE SUPREME COURT IN THE CASE OF CIT V. ASSOCIATED INDUSTRIAL DEVELOPMENT CO. (P.) LTD. [19717 82 ITR 586 HAS OBSERVED AS UNDER: 'WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY O F INVESTMENT OR FORMS PART OF THE STOCK-IN-TRADE IS A MATTER WHICH IS WITHIN THE KNOW LEDGE OF THE ASSESSEE WHO HOLDS THE ITA NOS. 832 & 833/HYD/2016 :- 5 - : SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE I N A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED AN Y DISTINCTION BETWEEN THOSE SHARES WHICH ARE ITS STOCK-IN-TRADE AND THOSE WHICH ARE HE LD BY WAY OF INVESTMENT. ' (B) THE HON'BLE SUPREME COURT IN THE CASE OF DALHOU SIE INVESTMENT TRUST CO. LTD. V. CIT [1967J 66 ITR 473 (SC) HAS OB SERVED AS UNDER: 'MERE FACT THAT AN INVESTMENT COMPANY PERIODICALLY VARIES ITS INVESTMENT DOES NOT NECESSARILY MEAN THAT THE PROFITS RESULTING FROM SU CH VARIATION ARE TAXABLE UNDER THE INCOME-TAX ACT. VARIATION OF ITS INVESTMENTS MUST A MOUNT TO DEALING IN INVESTMENTS BEFORE SUCH PROFITS CAN BE TAXED AS INCOME UNDER TH E INCOME TAX ACT. ' (C) IN COMMISSIONER OF INCOME TAX, U. P V. MADAN GO PAL RADHEY LAL, [1969J 73 ITR 652 (SC) THE SUPREME COURT DEALT WITH THE ISSUE, AND DISCUSSED THE QUESTION: 'A TRADER MAY ACQUIRE A COMMODITY IN WHICH HE IS DE ALING FOR HIS OWN PURPOSES, AND HOLD IT APART FROM THE STOCK-IN-TRADE OF HIS BUSINE SS. THERE IS NO PRESUMPTION THAT EVERY ACQUISITION BY A DEALER IN A PARTICULAR COMMO DITY IS ACQUISITION FOR THE PURPOSE OF HIS BUSINESS; IN EACH CASE THE QUESTION IS ONE O F INTENTION TO BE GATHERED FROM THE EVIDENCE OF CONDUCT AND DEALINGS BY THE ACQUIRER WI TH THE COMMODITY. ' 5. THE ASSESSING OFFICER RELIED UPON THE CIRCULAR 4 /2007 DT 15.06.2007 OF CBDT (COPY PLACED AT PAGES 173 & 174) AND QUOTED THE FOLLOWING THEREFROM: 8. THE AUTHORITY FOR ADVANCE RULINGS (AAR) (288 ITR 641), REFERRING TO THE DECISIONS OF THE SUPREME COURT IN SEVERAL CASES , HAS CULLED OUT THE FOLLOWING PRINCIPLES: '(I) WHERE A COMPANY PURCHASES AND SELLS SHARES, IT MUST BE SHOWN THAT THEY WERE HELD AS STOCK-IN-TRADE AND THAT EXIS TENCE OF THE POWER TO PURCHASE AND SELL SHARES IN THE MEMORANDUM OF AS SOCIATION IS NOT DECISIVE OF THE NATURE OF TRANSACTION; (II) THE SUBSTANTIAL NATURE OF TRANSACTIONS, THE MA NNER OF MAINTAINING BOOKS OF ACCOUNT, THE MAGNITUDE OF PURCHASES AND SA LES AND THE RATIO BETWEEN PURCHASES AND SALES AND THE HOLDING WOULD F URNISH A GOOD GUIDE TO DETERMINE THE NATURE OF TRANSACTIONS; III) ORDINARILY THE PURCHASE AND SALE OF SHARES WIT H THE MOTIVE OF EARNING A PROFIT, WOULD RESULT IN THE TRANSACTION B EING IN THE NATURE OF TRADE/ADVENTURE IN THE NATURE OF TRADE; BUT WHERE T HE OBJECT OF THE INVESTMENT IN SHARES OF A COMPANY IS TO DERIVE INCO ME BY WAY OF ITA NOS. 832 & 833/HYD/2016 :- 6 - : DIVIDEND, ETC., THEN THE PROFITS ACCRUING BY CHANGE IN SUCH INVESTMENT (BY SALE OF SHARES) WILL YIELD CAPITAL GAIN AND NOT REVENUE RECEIPT'. AND CONCLUDED THAT 'IN FACT, HAVING REGARD TO THE F REQUENCY OF TRANSACTIONS OF LARGE NUMBER OF SHARES OF THOSE COM PANIES MADE BY THE ASSESSEE DURING THE PREVIOUS YEAR AND AS SEEN F ROM DISCUSSION MADE ALREADY, IT HAS TO BE HELD THAT THOSE TRANSACT IONS OF SALE OF SHARES MADE BY THE ASSESSEE WERE PRINCIPALLY IN THE NATURE OF BUSINESS TRANSACTIONS. ' WHILE DOING SO, HE OVERLOOKED CERTAIN OTHER IMPORTA NT POINTS GIVEN IN THE CIRCULAR ITSELF WHICH ARE AS FOLLOWS: 11. ASSESSING OFFICERS ARE ADVISED THAT THE ABOVE P RINCIPLES SHOULD GUIDE THEM IN DETERMINING WHETHER, IN A GIVEN CASE, THE SHARES AR E HELD BY THE ASSESSEE AS INVESTMENT (AND THEREFORE GIVING RISE TO CAPITAL GA INS) OR AS STOCK-IN-TRADE (AND THEREFORE GIVING RISE TO BUSINESS PROFITS). THE ASS ESSING OFFICERS ARE FURTHER ADVISED THAT NO SINGLE PRINCIPLE WOULD BE DECISIVE AND THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO DETERMINE WHETHER, IN A GIV EN CASE, THE SHARES ARE HELD BY THE ASSESSEE AS INVESTMENT OR STOCK-IN-TRADE. (EMPH ASIS SUPPLIED) 61. IT IS SUBMITTED THAT THE ASSESSING OFFICER HAS MAINLY COMMENTED ON THE FREQUENCY OF TRANSACTIONS CARRIED OUT BY THE APPELL ANT WITH RESPECT TO SHARES OF LISTED ENTITIES. HE DID NOT APPLY VARIOUS OTHER PARAMETERS LAID OUT BY THE SUPREME COURT AND THE CBDT. HIS REMARKS THAT THE STATEMENT OF ACC OUNT OF THE APPELLANT IN M/S ZEN SECURITIES FOR THE ASST YEAR 2009-10 IS 10 PAGE S IN LENGTH WERE MADE WHILE LOOKING AT INVESTMENTS IN SHARES OF LISTED COMPANIE S ONLY. (COPY OF ZEN STATEMENT PLACED AT PAGES 163 TO 172). HE DID NOT GO IN DETAI L ABOUT THE PATTERN OF THE APPELLANT'S INVESTMENTS IN UNLISTED COMPANIES WHICH HAVE A LION'S SHARE. THE EQUITY SHARES TRANSFERRED ARE OF A PRIVATE LIMITED COMPANY . THESE WERE ACQUIRED ON 25.03.2007 AND WERE TRANSFERRED ON 12.08.2008 AFTER BEING HELD FOR NEARLY 17 MONTHS. (COPIES OF ALLOTMENT LETTER & SALE ACKNOWLE DGEMENT PLACED AT PAGES 192 TO 197 OF THE PAPER BOOK). EQUITY SHARES OF A PRIVATE LIMITED COMPANY ARE NOT FREELY TRANSFERABLE AND TRANSFERS ARE SUBJECT TO THE RESTR ICTIONS AS PER CLAUSE 9 OF THE ARTICLES OF THE ASSOCIATION OF THE COMPANY. IN LIGHT OF THE RESTRICTIONS THESE SHARES WERE TRANSFERRED TO M/S INDU PROJECTS LTD THE MAIN PROMO TER OF THE COMPANY. (COPY OF ARTICLES PLACED AT PAGES 198 TO 212 OF THE PAPER BO OK). FOR ALL THESE REASONS THE EQUITY SHARES OF A PRIVATE LIMITED COMPANY CANNOT B E TREATED AS BUSINESS ASSETS. 62. IT IS SUBMITTED THAT IN ASSESSMENTS U/S 143(3) FOR AYS 2010-11 AND 2012-13, THE SURPLUS ON SALE OF SHARES OF UNLISTED ENTITIES WERE ASSESSED AS CAPITAL GAINS ACCEPTING THE APPELLANT'S CLAIM THAT THE SHARES TRANSFERRED W ERE CAPITAL ASSETS AND NOT BUSINESS ASSETS. ITA NOS. 832 & 833/HYD/2016 :- 7 - : 63. THE AO'S OBSERVATIONS MAY AT MOST BE TRUE IN RE SPECT OF THE TRANSACTIONS CARRIED OUT IN RELATION TO THE SHARES OF LISTED COMPANIES T HROUGH M/S ZEN SECURITIES. THE TRANSACTIONS CARRIED OUT IN RELATION TO THE INVESTM ENTS IN UNLISTED COMPANIES ARE VERY FEW AND MORE OVER THEY ARE ILLIQUID AND EXIT FROM S UCH INVESTMENTS WERE ONLY TO STRATEGIC INVESTORS WHICH OCCUR AFTER THOROUGH DUE DILIGENCE AFTER VARIOUS ROUNDS OF NEGOTIATIONS AND VARIED LEGAL DOCUMENTS. SUCH TRANS ACTIONS CANNOT BE SO FREQUENT TO BE TREATED AS BUSINESS TRANSACTIONS. FURTHER THE AO FAILED TO OBSERVE THAT THE ASSESSEE IS A COMPANY ENDOWED WITH A RICH CORPUS AN D ALL THE INVESTMENTS ARE OUT OF OWN FUNDS. 64. IT IS PRAYED THAT THE HON'BLE COMMISSIONER OF I NCOME TAX BE PLEASED TO CONSIDER THE ABOVE FACTS AND SUBMISSIONS AND DIRECT THE ASSESSING OFFICER TO ACCEPT THE ASSESSEE'S CONTENTION THAT THE INVESTMENTS IN S HARES ARE CAPITAL ASSETS. ' 5.3. I HAVE CONSIDERED THE ABOVE AND I FIND THAT TH E ACTION OF THE AO IS JUSTIFIED IN TREATING THE CAPITAL GAINS OF RS.10 ,69,44,553 AS 'INCOME FROM BUSINESS', AS THE ASSESSEE, IN FACT, IS ENGAGE D IN TRADING IN SHARES ONLY. THE AO HAS MADE OUT A CASE TO THIS EFF ECT THAT IT IS THE ASSESSEE'S BUSINESS AND HENCE, TREATED THE GAIN OF RS.10,69,44,553 AS 'INCOME FROM BUSINESS'. IN VIEW OF THIS, I AM AL SO IN AGREEMENT WITH THE VIEW TAKEN BY THE AO. AS A RESULT, THE GRO UNDS RAISED BY THE ASSESSEE ARE DISMISSED. 2.1. IT WAS THE CONTENTION OF LD. COUNSEL THAT LD.CIT(A) HAS NOT EXAMINED THE ISSUES BOTH ON FACTS AND ON LAW. ASSESSEE HAS CONSISTENTLY SHOWING THE INVESTMENTS AND N OT AS STOCK IN TRADE AND THE GAINS WERE OFFERED AS SUCH AN D WAS ACCEPTED BY THE DEPARTMENT EVEN IN THE SCRUTINY ASSESSME NTS EARLIER. FURTHER LD. COUNSEL RELIED ON THE BOARD CIR CULAR F.NO. 225/12/2016/ITA.II, DT. 02-05-2016, WHEREIN BOARD HA S GIVEN THE FOLLOWING CIRCULAR FOR THE BENEFIT OF SETTLING THE D ISPUTES ON THIS ISSUE. REGARDING CHARACTERIZATION OF INCOME FROM TRANSACT IONS IN LISTED SHARES AND SECURITIES, CENTRAL BOARD OF DIRE CT TAXES (CBDT) HAD ISSUED A CLARIFICATORY CIRCULAR NO. 6/2016 DATE D 29 TH FEBRUARY, 2016, WHEREIN WITH A VIEW TO REDUCE LITIGATION AND MAINTAIN CONSISTENCY IN APPROACH IN ASSESSMENTS, IT WAS INST RUCTED THAT INCOME ARISING FROM TRANSFER OF LISTED SHARES AND S ECURITIES, WHICH ITA NOS. 832 & 833/HYD/2016 :- 8 - : ARE HELD FOR MORE THAN TWELVE MONTHS WOULD BE TAXED UNDER THE HEAD CAPITAL GAIN UNLESS THE TAX-PAYER ITSELF TREAT TH ESE AS ITS STOCK-IN- TRADE AND TRANSFER THEREOF AS ITS BUSINESS INCOME. IT WAS FURTHER STATED THAT IN OTHER SITUATIONS, THE ISSUE WAS TO B E DECIDED ON THE BASIS OF EXISTING CIRCULARS ISSUED BY THE CBDT ON T HIS SUBJECT. 2. SIMILARLY, FOR DETERMINING THE TAX-TREATMENT OF INCOME ARISING FROM TRANSFER OF UNLISTED SHARES FOR WHICH NO FORMA L MARKET EXISTS FOR TRADING, A NEED HAS BEEN FELT TO HAVE A CONSISTENT VIEW IN ASSESSMENTS PERTAINING TO SUCH INCOME. IT HAS, ACC ORDINGLY, BEEN DECIDED THAT THE INCOME ARISING FROM TRANSFER OF UN LISTED SHARES WOULD BE CONSIDERED UNDER THE HEAD CAPITAL GAIN, IRRESPECTIVE OF PERIOD OF HOLDING WITH A VIEW TO AVOID DISPUTES/LIT IGATION AND TO MAINTAIN UNIFORM APPROACH. 3. IT IS, HOWEVER, CLARIFIED THAT THE ABOVE WOULD N OT BE NECESSARILY APPLIED IN THE SITUATIONS WHERE: I. THE GENUINENESS OF TRANSACTIONS IN UNLISTED SHARES ITSELF IS QUESTIONABLE; OR II. THE TRANSFER OF UNLISTED SHARES IS RELATED TO AN IS SUE PERTAINING TO LIFTING OF CORPORATE VEIL; OR III. THE TRANSFER OF UNLISTED SHARES IS MADE ALONG WITH THE CONTROL AND MANAGEMENT OF UNDERLYING BUSINESS AND THE ASSESSING OFFICER WOULD TAKE APPROPRIATE VI EW IN SUCH SITUATIONS. 2.2. IT WAS THE CONTENTION THAT ASSESSEES TRANSACTIONS ARE NOT COVERED BY PARA 3 AND THEREFORE, SINCE ASSESS EE IS CONSISTENTLY SHOWING THE PURCHASE OF SHARES AS INVESTME NT AND THE CAPITAL GAIN EARNED IS MOSTLY FROM UN-LISTED SH ARES, THE SAME IS REQUIRED TO BE ASSESSED UNDER THE HEAD CA PITAL GAINS. 2.3. AFTER CONSIDERING THE RIVAL CONTENTIONS AND DOCUMENTS ON RECORD, WE AGREE WITH THE CONTENTIONS OF ASSESSEE. THE INCOME IS TO BE ASSESSED UNDER THE HEA D CAPITAL ITA NOS. 832 & 833/HYD/2016 :- 9 - : GAINS ONLY. ASSESSEE HAS GIVEN DETAILED EXPLANATION AND SUBMISSIONS BOTH ON FACTS AND ON LAW AND ALSO ON THE CONSISTENT TREATMENT BY THE DEPARTMENT IN EARLIER YEARS THA T THE INCOME IS TO BE ASSESSED UNDER THE HEAD CAPITAL GA INS ONLY. WITHOUT COUNTERING ANY OF THE SUBMISSIONS, LD. CIT(A) CONCURRED WITH AO. NOW THAT THE BOARD CIRCULAR HAS SE TTLED THE ISSUE, WE ARE OF THE OPINION THAT THE INCOME ARISIN G FROM TRANSFER OF UN-LISTED SHARES SHOULD BE CONSIDERED UN DER THE HEAD CAPITAL GAINS ONLY. EVEN FOR THE SHORT TERM CA PITAL GAIN ON THE SALE OF LISTED SHARES THE PARAMETERS DO I NDICATE THAT ASSESSEE IS ONLY INVESTING AND NOT TRADING. THEREF ORE, THE CAPITAL GAINS OFFERED BY ASSESSEE SHOULD BE ASSESSED AS SUCH UNDER THE HEAD CAPITAL GAINS ONLY. GROUNDS ON THIS ISSUE ARE ALLOWED. DISALLOWANCE U/S. 14A: 3. THIS ISSUE ARISES IN BOTH THE ASSESSMENT YEARS I .E., AY. 2009-10 AS WELL AS IN AY. 2011-12. IN AY. 2009- 10, AO DISALLOWED AN AMOUNT OF RS. 1,87,52,042/- INVOKING R ULE 8D(2)(III) AS PERCENTAGE OF AVERAGE VALUE OF INVESTME NTS. LD.CIT(A) ACCEPTING THAT DIVIDENDS ON FOREIGN ENTITIES A RE TAXABLE AND ARE NOT EXEMPT U/S. 10(34) OF THE ACT, THE INVESTMENT TO THE EXTENT OF RS. 253.50 CRORES WAS DIRECT ED TO BE EXCLUDED WHILE DETERMINING THE DISALLOWANCE UNDER RULE 8D(2)(III). HOWEVER, IN THE LATER ORDER IN AY. 2011 -12 HE HAS CONFIRMED THE DISALLOWANCE MADE BY THE AO AS SUCH, WH EREIN ITA NOS. 832 & 833/HYD/2016 :- 10 -: THE DISALLOWANCE WAS MADE TO AN EXTENT OF 2,01,57,833/- U/S. 14A BY THE AO. 3.1. POINTING OUT THE INCONSISTENCY IN THE ORDER OF LD.CIT(A), IT WAS THE SUBMISSION THAT ASSESSEE HAS INV ESTED OWN FUNDS IN GROUP CONCERNS AND EXPENDITURE ITSELF IS NOT THAT MUCH SO AS TO BE DISALLOWED U/S. 14A. THERE WAS NO FINDING BY AO THAT ASSESSEE HAS SPENT ANY AMOUNT. ALTERNATIVELY LD. COUNSEL SUBMITTED THAT THE DISALLOWANCE CAN BE RESTRICTED ONLY TO THE EXTENT OF DIVIDEND EARNED AND RELIED ON THE CO-O RDINATE BENCH DECISION IN THE CASE OF MYLAN LABORATORIES LTD., IN ITA NOS. 362/HYD/2017 AND 452/HYD/2017, DT. 09-05-2018. 3.2. LD.DR, HOWEVER, RELIED ON THE ORDERS OF LD.CIT (A). 3.3. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM THE ORDERS OF THE AO, THE ONLY DISALLOWANCE IS UNDER RUL E 8D(2)(III). BUT THERE IS NO FINDING THAT ASSESSEE COULD HAVE SPEN T ANY AMOUNT. THERE IS ALSO INCONSISTENCY IN THE ORDER OF LD.CIT(A). IN AY 2009-10 HE HAD RIGHTLY EXCLUDED INVESTMENTS MADE IN FOREIGN ENTITIES AS THE DIVIDEND EARNED THEREON IS NOT EXEMPT U/S. 10(34) OF THE ACT. HE SHOULD HAVE FOLLOWED THE S AME PRINCIPLE IN AY. 2011-12 ALSO. BE THAT AS IT MAY, IT IS ESTABLISHED PRINCIPLE THAT THE DISALLOWANCE U/S. 14A SH OULD NOT EXCEED THE INCOME EARNED AND CLAIMED AS EXEMPTION. THIS PRINCIPLE IS DISCUSSED ELABORATELY IN THE CASE OF MY LAN LABORATORIES LTD., (SUPRA) AS UNDER: ITA NOS. 832 & 833/HYD/2016 :- 11 -: 5.5. COMING TO THE DISALLOWANCE OF % OF AVERAGE VALUE OF INVESTMENT, SOME PROPORTIONATE EXPENDITURE CAN BE D ISALLOWED BUT IN NO CASE, IT SHOULD EXCEED THE AMOUNT EARNED CLAIMING EXEMPTION. THE HON'BLE HIGH COURT OF PUNJAB & HARYANA IN THE CASE OF PR. COMMISSIONER OF INCOME TAX VS. EMPIRE PACKAGE PVT. LTD., (SUPRA), ANSWERED THE QUESTION R AISED BY REVENUE IN NEGATIVE, WHEREIN THE REVENUE HAS RAISED WHETHER IN THE FACT S AND CIRCUMSTANCES OF THE CASE, THE HON'BLE TRIBUNAL IS JUSTIFIED IN LAW TO H OLD THE DISALLOWANCE MADE U/S. 14A R.W. RULE 8D CANNOT EXCEED THE EXEMPT INCOME IN THE ABSENCE OF ANY SUCH RESTRICTION BEING THERE IN THE RELEVANT SECTION OR RULE. SIMILAR OPINION WAS ALSO EXPRESSED BY THE HON'BLE DELHI HIGH COURT IN THE CA SE OF JOINT INVESTMENTS PVT. LTD., VS. CIT (SUPRA), WHEREIN THE HON'BLE DELHI HI GH COURT HAS CLEARLY HELD THAT THE PROPORTIONATE OR PORTION OF THE TAX EXEMPT INCOME S URELY CANNOT SWALLOW THE ENTIRE AMOUNT AS HAPPENED IN THIS CASE. THE CO-ORD INATE BENCH IN THE CASE OF M/S. KAMADHENU SUKRIT PVT. LTD., VS. ITO (SUPRA) RELIED ON ANOTHER DECISION IN THE CASE OF SAHARA INDIA FINANCIAL CORPN. LTD., VS. DCIT [41 TAXMANN.COM 251] (DELHI-TRIB) AND HAS HELD AS UNDER: 8.1. AS CAN BE SEEN FROM THE NATURE OF EXPENDITURE , THERE IS NO INDICATION EVEN THAT THE ABOVE EXPENDITURE IS EX PENDED FOR EARNING DIVIDEND INCOME. AO WITHOUT GIVING ANY SATISFACTOR Y REASON, JUST INVOKED RULE 8D(III) AND DISALLOWED THE AMOUNT. 9. THE CO-ORDINATE BENCH IN THE CASE OF SAHARA INDI A FINANCIAL CORPN. LTD., VS. DCIT (SUPRA) HAS HELD IN PARA 81 A S UNDER: WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E MATERIAL AVAILABLE ON RECORD. IT HAS NOT BEEN DISPUTED THAT THE ADMINISTR ATION, EXPENSES AND BOOKS OF ACCOUNT OF INVESTMENT DIVISION ARE SEPARATELY CARRI ED OUT AND MAINTAINED BY THE ASSESSEE. NO INFIRMITY HAS BEEN FOUND BY THE DEPART MENT IN THIS BEHALF. ONE OF THE MAIN ISSUE IS ON WHOM LIES THE ONUS TO ESTABLISH NE XUS OF AVAILABLE FUNDS WITH FREE AND TAXABLE INCOME. SIMILARLY COURTS HAVE HELD THAT A FINDING IN OBJECTIVE TERMS ABOUT ASSESSEE WORKING BEING UNSATISFACTORY IS TO BE RECO RDED BY AO IN THE ORDER. CHANDIGARH BENCH OF THE TRIBUNAL IN THE CASE OF PUN JAB STATE CO-OP. & MARKETING FED. LTD. (SUPRA) HAS HELD THAT IN ANY CASE THE DIS ALLOWANCE U/S 14A CANNOT EXCEED TAX FREE INCOME OF THE ASSESSEE. IF MECHANICAL METH OD OF RULE 8D IS APPLIED, IT LEADS TO MANIFESTLY ABSURD RESULTS IN AS MUCH AS FOR TAX FREE INCOME OF RS.68,37,583/- DISALLOWANCE OF RS.2,16,51,917 (ENHANCED BY CIT(A) AT RS. 2,19,47,772) IS MADE U/S 14A WHICH IS WAY TOO MUCH THAN THE EXEMPT INCOME. A S THE INTERPRETATION OF PROVISIONS OF SEC. 14A R/W RULE 8D IS LEADING TO UN ANTICIPATED ABSURDITIES WHICH CANNOT BE THE INTENTION OF LEGISLATURE. UNDER THESE CIRCUMSTANCES HELP OF EXTERNAL AIDS OF CONSTRUCTION FOR INTERPRETATION OF STATUTE IS CALLED FOR. LOOKING AT THE VARYING INTERPRETATION OFFERED BY VARIOUS COURTS AND BENCHE S OF TRIBUNAL IN RELATION TO SEC. 14A, IT IS QUITE ARDUOUS TO PRECISELY DECIDE THE IS SUE. IN GIVEN FACTS AND CIRCUMSTANCES WITHOUT GOING INTO ALL THE ISSUES, IN OUR VIEW IT I S APPROPRIATE TO TAKE GUIDANCE FROM CHANDIGARH BENCH JUDGMENT IN THE CASE OF PUNJAB STA TE CO-OPT MARKETING FED. LTD. (SUPRA) HOLDING THAT THE DISALLOWANCE OF EXPENDITUR E IN ANY CASE CANNOT EXCEED THE ITA NOS. 832 & 833/HYD/2016 :- 12 -: INCOME EARNED. IN OUR VIEW THIS JUDGMENT TAKES A HO LISTIC VIEW THAT DISALLOWANCE IN TERMS OF SEC. 14A CAN BE MAXIMUM TO THE EXTENT OF E XEMPT INCOME, THERE IS NO DISPUTE THAT IN THIS CASE WHICH IS AT RS. 68,37,583 /-. THIS JUDGMENT IMPLIES THAT REASONABLE EXPENDITURE LESS THAN THE EXEMPT INCOME CAN BE DISALLOWED. IN OUR CONSIDERED OPINION, IN THE INTEREST OF JUSTICE, IT WILL BE REASONABLE TO ESTIMATE AND DISALLOW, 50% OF EXEMPT) INCOME (RS.68,37,583/-) AS RELATABLE TO EXEMPT INCOME U/S 14A R/W RULE 8D. WE DO NOT GO INTO VARIOUS PLEA TAK EN BY BOTH SIDES OFFERING DIVERSE VIEWS BASED ON JUDICIAL CITATIONS. THIS GROUND OF T HE ASSESSEE IS PARTLY ALLOWED. 10. RESPECTFULLY FOLLOWING THE ABOVE PRINCIPLES, AS THE DISALLOWANCE MADE BY AO HAS RESULTED IN ABSURD SITUATION OF DISA LLOWING GENUINE OTHER BUSINESS EXPENDITURE, ON WHICH ASSESSEE EARNE D MORE THAN RS. 19 LAKHS INCOME (AS AGAINST RS. 8,100/- OF DIVIDEND ), I AM SATISFIED THAT THE DISALLOWANCE U/S. 14A SHOULD BE RESTRICTED TO THE INCOME EARNED OF RS. 8,100/-. AO IS DIRECTED ACCORDINGLY . 5.6. RESPECTFULLY FOLLOWING THE PRINCIPLES LAID DO WN IN VARIOUS JUDGMENTS OF THE HON'BLE HIGH COURTS AND THE DECISIONS OF THE CO-ORDINATE BENCHES, WE ARE OF THE OPINION THAT THE DISALLOWANCE UNDER RULE 8D CAN NOT EXCEED THE DIVIDEND INCOME EARNED AND CLAIMED AS EXEMPT. THEREFORE, THE DISALLOWANCE WORKED OUT UNDER RULE 8D(III) BEING ADMINISTRATIVE EXPENDITURE IS RESTRICTED TO THE AMOUNT OF DIVIDEND EARNED. AO IS DIRECTED TO MODIFY ACCORDING LY. GROUND IS PARTLY ALLOWED. 3.4. RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE A O TO RESTRICT THE DISALLOWANCE TO DIVIDEND EARNED. AS SEEN FROM THE ASSESSMENT ORDER, THE DIVIDEND EARNED IN AY. 2009-10 WAS RS. 18,61,730/- AND DIVIDEND EARNED IN AY. 2011-12 WAS RS. 18,37,539/-. THE RESPECTIVE DISALLOWANCES ARE RESTRIC TED TO THE ABOVE AMOUNTS. THESE GROUNDS ARE ALLOWED PARTLY. 4. IN THE RESULT, BOTH THE APPEALS OF ASSESSEE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 8 TH JUNE, 2018 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 8 TH JUNE, 2018 TNMM ITA NOS. 832 & 833/HYD/2016 :- 13 -: COPY TO : 1. M/S. G2 CORPORATE SERVICES LLP (FORMERLY M/S. G2 CORPORATE SERVICES LTD) C/O. CH. PARTHASARATHY & CO ., 1-1-298/2/B/3, 1 ST FLOOR, SOWBHAGYA AVENUE, ST.NO.1, ASHOKNAGAR, HYDERABAD. 2. THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(3), HYDERABAD. 3. CIT(APPEALS)-2, HYDERABAD. 4. PR.CIT-2, HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.