IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "L", MUMBAI ITA No.7624/Mum/2010 : Asst.Year 2007-2008 M/s.McKinsey & Company (Thailand) Date of Pronouncement : 10.
The only issue assailed in this appeal is against the treatment
given to income from borrowed services rendered as `Royalties'
under Article 12 of the Double Taxation Avoidance Agreement
between India and Thailand (hereinafter called `the DTAA') as
against the assessee's claim of `Business profits'. Briefly stated the
facts of the case are that the assessee is a foreign company incorporated in and resident of Thailand. The assessee is part of
McKinsey group of entities, the primary business of which is to
render strategic consultancy services to their clients, which, inter
alia, include the analysis of performance, developments, strengths
and weaknesses of their clients, improving their profitability and
productivity and similar other parameters. In order to analyze these
parameters, the entities in various countries make use of certain data,
information and other support that is provided by the assessee. The
receipts amounting to `79,99,272 in the instant year for such services
rendered by the assessee to its Indian counterpart were claimed as
having been performed outside India and since these were rendered in
the ordinary course of business, the same qualified to be a `business
receipt'. In the absence of the assessee having any Permanent
Establishment (PE) in India, it was argued that no incidence of tax
arose in India on this account.
We have heard the rival submissions and perused the relevant material on record. There is no dispute on the fact that the assessee received `79.99 lakh from its group entity in India. It is further not disputed that the assessee has no PE in India. It is clearly borne out from the facts recorded in the assessment order that the assessee is in the business of rendering strategic consultancy services to their clients. Under such circumstances, the question arises as to whether
the said receipt of `79.99 lakh is covered under Article 22 of the DTAA as held by the DRP or under Article 12 of the DTAA as held by the Assessing Officer in the final order or under Article 7 as claimed by the assessee.
The effect of para 7 of Article 7 is that if
there is a `Business income' which is of the nature as covered under
separate Articles such as `Shipping and air transport' under Article 8
or `Royalties' under Article 12, then such income would move out
of Article 7 and be considered only under the specific Articles. The
position which conversely follows is that if there is an income from
the carrying on of the business by the assessee, which does not fall
into any of the specific Articles, then it would remain included under
Article 7.
6. Article 22, which has been taken note of by the DRP, provides
that : "Items of income of a resident of a Contracting State, wherever arising, not expressly dealt with in the foregoing Articles may be
taxed in that State. Such items of income may also be taxed in the
Contracting State where the income arises". A bare perusal of Article
22 makes it abundantly clear that it deals with residual items of
income which are not covered in any of the earlier Articles of the
Treaty. To put it differently, if an income is covered under one of the
Articles then application of Article 22 is ousted on such income.
Presently we are dealing with a situation in which the assessee
earned income by rendering the services which are in the course of its
business. Ordinarily, such income would remain under Article 7,
unless specifically dealt by other Articles. The case of the AO is that
Article 12 is applicable. We have noticed that such Article deals only
with `Royalties' and not `Fees for included services'. Obviously, the
application of Article 12 is ruled out. In that view of the matter, such
income would remain included under Article 7 and will not move in
the lap of Article 22, which deals with items of income not expressly
dealt with in the other Articles of the DTAA. As the nature of the
extant income is such which is otherwise specifically covered under
Article 7, it cannot be considered in the residual provision of Article
22. Whichever way we may view the income, the opinion of the
authorities below of including it under Article 12 or under Article 22
is not sustainable. The amount falls under Article 7 as `Business
profits' and is hence not chargeable to tax because of the absence of
any PE in India. We, therefore, hold that the amount of `79.99 lakh
falls under Article 7 and not under Article 12 or Article 22 of the
DTAA.
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "L", MUMBAI ITA No.8986/Mum/2010 : Asst. Year 2007-2008 Sargent & Lundy, LLC, USA, Date of Pronouncement : 24.07.2013 Briefly stated the facts of the case are that the assessee was incorporated in and is tax resident of USA. It is a consulting firm engaged in providing services to the power industry by providing diverse services such as operating power plants, decommissioning consulting, project solutions and other engineering based services. In the previous year relevant to the assessment year under consideration, the assessee received a sum of Rs.2,22,16,154/- from L&T Limited for rendering consulting and engineering services in relation to Ultra Mega Power projects in Mundra and Sesan. he only controversy is as to whether such technical services can fall within the scope of the DTAA. Article 12 of the DTAA, inter alia, deals with `fees for included services'. Para 4 of the Article defines this expression as : " …….payments of any kind to any person in consideration for the rendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services: ……. b. make available technical knowledge, experience, skill, know-how, or processes, or consist of the development and transfer of a technical plan or technical design." It is not the case of the assessee that the payment is covered by para 5 of the Article 12, which states that "fees for included services" does not include amounts paid in respect of certain items enumerated therein. A brief resume of the services provided by the assessee to L&T as noticed above makes it abundantly clear that these are in the nature of `technical or consultancy services' as per the main part of para 4 of the DTAA. To this extent the definition of `fees for included services' given under the DTAA matches with that given in Explanation to section 9(1)(vii), which provides that : "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include …..". At the cost of repetition, we mention that that the assessee has not assailed the finding of the AO in treating the amount as covered under `fees for technical services' as per section 9(1)(vii) of the Act. The arguments made before us revolve around the definition of `fees for included services' as per Article 12 of the DTAA. In nutshell, there are two aspects of the definition of `fees for included services' for our purpose, viz., first that there should be rendering of `technical or consultancy services' and second that such services should be `made available' to the payer of such services. On perusal of the details of the nature of work done by the assessee for L&T, we have held above that the consideration is for the rendition of `technical or consultancy services'. The case of the assessee largely hinges on the second aspect of the definition, being `making available' such technical or consultancy services. The ld. AR argued that the activities done by the assessee did not result into making available such technical or consultancy services to L& 14. Adverting to the facts of the extant case we find that the technical services provided by the assessee in the shape of technical plans, designs, projects, etc. are nothing but blueprints of the technical side of mega power projects. Admittedly such services are rendered at a pre-bid stage. It is quite natural that such technical plans etc. are meant for use in future alone if and when L&T takes up the bid for the installation of the power project. When the otherwise technical services provided by the assessee are of such a nature which are capable of use in future alone, we fail to comprehend as to how the same can be considered as not made available to L&T. In our considered opinion, there is no infirmity in the impugned order holding that the assessee received consideration for `making available' technical services within the meaning of Article 12 of the DTAA. This ground is not allowed..
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "L", MUMBAI ITA No.8847/Mum/2010 : Asst. Year 2007-2008 ITA No.8847/Mum/2010 : Asst. Year 2007-2008 Date of Pronouncement : 24.07.2013
We have heard the rival submissions and perused the material on record. Before going into the first question of the availability of the benefit of Article 8 of the DTAA in respect of such 21 voyages, we proceed to examine as to whether the amount is chargeable to tax as per Article 7 of the DTAA. The ld. AR was fair enough to accept that CMA may be considered as the dependent agent of the assessee. Thus, it satisfies the requirement of Article 5 of the DTAA. We therefore, hold that CMA was the agent of the assessee and hence constitutes its permanent establishment in India. 4. The next question is determination of the `Business profits' as per Article 7 of the DTAA. 6. It is observed that the income in respect of 21 voyages which has been considered as chargeable to tax in India as per Article 7 of the DTAA is the amount on which the assessee paid commission etc. to CMA, which is its AE and also a dependent agent. The receipt in the hands of the CMA has been determined at ALP under due process of law. Though we do not find the submissions of the ld. DR recorded above as absolutely devoid of any force, but the cases of Set Satellite (supra) and Delmas France (supra) stand in the way. In these decisions, it has been held that where the associated enterprise (that also constitutes a PE) is remunerated on ALP, then nothing further would be left to attribute to the PE. In that view of the matter and respectfully following the precedents, we uphold the contention of the ld. AR. We, therefore, hold that income in respect of 21 voyages cannot be included in the hands of the assessee.
IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH : CHENNAI I.T.A. No. 1774/Mds/2012 Assessment year : 2008-09 Sundaram Asset Management Date of Pronouncement : 19-07-2013 Co. Ltd.,
Dis-allowance u/s. 40(a)(i) Rs. 33,48,666/- on account of non-deduction of tax at source u/s. 195 on the payments made to M/s. Fund Quest a non-resident firm:
ld. Counsel on ground No. 3 of the appeal submitted that an amount of Rs. 33,48,666/- was paid to M/s. Fund Quest for the services rendered abroad. M/s. Fund Quest does not have PE in India and the services rendered by them were advisory in nature. The Assessing Officer has erred in come into the conclusion that the payment is in the nature of 'Royalty'. The assessee had not obtained any certificate u/s. 197 of the Act as assessee had no doubt that the payment is for services and not in the nature of 'Royalty'. Since, the said amount is not taxable in India, the provisions of Section 195 are not applicable.. The third ground in the appeal relates to dis-allowance u/s. 40(a)(ia). The assessee is into investment business. The assessee has entered into an agreement with M/s. Fund Quest (France) on 13-07-2007, to provide investment advice for the investments to be carried outside India. M/s. Fund Quest has been providing advisory services. For the services rendered, the assessee paid fee in accordance with mutual agreement. In the course of providing advisory services, M/s. Fund Quest is providing certain data of the companies which facilitates the assessee to make investment decisions. The information provided to the assessee by Fund Quest in the form of database is published information which is available in public domain. M/s. Fund Quest has merely compiled the information and transmitted the same to assessee. The authorities below termed the payments made by the assessee to M/s. Fund Quest for the services and data provided as 'Royalty' We are of the considered opinion that such payments cannot be termed as 'Royalty' as defined under the provisions of the Act. The term 'Royalty' has been defined in Explanation (2) to Section-9, Sub-section-1, Clause-(vi) which is re-produced here in below.. Thus, a perusal of the term of 'Royalty' as defined in the Act shows that it does not include any information provided in the course of advisory services. We do not agree with the findings of the CIT(Appeals) on the issue. Since, payments made to M/s. Fund Quest are not in the nature of 'Royalty' and the services were rendered abroad, no part of income had accrued or arisen in India. The assessee is not liable to deduct tax at source on the payments so made. The findings of the CIT(Appeals) on this issue are set aside and this ground of appeal of the assessee is allowed.
Capital gains or business income - The taxation conundrum
[2013] 35 taxmann.com 249 (Article)
Capital gains or business income - The taxation conundrum
SANJEEVA NARAYAN
CA
Introduction
1. The issue whether the gains arising from sale/dealing of shares are taxable under the head "Capital Gains" or under "Business Income" has been increasingly engaging the attention of the assessees, the tax department and, consequently, of the judiciary. The litigation on the issue has tended to only multiply. The question has attained greater relevance in the cases where an assessees (immaterial of whether it is an individual, firm, company or any other entity) have engaged in a series of frequent transactions and the turnover is high. The question also assumes relevance in cases where an assessee bifurcates his gains (on some rational, systematic and consistent basis by applying criteria such as the period of holding, or the actual/constructive delivery of shares, etc.) into Capital Gains or Business income, i.e., where he maintains a dual portfolio comprising of a trading portfolio and an investment portfolio and, consequently, has income both under the head "Capital Gains" as well as under "Business Income".
This article analyzes the issue with reference to the provisions of the Income-tax Act, 1961, the guidelines/circulars issued by the Central Board of Direct Taxes and the judicial pronouncements on the issue.
Tax treatment in cases of gains from sale/dealing of shares
2. The tax treatment in such cases would depend upon the fact whether the said activity has been undertaken by the assessee as an "investor" with a view to partake in the short/medium/long-term fortune of the investee-companies as opposed to that of a "trader" with a view to benefit from fluctuation in prices? Such a distinction, at a first glance, might seem to be exceedingly simple but in practice is complex and difficult.
2.1 Treatment under the Income-tax Act, 1961 - Income under the head "Profits and Gains of Business or Profession" is to be computed in the manner specified in sections 28 to 44 of the Income-tax Act, 1961 and, correspondingly, trading assets are dealt with under section 28 of the Act. Similarly, Capital Gains are to be computed in accordance with sections 45 to 55A of the Act. "Capital Assets" are defined in section 2(14) of the Act to include property of any kind held by an assessee whether or not connected with the business or profession. Long-term capital assets and gains are defined in section 2(29A)/(29B) and short–term capital assets and gains are defined in sections 2(42A)/(42B) of the Act.
2.2 Treatment in view of guidelines/circulars issued by the CBDT
2.2.1 CBDT's Instruction No. 1827, dated 31-8-1989 - The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 [F. No. 181/1/89-IT(AI), dated 31-8-1989] had initially brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital assets) and shares held as stock-in-trade (trading assets). After discussing a number of judicial decisions pronounced on the subject the CBDT had emphasized on fact that "although the tests laid down by the Courts may help determine the issue in particular cases, the decision will ultimately turn on the facts of each case."
2.2.2 CBDT's office memorandum, dated 13-12-2005 – Tests to distinguish between shares held as stock-in-trade and shares held as investments - The CBDT has also issued guidelines on tests for distinction between shares held as stock-in-trade and shares held as investment vide office memorandum, dated 13.12.2005 [F. No. 149/287/2005-TPL]which are reproduced as under:—
"Circumstances to be considered by the Assessing Officers in determining whether a person is a trader or an investor in stocks:-
| (i) | Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity; | |
| (ii) | Whether, the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or for earning dividends and interest. | |
| (iii) | Whether scale of activity is substantial; | |
| (iv) | Whether transaction were entered into continuously and regularly during the assessment year. | |
| (v) | Whether purchases are made out of own funds or borrowings; | |
| (vi) | The stated objects in the Memorandum and Articles of Association in the case of corporate assessee; | |
| (vii) | Typical holding period for securities bought and sold; | |
| (viii) | Ratio of sales to purchase and holding. | |
| (ix) | The time devoted to the activity and the extent to which it is the means of livelihood. | |
| (x) | The characterization of securities in the books of account and balance sheet as stock-in-trade or investment. | |
| (xi) | Whether the securities purchased or sold are listed or unlisted. | |
| (xii) | Whether investment is in sister/related concerns or independent companies. | |
| (xiii) | Whether transaction is by promoters of the company. | |
| (xiv) | Total number of stock dealt in | |
| (xv) | Whether money has been paid or received or whether these are only book entries". |
The above Memorandum also advised the Assessing Officers that no single criteria listed would be decisive and that the total effect of all these parameters should be considered to determine the nature of an activity.
2.2.3 CBDT's Circular No. 4/2007, dated 15-6-2007 on the issue - The Central Board of Direct Taxes has vide Circular No. 4/2007, dated 15-06-2007 [F. No. 149/287/2005-TPL] after discussing a number of judicial decisions on the subject pronounced by the Supreme Court and the Authority of Advance Rulings emphasized on the fact that "it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated a capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, i.e., capital gains as well as business income." The said Circular has also advised the Assessing Officers that "the above principles should guide them in determining whether, in a given case, the shares are held by the assessees as investments (and, therefore, giving rise to capital gains) or as stock-in-trade (and, therefore, giving rise to business profits). The Assessing Officers have been further advised that "no single principle would be decisive and that the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade?" The said Circular has discussed on the following judicial decisions:-
2.2.3.1 JUDICIAL PRONOUNCEMENTS ON THE ISSUE DISCUSSED IN THE ABOVE CIRCULAR
| ♦ | Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. | |
| CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC) | ||
| ♦ | The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment, was a question of law. This was a mixed question of law and fact. | |
| CIT v. H. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 (SC) | ||
| ♦ | 13. .............................................................. |
| "(i) | where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; | |
| (ii) | the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; | |
| (iii) | ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. |
| ** | ** | ** |
33. We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account, i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits."
Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR – New Delhi)
2.3 CBDT's guidelines/instructions vis-Ã -vis Judicial pronouncements - The above guidelines/instructions/circulars issued by the CBDT also need to be viewed in the context of judicial pronouncements. These Judicial pronouncements have been briefly given hereunder:—
| ♦ | It is fairly clear that where a person in selling his investment realizes an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realization of the investment but an act done of making profits. The distinction between the two types of transactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realizing a security or a gain in an operation of profit making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was trading transactions, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade? The surplus realized on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realizing his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in a higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business? |
Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC)
| ♦ | Mere fact that an investment company periodically varies its investment does not necessarily mean that the profits resulting from such variation are taxable under the Income-tax Act. Variation of its investments must amount to dealing in investments before such profits can be taxed as income under the Income Tax Act. |
Dalhousie Investment Trust Co. Ltd. v. CIT [1967] 66 ITR 473 (SC)
| ♦ | In deciding whether a venture is in the nature of trade no rigid formula can be applied. The total impression must be gathered from all the relevant facts and circumstances. | |
| In a transaction of purchase and re-sale where the purchase is made solely and exclusively with the intention to re-sell at a profit and the purchaser has no intention of holding the property for himself or otherwise using it, the presence of such an intention is a relevant fact and unless offset raises a strong presumption that the adventure is in the nature of trade. |
Premji Bhimji v. CIT [1971] 81 ITR 179 (Cal.)
| ♦ | In order that it may be held that a person is undertaking a trade or business, or entering into an adventure in the nature of trade, it is essential that the particular transactions under scrutiny should have been entered into with the intention of earning a profit. Though that is not a conclusive test it is certainly an essential test before such a conclusion can be drawn; but such a case is quite different from the case of a person purchasing property with the dominant intention of using it himself or enjoying it himself but at the same time expecting that at some future date if it goes up in value he may take advantage of the rise in the price. | |
| If a person invests money in land intending to hold it, enjoys its income for sometime, and then sells it at a profit, it would be a case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale, though profitable, are outside the domain of adventure in the nature of trade. | ||
| Though intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that, when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception. |
Bhogilal H. Patel v. CIT [1969] 74 ITR 692 (Bom.)
| ♦ | It is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. |
P. M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC)
| ♦ | The term "adventure in the nature of trade" clearly suggests that the transaction itself cannot properly be regarded as trade or business. It is characterized by some of the essential features that make up trade or business but not by all of them; and so even an isolated transaction can satisfy the description of an adventure in the nature of trade. It is impossible to evolve any formula which could be applied to determine the character of an isolated transaction. However, the following factors are relevant: Was the purchaser a trader and was the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? What is the nature of the commodity purchased and re-sold and in what quantity was it purchased and re-sold? If the commodity purchased is generally the subject matter of trade and if it is purchased in very large quantities it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity and thereby make it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and resale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture? The total effect of all the relevant factors and circumstances would determine the character of the transaction. |
CIT v. Himalayan Tiles & Marble (P.) Ltd. [1975] 100 ITR 177 (Bom.)
| ♦ | A number of principles have been enumerated succinctly and in the narrow compass of a few sentences:- |
| "(a) | The commodity purchased plays an important role in deciding whether a person was indulging in an adventure in the nature of trade or was making an investment? | |
| (b) | Whether the transaction was an isolated one or formed part of a series of transactions showing a tendency to indulge in trade is another important factor; | |
| (c) | The fact that the property bought has been sold within a short time does not by itself indicate that the transaction was in the nature of trade; | |
| (d) | If land has been purchased or a commodity which normally is not treated as a stock-in-trade has been purchased, the presumption is that the intention was to make an investment and not to indulge in an adventure in the nature of trade, and | |
| (e) | If the property purchased was capable of yielding income then again the inference was that an investment was intended and not an adventure." |
Michael A. Kallivayalil v. CIT [1976] 102 ITR 202 (Ker.)
| ♦ | Where there is an isolated transaction, some of the indicia for testing whether the transaction was a transaction in the nature of investment or of an adventure in the nature of trade are:- |
| (a) | Was the purchase a trade and where the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? | |
| (b) | What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? | |
| (c) | Did the purchaser, by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily resaleable? | |
| (d) | What were the incidents associated with the purchase and resale? | |
| (e) | Were they similar to the operations usually associated with trade or business? | |
| (f) | Are the transactions of purchase and sale repeated? | |
| (g) | In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? | |
| (h) | Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assessee or whether they represent borrowed money? |
G.Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC)
| ♦ | In order to determine whether profit arising on sale is business income, the following tests can be applied:— |
| • | The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment? If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, if would furnish a valuable guideline; | |
| • | The second test is why and how and for what purpose the sale was effected subsequently? | |
| • | The third test is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee, whether it has been treated as stock-in-trade, or has been shown in the books of account and balance sheet as an investment? This inquiry, though relevant, is not conclusive; | |
| • | The fourth test is how the assesee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments? This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation; | |
| • | The fifth test normally applied in cases of firms and companies is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity? | |
| • | The most important test is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, an inference can readily be drawn that the activity is in the nature of business. |
CIT v. Rewashanker A. Kothari [2006] 283 ITR 338/155 Taxman 214 (Guj.)
| ♦ | According to the Assessing Officer as well as the Tribunal, the shares were held as an investment of the assessee and, therefore, the profit earned by the assessee on the sale of the shares was to be treated as capital gains. However, the CIT was of the view that the shares were the stock-in-trade of the assessee and, therefore, profit earned on the sale thereof could not be treated as capital gains but as business income; | |
| It was noted by the Tribunal that in earlier assessment years, the assessee had shown the shares held in BT Tech Net Ltd., as an investment right from the date of purchase and this was shown as such in the balance sheet of the assessee, which was filed alongwith the return of income. No objection was taken to this position in the earlier years. However, the CIT had not decided that it was not an investment without there being any change in facts and, therefore, the Tribunal held that there was no occasion for the CIT to take a contrary view than what was disclosed and accepted on earlier occasions; | ||
| ♦ | Even on merits, the Tribunal came to the conclusion that the shares held by the assessee in BT Tech Net Ltd. were an investment and, therefore, any profit earned on the sale thereof was required to be treated as capital gains. Whether the shares were held by the assessee as an investment or stock-in-trade was a matter of fact, and we do not find any perversity in the view taken by the Tribunal that the shares were held as an investment. |
CIT v. Gulmohar Finance Ltd. [2008] 170 Taxman 483 (Delhi)
| ♦ | Capital gains viz-a-viz business income – sale of shares, there is nothing, in law, which prohibits a trader in shares to invest in shares. The intention of the assessee is relevant to determine whether he is carrying on the business in shares or investments. It was found that the assessee had been holding shares for a long time and had been utilizing the surplus funds only for the investments. Both, CIT(A) and Tribunal had concurrently found as a fact that assessee was dealing as also investing in shares while maintaining separate books of account and receipts from sale of shares in question was assessable under the head capital gains. Finding was not perverse, hence, no substantial question of law arose. |
CIT v. S. Rammaamirtham [2008] 217 CTR 206 (Mad.)
| ♦ | We were of the view that the Tribunal had not committed any error in the opinion expressed by it. The assessee held the shares as an investment and there was nothing to show that the investment was converted into stock-in-trade of the business of the assessee. In fact, the business of the assessee appeared to have been that of running a restaurant. It was true that one of the objects mentioned in the Memorandum of Association was with respect to buying and selling of shares but that was neither the business of the assessee nor was there any material on record to show that the assessee was regularly dealing in shares. | |
| The Supreme Court in Raja Bahadur Kamakhya Narain Singh(supra) took the view that the treatment given to a transaction in the books of account is of importance. As noted above, the assessee had shown its shareholding in JPIL as an investment and not a stock-in-trade of business. As already noted, there was nothing to show that the shares were converted into stock-in-trade. | ||
| Under these circumstances, the Commissioner as well as the Tribunal were justified in holding that the claim of the assessee for capital gains was justified and that the Assessing Officer was not correct in taking the income of the assessee from the sale of shares as business income. |
CIT v. Ess Jay Enterprises (P.) Ltd. [2008] 173 Taxman 1 (Delhi)
| ♦ | Whether where shares were never treated by assessee as stock-in-trade and they were held for earning dividend only, profit on sale of shares in question was to be treated as capital gains instead of as business income, as adopted by Assessing Officer? |
CIT v. N.S.S. Investments (P.) Ltd. [2007]158 Taxman 13 (Mad.)
| ♦ | The mere volume of transactions by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings, as each year is an independent year of the assessment, but in order to maintain consistency it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts. | |
| In the facts of the instant case, the assessee was holding the shares as an investment from year-to-year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude, but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains, both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction would not change the nature of transaction, which were being assessed as income from capital gains in the past several years. The Assessing Officer was to be directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. |
Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mum.)
| ♦ | The assessee was in the business of investments in shares and securities and it was never in the business of trading in shares. The term 'business' is defined in sec. 2(13). The "capital asset" is defined in sec. 2(14). The test to decide whether it is an investment or an adventure in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business and even multiple transactions sometimes are deemed as investments. So, the criteria for deciding whether it is investment or business is that of the intention of the assessee, viz., whether assessee's real intention is to invest or the intention is in the nature of trade. As per the memorandum of association of the assessee-company, it could be seen that the assessee-company was incorporated to engage in the business of investment. The finding given by the Tribunal was that the assessee had no intention to trade in shares. Hence, the purchase of shares could not be business asset in the hands of the assessee. The assessee had rightly offered the same under the head "Capital gain". The Tribunal also correctly arrived at a conclusion that it was only an investment activity and held that the profits derived from the sale of shares were subject to capital gain. The reasons given by the Tribunal were based on valid materials and evidences and there was no error or legal infirmity in the order of the Tribunal so as to warrant interference. Under the circumstances, no substantial question of law arose. |
CIT v. Trishul Investments Ltd. [2008] 305 ITR 434 (Mad.)
| ♦ | Reference may also be made to a recent judgment of the Mumbai Bench of the Income Tax Appellate Tribunal in the case ofGopal Purohit v. Jt. CIT [2009] 29 SOT 117 (Mum.), wherein the following observations have been made:- | |
| "In the present case, the assessee is also maintaining separate records for both types of transactions. Further, in the present case, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature, i.e., one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee's case on a more strong footing. Hence, in our view, the ratio of this decision would squarely apply to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain, depending upon the period of holding." | ||
| ♦ | The Hon'ble High Court in the case of CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom.) had concurred with the view of the Income Tax Appellate Tribunal with the following remarks:— | |
| "Held, dismissing the appeal, (i) that it was open to the assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, and this warranted no interference. | ||
| (ii) That there should be uniformity in treatment and consistency when facts and circumstances for different years were identical particularly in the case of the same assessee. | ||
| (iii) That entries in the books of account alone are not conclusive in determining the nature of income." | ||
| While delivering the above judgment the High Court had opined that it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, that there should be uniformity in treatment and consistency when facts and circumstances are identical, particularly in the case of the assessee and that entries in books of account along are not conclusive in determining the nature of income. Subsequently, the Special Leave Petition filed by the Department against the said judgment had been dismissed by the Hon'ble Supreme Court vide judgment, dated 15-11-2010 passed in the case of CIT v. Gopal Purohit [S.L.P. (Civil) No. 32891 of 2010 reported at 334 ITR 308 (Statutes)] | ||
| ♦ | The Delhi High Court in a recent judgment delivered on 9-1-2013 in the case of CIT v. Avinash Jain [2013] 214 Taxman 260/30 taxmann.com 133 has upheld the decision of the Hon'ble Income Tax Appellate Tribunal deleting the addition made by the Ld. Assessing Officer by holding that the intent and purport of the CBDT's Circular No. 4/2007, dated 15-6-2007 is that a taxpayer could have two portfolios, namely, an investment portfolio and a trading portfolio. The assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case, whenever the shares are sold and gains are made, the gains would be capital gains and not profits of any business venture. In this connection the following observations made by the Learned Judges are relevant and topical. | |
| "5. Before us the Ld. Counsel for the revenue submitted that while the CBDT's Circular only mentioned that it was "possible" for a taxpayer to have two portfolios, namely, an investment portfolio and a trading portfolio, the Tribunal has misunderstood the said Circular by holding that the Circular had "allowed" the assessee to maintain two types of portfolios. Although technically the Ld. Counsel for the revenue may be right, but that really does not make any difference when the entire circular is considered. The intent and purport of the circular is to demonstrate that a taxpayer could have two portfolios, namely, an investment portfolio and a trading portfolio. In other words, the assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case whenever the shares are sold and gains are made the gains would be capital gains and not profit of any business venture. In the latter case, any gains would amount to profits in business. This has been made clear by the CBDT's Circular in the remaining portion of the Circular itself. | ||
| 6. On the facts, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have held that the short-term capital gains and the long-term capital gains in the present case were out of the investment account and were not related to the trading account of the assessee. That being the position, no interference with the decision of the Tribunal is called for. No question of law arises for our consideration." |
Conclusion
3. In the light of the above discussions, it seems abundantly clear that the dominant judicial, administrative and professional opinion is that there is no bar on an assessee for maintaining two portfolios, viz., an investment portfolio and a trading portfolio. However, while accounts in respect of the said activities should not only be separately maintained, but, in addition a systematic criteria needs to be adopted and consistently applied to bifurcate the various transactions into each of the portfolios. In the case of an investment activity the intention to acquire and hold the underlying securities should be evident from the underlying facts and records. The transactions should invariably be backed by actual/constructive delivery of shares.
 | Provision of Section 80IA on inter unit and intra unit transfer |
| Posted on 26 July 2013 by Diganta Paul | |
CourtINCOME TAX APPELLATE TRIBUNAL BriefThe assessee is a company and is engaged in the business of manufacture of fertilizers, chemicals, soya oil etc. It manufactures and sells single super phosphate, Sulphuric Acid in its three fertilizers unit situated at Nimrani (MP), Jhansi (UP) and Nimbakhera (Rajasthan) and De-oiled cake, soya oil in its Agro based unit at Ratlam (MP). The assessee also is engaged in trading activities in the above products. The assessee company is having power generation unit at Nimrani, MP, wherein it has set up a 3.2 MW turbo generating set. The assessee had claimed deduction u/s 80 IA, on 100% of the profits of its power division. It further claimed deduction u/s 80 IA at 30% of the profits on its single super phosphate and Sulphuric Acid unit CitationDy.CIT, Co.Circle 5(1) New Delhi (Appellant) Vs. M/s Khaitan Chemicals & Fertilizers Ltd. 201, Skipper House, 62-63 Nehru Place New Delhi 110 019(Respondent) Judgement IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: "D" New Delhi BEFORE SHRI I.C. SUDHIR, JM AND SHRI J.SUDHAKAR REDDY, A.M ITA No: 1840/Del/2009 Assessment Year: 2005-06 A N D ITA No: 4112/Del/2010 Assessment Year : 2007-08 Dy.CIT, Co.Circle 5(1) New Delhi (Appellant) Vs. M/s Khaitan Chemicals & Fertilizers Ltd. 201, Skipper House, 62-63 Nehru Place New Delhi 110 019 (Respondent) ITA No: 4200/Del/2010 Assessment Year: 2007-08 Khaitan Chemicals & Fertilisers P.Ltd. New Delhi (Appellant) Vs. ACIT, New Delhi (Respondent) Department by: Ms. Shumana Sen, D.R. Assessee by: Sh. V.K. Jain, C.A. O R D E R PER J.SUDHAKAR REDDY, ACCOUNTANT MEMBER The Appeal for the AY 2005-06 is filed by the Revenue and is directed against the order of the Ld.CIT(A)-VIII, New Delhi dated 18.2.2009. Appeals for the AY 2007-08 are Cross Appeals directed against the order of the Ld.CIT(A)- VIII, New Delhi dated 30.6.2010. 2. As the issues arising in all these appeals are common, for the sake of convenience they are heard together and are disposed of by way of this common order. 3. Facts in brief:- The assessee is a company and is engaged in the business of manufacture of fertilizers, chemicals, soya oil etc. It manufactures and sells single super phosphate, Sulphuric Acid in its three fertilizers unit situated at Nimrani (MP), Jhansi (UP) and Nimbakhera (Rajasthan) and De-oiled cake, soya oil in its Agro based unit at Ratlam (MP). The assessee also is engaged in trading activities in the above products. The assessee company is having power generation unit at Nimrani, MP, wherein it has set up a 3.2 MW turbo generating set. The assessee had claimed deduction u/s 80 IA, on 100% of the profits of its power division. It further claimed deduction u/s 80 IA at 30% of the profits on its single super phosphate and Sulphuric Acid unit. The AO denied deduction u/s 80 IA by observing as follows. "5. To ascertain the existence of eligible business of power generation in the case of assessee company, the annual report of the company for the relevant AY was examined. As regards the details on business of the company, during the relevant period a note is given in annexure B para 2 under head 'business organisation' on page no.9 of the Annual report which is reproduced verbatim as under: "The company is mainly engaged in the manufacturing of single super phosphate, (fertilizer) and edible oil. It has three plants of SSP situated at Nimrani (MP), Jhansi (UP) and Nimbahera (Rajasthan). It also has plant of soya solvent extraction plant/refinery at Ratlam (MP). The company has an extensive marketing net work to support its business activities." From the above, the generation of power has not been admitted to be the business of assessee company in terms of s.80 IA. The composition of sales shown in the annual report at point no.16(c ) page 31 was also examined. In the details of opening, closing stock and sales, no detail of power as product of the company is shown. 6. Unit wise profit and loss account of the company were called for during the assessment proceedings. It was seen that power generated was meant for captive consumption only and not for sale to other parties which is further corroborated by the permission letter dt. 28.10.98 of Chief Engineer (Commercial), M.P.E.B., Jabalpur, as enclosed with the form 10 CCB. The permission letter is related to allowing installation of 3.2 MW set for generating power to be consumed by the assessee for its fertilizer plant. The relevant extracts in para (ii) of the permission letter are noted below: "No permission for third party sale would be entertained in future also from this. 3.2MW set." Also in para vi, it is further specifically mentioned that: "Captive power plant is basically meant for HT consumers own production activities and the feasibility of installation of captive power plant should not be based on sale or wheeling of power to MPEB or other HT consumers. MEPB will not involve in any type of certification/clarification required by their financiers in this regard." 7. Now it is also pertinent to refer to the provisions of S.80IA(8) which are as under: "Where any goods or services held for the purposes of eligible business are transferred to any other business carried on by the assessee or where any goods or services held for the purpose of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of eligible business does not correspond to the market value of such goods or services as on the date of transfer, then, for the purpose of deduction under this section, the profit and gains of such eligible business shall be computed as if the transfer, in either case, had been made at the market value of such goods or services as on that date." From the reading of the section it is evident that it speaks of inter unit transfer and not intra unit transfer of goods. The emphasis is on transfer between separate eligible business of the company which is to be taken at market value. 8. From the analysis of unit wise profit and loss account, the permission letter from MPEB and Annual report of the assessee company whose relevant extracts have already been high lighted in preceding paragraphs, the assessee does not have any business of generation of power which can be construed as eligible business in terms of s.80 IA(1) read with s.80IA(8) of the Act. The power plant as per the permission letter of MPEB dt. 28.10.98 is meant for own consumption of power and it is not an agreement with the local authority for setting up an undertaking to generate power as eligible business. 9. It is also pertinent to note that in the assessee's business of fertilizer manufacturing, steam is generated in huge quantity as a waste product which is of no tangible value. By putting the waste product to effective use in its manufacturing process, by setting up a captive power generation plant, can by no means qualify as eligible business of assessee. The permission letter of MPEB debars the assessee from sale of power to third parties and specifically mentions in para ii that no permission for third party sale would be entertained in future also from this 3.2MW set. Hence the said power generation by captive power plant cannot be considering to be satisfying the pre requisite criteria of 'eligible business' for claiming the benefit of deduction u/s 80IA of the Act." 4. Aggrieved, the assessee carried the matter in appeal. The First Appellate Authority granted relief. Aggrieved the Revenue is in appeal on this issue for the AY 2005-06 on the following effective ground. "2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred in directing AO to allow claim of deduction u/s 80 IA. a) Ignoring that the basic contention of the AO was that the transfer of power is intra unit and not inter unit. Thus, the AO has held that power division at Nimrani (MP) is not an independent and distinct unit. This is further corroborated from the fact that separate books of accounts, balance sheet, profit and loss account were not prepared for the power division. This has been pointed out by the Auditors in the P&L a/c of power unit annexed with Form 10 CCB that the power unit has been prepared on the basis of composite books of accounts and other accounts made by the company and based on the assumption attached in Annexure K(iv). The assumptions in annexure K(iv) revealed that cost of steam transfer to power unit from the other units has been charged on estimated price @ 1.7 per unit and credit has been given to the respective unit on the basis of SA production of the respective units. Thus, the profit & loss a/c for the power unit is based on estimation and not on the actual basis. b) As the case laws quoted by the Ld.CIT(A) not in any way support the claim of deduction u/s 80 IA in the case of intra unit transfer. c) As the Ld.CIT(A) has not been able to bring out any material fact to establish that the transfer of power was inter unit and not intra unit. It has not been discussed as to whether the power division is an independent and distinct unit as required u/s 80 IA. d) Since the assessee has not maintained independent books of accounts for the power division as pointed out by the auditor it is evident that the power division at Nimrani was not an independent and district unit and therefore the transfer of power was intra unit and inter unit. Therefore assessee is not eligible to claim deduction u/s 80 IA of the Act. e) Ignoring that no 10 CCB has been filed by the asssessee for fertilizer division at any stage and power division is not an independent unit. f) The principle of res-judicata is not applicable in income tax proceedings." 5. For the AY 2007-08 in addition to the issue of disallowance of deduction u/s 80IA of the Act on 100% of the profits of power generating unit, the Revenue disputed the issue of treating the profits on sale of shares, as capital gains by the Ld.CIT(A) as the income treated by the AO as business income. The effective grounds of Revenue in this year are as follows. "2. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in allowing the deduction u/s 80 IA of the Act of Rs.1,70,29,232/-. 2.1. The Ld.CIT(A) ignored the findings recorded by the AO and the fact that the assessee did not fulfil the conditions laid down in sub section 5 of section 80 IA of the Act. 3. On the facts and in the circumstances of the case and in law, the ld.CIT(A) has erred in treating the income from share trading as capital gains as against the business income treated by the AO. 3.1. The Ld.CIT(A) ignored the fact that the assessee indulged in trading of shares at frequent intervals." 6. The assessee in the A.Y. 2005-06 raised the following effective grounds. 2.(a) The Ld.CIT(A) while adjudicating upon the allowability of deduction u/s 80 IA of the Act in respect of power unit of the appellant company has wrongly concluded that deduction u/s 80 IA of the Act shall be allowed after setting of brought forward losses and unabsorbed depreciation of the power unit against the eligible profits of the power unit for the AY 2007-08. (b) The Ld.AO has concluded that the deduction u/s 80IA of the Act shall be allowed after reducing the brought forward losses/unabsorbed depreciation of the power unit from the eligible profits of the power unit for AY 2007-08 by relying on the order of the Special Bench of the Hon'ble ITAT in the case of Gold Mine Shares & Finance P.Ltd. wherein the facts were not same as that of the appellant company and has ignored the ruling of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills P.Ltd. vs ACIT reported in 231 CTR 368 and Hon'ble Madras ITAT in the case of Mohan Breweries & Distilleries Ltd. Vs. ACIT 311 ITR 0346 wherein it has been held that loss or depreciation earlier to the initial AY already absorbed against the profit of other business cannot be notionally brought forward set off against the profits of the eligible business. (c)The Ld.CIT(A) has given observation and decided the allowability of deduction u/s 80 IA on an issue which is not arising from the order of AO at all 3.(a) The Ld.A.O. has erred in making disallowance as per rule 8D. The provision of Rule 8D are not applicable for AY 2007-08 as has already been held by Hon'ble Mumbai High Court in the case of Godrej Boycee in ITA 626 of 2010 writ Petition no.758 of 2010. (b) The Ld.CIT(A) has erred in confirming the disallowance of a sum of Rs.6,61,382/- u/s 14 A of the Act by concluding that the expenditure incurred for earning exempt income. The Ld.CIT(A) has failed to appreciate that the appellant company has not received any dividend income or any other exempt income during the year under appeal and therefore the provisions of S.14A of the Act were not attracted. c) Without prejudice the Ld.CIT(A) while confirming the disallowance of Rs.661382/- u/s 14A of the Act has made disallowance of Rs.596507/- out of interest paid and Rs.64875/- out of indirect expenses aggregating to Rs.661382/-. The Ld.CIT(A) has failed to appreciate that the interest was paid to bank/financial institutions on term loans/working capital facilities for carrying out the business of manufacturing and sale of fertilizers, soya oil etc. and such loans cannot be used for investment in shares and therefore the disallowance u/s 14A out of interest paid is not warranted." 7. We have heard the Ld.D.R. Ms.Shumana Sen on behalf of the Revenue and Shri VK Jain, the Ld.Counsel for the assessee at length. 8. On a careful consideration of the facts and circumstances of the case and perusal of papers on record, orders of the authorities below and various case laws cited, we hold as follows. 9. The issue whether profits from a captive plant is eligible for relief u/s 80 IA is no more res integra. The Hon'ble Madras High Court in the case of CIT, Madurai vs. Thiagarajar Mills Ltd. Kappalur (Tax appeal no. 68 to 70/2010 dt. 7.6.2010) considered the issue and decided in favour of the assessee. The substantial question of law considered by the Hon'ble High Court reads as follows:- "Whether on the facts and in the circumstances of case, the Tribunal was right in holding that the assessee is entitled to deduction u/s 80 IA of the Act in respect of notional profits on account of power generation from its own captive power plant and utilized by itself?" At page 9, the Hon'ble Court has held as follows:- "In Section 80 IA(i) also no restriction has been imposed as regards the deriving of profit or gain in order to state that such profit or gain derived only through an outside source alone would make eligible for the benefits provided in the said section. Therefore, there is no difficulty in holding that captive consumption of the power generated by the assessee from its own power plant would enable the respondent/assessee to derive profit end gains by working out the cost of such consumption of power in as much as the assessee is able to save to that extent which would certainly be covered by s.80 IA(1). When such will be the out come out of own consumption of the power generated and gained by the assessee by setting up its own power plant, we do not find any lack of merit in the claim of the respondent/assessee when it claimed by relying upon s.80-IA(1) of the Income Tax Act by way of deduction of the value of such units of power consumed by its own plant by way of profit and gains for the relevant assessment years." Thereafter at para 13, page 14 it held as follows "13. A perusal of the above said circular would clearly show that it is also in favour of the assessee. The said Circular is very specific that in a case of captive power unit the provisions of law is also the same as in the case of the undertaking which generates and distributes the power to any other concern. Further, it is a well established principle of law that a circular can only be made in consonance with the provisions of the enactment and the same cannot be derogatory to the purport sought to be achieved. Hence we are of the opinion that the Circular relied upon by the Ld.Counsel for the Revenue is in fact in favour of the assesses end therefore the said contention also cannot be accepted." 10. The Hon'ble Supreme Court in CC 2717 and 2719/2011 order dt. 21.2.2011 dismissed the Special Leave Petitions against this order. 11. The Hon'ble Madras High Court in the case of TN Paper Products Ltd. Vs ACIT, 338 ITR 643 (Madras) considered a similar issue and decided the issue in favour of the assessee by following its own decision dt. 7.11.2010 in the case of Thiagaraja Mills Ltd. by rejecting the contentions of the Revenue that the expression 'derived from' when applied to the facts of the case of the assessee, as it is not in the business of generation of electricity and as the profits earned are only notional profits and not actual profits earned. The income is not derived from the business of the undertaking and hence the assessee is not eligible for deduction u/s 80 IA of the Act. 12. Respectfully following these decisions of the Hon'ble Madras High Court, we uphold the findings of the Ld.CIT(A) in this regard. 13. The contentions of the Ld.D.R. that it is a case of transfer of power and not sale and that the assessee is not in the business of power generation and that there is no proof that the assessee has a separate power generation unit which is not an integral part and parcel of its manufacturing plant is devoid on merit. The Ld.CIT(A) has dealt with these issues in a detailed manner. For the sake of brevity we do not extract the same. Suffice to say the Ld.CIT(A) at para 3.4.4 referred to the annual report Annexure A to the Directors' Report and came to a conclusion that the observations of the AO cannot be said to be wholesome and are based on partial appreciation/analysis of the facts of the case. He also dealt with the objection of the AO regarding segment wise reporting by holding that the same is applicable only if the value exceeds 10% of the total value. He relied on the decision of Hon'ble Supreme Court in the case of Orient Paper Mills 176 ITR 110 and answered the question raised by the AO on inter unit and intra unit transfer of items/goods. On a fourth objection of the A.O. about the absence of agreements with the local authority, and observed that there is no such requirement under the Act. We find no infirmity in this order. 14. In the result the appeal of the Revenue is dismissed. 15. Ground no. 2 and 2.1 are on the issue of allowability of deduction u/s 80 IA on profits of the assessee from the captive power generation plant. Consistent with the view taken by us on this issue for the AY 2005-06 in ITA 1840/Del/2009, we uphold the order of the First Appellate Authority and dismiss this ground of the Revenue. 16. Ground no.3 and 3.1 are misconceived. The ground says that theLd.CIT(A) has erred in treating the income from share trading as capital gains as against business income treated by the AO. There is no such finding in the assessment order. The AO treated long term capital loss claimed by the assessee as deemed speculation loss u/s 73 of the Act. 17. On appeal the First Appellate Authority while disposing of ground no.3 at para 4.2 held as follows. "4.2. The submissions made on behalf of the appellant company and the findings recorded by the Ld.AO have been carefully perused. On consideration, I find that the ldAO has failed to correctly appreciate the import of Explanation to section 73 of the Act. The explanation itself starts with "Where any part of the business of a company…". Thus, the provisions of Explanation will have an applicability only in cases where the assessee is found to be engaged in the business relating to purchase and sale of shares and securities of other companies. However, in the present case there is no material to suggest that the appellant company was doing any business of purchase and sale of shares of other companies. There is also no rebuttal of the assessee's claim that the shares in question were held by it as 'investment' and not as 'stock in trade', on long term basis. In view of the aforesaid factual position, I have no hesitation in holding that the AO was not justified in treating the loss of Rs.9451064 as speculation loss. Therefore, the AO is directed to assess the loss in question as long term capital loss only." 18. Thus the grounds raised are dismissed as 'misconceived'. 19. On a careful consideration of the contentions raised in ground no.2, we find that the Ld.CIT(A) at para 3.6 page 27 held as follows: "3.6. In view of the above, the AO is directed to allow deduction u/s 80IA of the Act to the appellant company only after setting off of brought forward losses and unabsorbed depreciation of eligible business against the eligible profit for the AY under consideration." 20. In our considered view the assessee should not have any grievance with these directions of the Ld.CIT(A). The AO is directed to consider the decision of the Hon'ble Madras High Court in the case of Velayudhaswamy Spinning Mills P.Ltd. vs. ACIT reported in 231 CTR 368 and pass orders in accordance with law. With these directions we dispose of ground no.2 raised by the assessee. 21. Coming to ground no.3, which is against the disallowance made u/s 14A read with Rule 8D we set aside the matter to the file of the AO for fresh adjudication in line with the decision in the case Maxopp Investment Ltd. vs. CIT (2012)347 ITR 272 (Del.) wherein the Jurisdictional High Court has held as follows. The High Court had to consider two issues: (a) whether interest paid on funds borrowed to acquire "trading shares" is hit by s. 14A given that the profits there from are assessable to tax as "business profits" and the dividend is incidental and (b) whether Rule 8D has retrospective operation. HELD by the Court: (i) The argument that if the dominant and main objective of the expenditure was not the earning of 'exempt' income then, the expenditure cannot be disallowed u/s 14A is not acceptable. The expression "in relation to" cannot be given a narrow meaning and simply means "in connection with" or "pertaining to". If the expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the Act; (ii) The expression "expenditure incurred" in s. 14A refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A (Hero Cycles Ltd.323 ITR 518 referred). (iii) The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. While rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the AO will have to indicate cogent reasons for the same; (iv) Rule 8D comes into play only when the AO records a finding that he is not satisfied with the assessee's method. Though s. 14A(2) & (3) were inserted w.e.f. 1.4.1962, Rule 8D was inserted on 24.03.2008. Accordingly, Rule 8D would operate prospectively. (Godrej and Boyce Mfg. Co.Ltd. 328 ITR 81 (Bom) followed); (v) For periods prior to Rule 8D, the AO will have to adopt a reasonable method on the basis of objective criteria to determine the expenditure. However, here also, he will have to show why he is not satisfied with the correctness of the assessee's claim (argument that Rule 8D exceeds the mandate of s. 14A left open). 19. In the result this ground of the assessee is allowed for statistical purposes. 20. In the result, Revenue's appeal for the AY 2005-06 is dismissed. Revenue's appeal for AY 2007-08 is dismissed. Assessee's appeal for AY 2007- 08 is allowed for statistical purposes. Order pronounced in the Open Court on 24th May, 2013. Sd/- Sd/- (I.C.SUDHIR) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: the 24th May, 2013 *manga Copy of the Order forwarded to: 1. Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5.DR; 6.Guard File By Order Dy. Registrar 1. Date of Dictation: 2. Draft placed before the Author on: 3. Draft proposed and placed before Second Member on: 4. Draft discussed/approved by the Second Member on: 5. Approved draft came to Sr.P.S. on: 6. Date of Pronouncement: 7. File sent to Bench Clerk on: 8. Date on which file given to Head Clerk on: 9. Date of dispatching the Order on: |
__._,_.___
No comments:
Post a Comment