Shrihari Investments , New Delhi vs Assessee

BEFORE SHRI G. C. GUPTA, HON'BLE VICE PRESIDENT AND SHRI T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A. No.839 /Del/2012 Assessment year : 2008-09 Shrihari Investments, Vs. ACIT, Circle 31(1), nd 2 Floor, Shiv Mahal, New Delhi B-47, Connaught Place, New Delhi-110 001 GIR / PAN:ABEFS8112L

I.T.A.No. 1263/Del/2012 (Assessment Year 2008-09) ACIT, Circle 31(1), Vs. Shrihari Investments, New Delhi 2nd Floor, Shiv Mahal, B-47, Connaught Place, New Delhi-110 001. (Appellant) (Respondent)

Appellant by : Shri M.L.Dujeri, CA Respondent by : Shri BRR Kumar, Sr. DR

Date of hearing : 23.02.2015 Date of pronouncement :_____________

ORDER

PER T.S. KAPOOR, AM:

These are two appeals filed by assessee and Revenue respectively against the order of Ld. CIT(A) dated 23.12.2011. The grounds of appeal taken by assessee as well as Revenue are reproduced below:

(i) I.T.A.No. 839/Del/2012: (Assessee's appeal):

2 ITA Nos.839 & 1263/Del/2012 "1. That the learned CIT(Appeals) has erred in not granting relief in respect of the addition of Rs.12 lacs made by the Assessing Officer u/s 69C of the Income Tax Act,1961.

1.2 That the learned CIT(Appeals) has erred in not adjudicating upon the issue, though taken note of on pages 12 and 20 of her order in paras 7, 23 and 24.

1.3 That the addition of Rs.12 lacs made by the Assessing Officer deserves to be deleted.

(ii) I.T.A.No. 1263/Del/2012: (Revenue's appeal):

(A) Whether in the facts and circumstances of the case, CIT(A) was justified in treating Rs. 5,27,93,412/- as income from capital gain as against business income treated by AO when the sole intention of the assessee was to earn profit?"

2. The brief facts of the case are that the assessee firm is engaged in the business of shares, securities and mutual funds and apart from business income, the assessee had also declared income from capital gain in the return of income. The A.O. during assessment proceedings observed that as per tax audit report, the assessee was into the business of trading in shares and securities and, therefore, after relying in a number of case laws, the A.O. held that income declared as capital gain to be as income from business. The A.O. further observed that the assessee had not claimed any expenses for earning of income therefore he estimated an amount of Rs.12 lacs as estimated expenses and made the addition of such amount u/s69C of the Act. The relevant portion of the assessment order for making these additions is reproduced below:

"3.2. During the course of assessment proceedings, it was seen that the partnership firm comprises of eight corporate assessees as partners and they have contributed capital amounting to Rs.42.32 crores as opening capital and RS.61.64 crores as closing capital for 3 ITA Nos.839 & 1263/Del/2012

the year. The addition in capital is through contribution of shares by the companies who are partners in this firm.

3.3 The main business of the firm and its partner companies is to invest in equity and mutual funds.

3.4 The profit and loss a/c drawn by the assessee shows the Income from sale of securities and profit on sale of investments. The assessee has also furnished his tax audit report wherein it has been mentioned "During the year assessee has also traded in shares and securities".

3.5 Further, it is seen that last year the assessee has shown purchase and sale of shares as his business but this year he has changed the trading activity and shown the sale/purchase as profit on sale of investment on which lower rate of tax as· capital gains has been shown.

3.6 The assessee's volume of transactions during the year runs into crores of rupees whereas no expenditure on account of any employee, rent, telephone and other daily expenses have been incurred to run the firm which goes to show that the firm has been used as a vehicle to avoid paying tax by the corporate partners.

3.7 The assessee was asked to submit as to why its income be not treated as income from business instead of capital gains declared by the assessee. In response to the same the assessee submitted vide his letter dated 10-12-2010 as under:

"With reference to the above assessment proceedings and with reference to your query as to why capital gains declared be not treated as business income, we would like to submit that partnership was formed with a view to carry on activity of investment in shares and securities and has been carrying out only these activities.

From the copy of the balance sheet already submitted it will kindly be seen that in the balance sheet investment in mutual funds and shares and securities are reflected as investment and value of such investment as on 31-03-2007 was Rs.42,19,89,570/-. Details of investment in shares and securities are given in Schedule 2 attached to the balance sheet.' 4 ITA Nos.839 & 1263/Del/2012

From the details long term capital gains claimed to be exempt u/s 10(38) of the Income Tax Act, 1961, it will kindly be seen that the holding period in respect of shares which have been sold and gains in respect of which has been claimed to be exempt u/s 10(38) of the Income Tax Act, 1961 is more than one year. Dates of acquisition of these shares is' from December, 2006 to March, 2007 and the dates of sale is between January to March, 2008.

Under the Income Tax Act, 1961, if the shares are held for more than 12 months period they are to be treated as long term assets. As such profit on sale of these shares cannot be treated as business income. Even in respect of short term capital gains the period of holding of the shares ranges from two to six months and sometimes even more. Therefore, profit on realization of these shares else cannot be treated. as business income. It is further submitted that in most of the cases the shares sold have been received as capital contribution from the partners. Accordingly, these shares have to be treated as investment only. Besides, the shares sold out of opening stock were held as investment, which is clear from the balance sheet as on 31-03-2007. Accordingly, profits arising from sale of these shares cannot be treated as business income."

3.8 The assessee firm was created on 13-12-2006 with all its partners being investment companies. The partnership deed was registered on 05-01-2007. However, a perusal of ITR-V shows that the assessee has wrongly filled up the date of registration as 14-03-2006 which is patently wrong.

3.9 The assessee firm cannot by itself open and trade in shares and securities and hence one of the partner companies namely M/s Raghu Investments is operating the D-mat account.

3.10 All these companies have contributed ·shares as capital instead of cash. All the companies could have traded in these shares by themselves as they are regularly doing during the course of their day- to-day business. It is important to understand the motive of infusion of the shares as capital in the firm. It appears that the firm has been created for the express purpose of avoiding tax liabilities in respect of 5 ITA Nos.839 & 1263/Del/2012

the promoters partner companies by taking advantage of lower rate of tax in respect of capital gains instead of business income which the transactions actually are. Further, there is no parity in the capital contribution of shares with the profit sharing ratios.

3.11 Further, the Finance Act, 2006 amended the provisions of section 14A w.e.f. 01-04- 2007 with which the AO was empowered to disallow expenses relating to earning of tax free income. All the partner companies have huge expenses, whereas in the firm no expense has been claimed to earn the dividend income. This appears to be one of the main motive for creation of this firm on 13-12-20006.

3.12 The firms independent operations are not in conformity with the others arrangements of the firm because such high volumes of transactions have not only been operated but successfully into huge profit. It is difficult to understand as to how the firm is operating without any administrative & personal expenditure like employee, rent, telephone and other daily expenses on account of stationery, payment of stamp duty etc. The firm also does not have any fixed asset. The total expenditure incurred by the assessee in earning the huge amount income of Rs.5.32 crores is only Rs.5,01 ,701/- which comprises of auditors remuneration of Rs.11 ,236/-, depository charges Rs.2,664/-, STT of Rs.4,85,558/- and bank charges of 2,250/- which is hardly 1 % of the net profit earned. The cash in hand as on 01-04-2007 and 31-03-2008 is nil.

3.13 The assessee firm in its profit & loss a/c for the period ending 31-03-2007 was showing sale and purchase of shares as per schedule 5 and 6 of the accounts which has been changed to profit on sale of investments during the current year which goes to show that the basic activity is in trading of shares and mutual funds. Hence, the shares/mutual funds were not investment as on 01-04-2008 but rather "Stock in Trade" as they have been sold during the year for earning profit.

3.14 The assessee's submission that the shares and mutual funds are reflected as investment does not hold true as they are basically the partners capital in the firm in the shape of shares and mutual funds instead of cash' capital. The partner companies themselves are 6 ITA Nos.839 & 1263/Del/2012

trading in shares and mutual funds and hence this colourful device has been used to evade tax liability of the partner companies. 3.15 The assessee firm has in its computation of income first declared its profit & loss a/c and has also got completed its tax audit report under section 44AB which is required for every person "carrying on business". The requirement of audit u/s 44AB is only if the total turnover of the business exceeds Rs.40 lacs and is reflected in the Profit & Loss account. The assessee has apparently got the audit done to avoid the Penal Provisions on the Income Tax Act, 1961 for levy of penalty in the event of failure to get the audit done but due to malafide intention for not offering tax on the total income as the turnover of the sale purchase has not been disclosed in the profit & loss account. It is also important to highlight that the audit was conducted by M/s M. L. Dujari & Co. who is also the authorized representative of the assessee. Further, in the tax audit report the auditor has certified that cash book is being maintained by the assessee as per column 9(b) whereas no cash book is being maintained by the assessee rather, journal is maintained as the assessee has nil cash balance. This was clarified & verified during the proceedings while verifying the books of account on 24/12/2010. The same counsel who has conducted the tax audit of this business is now agitating the taxability of the same as business income. If the auditor did not consider the assessee's activity to be in the nature of business, then why the tax audit was conducted cannot be fathomed.

4. The Apex Hon'ble Supreme Court in the case of M/s Mc. Dowell & Co. Ltd Vs. CTO (1985 ) 154 ITR 148 has observed that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be a part of tax planning and it is the obligation of every citizen to pay the taxes honestly. In the case of Mc. Dowell & Co. Limited Vs. CIT 154 ITR 148 (SC) and Union of India Vs. Plywood Electronics ( 1990) 184 ITR 308 (SC), Hon'ble Supreme Court has held that when two interpretations are possible, one leading to avoidance or evasion of tax should be avoided and that which prevents such avoidance or evasion should be adopted. In the case of the assessee, the interpretation by the assessee leads to avoidance of tax on facts and on merits it leads to incorrect interpretation of law also.

7 ITA Nos.839 & 1263/Del/2012 5. Therefore, it is clear that the nomenclature in the balance sheet. profit & loss a/c and ITR would not alter the colour of transaction and I am satisfied that the assessee has willfully and deliberately avoided payment of taxes on his business income.

6. In view of the above facts and circumstance and after considering the submissions placed on record, I am fully convinced that the entire arrangement is business carried out for the sole intention of earning profit and in no way such transaction can be attributed as short term and long term capital gain. Accordingly, I hold the capital gains of the assessee firm as income from business and accordingly assess the same at Rs.5,27,93,412/-.

7. Consequently, I am satisfied that the assessee has willfully furnished inaccurate particulars of its income within the meaning of section 271 (1 )(c) of the Income Tax Act, 1961 and thereby has suppressed its taxable income. Therefore, penalty proceedings u/s 271 (1 )(c) of the Income Tax Act, 1961 have been initiated separately.

8. Further, as discussed above, as the firm has not claimed any expense on earning of this income running into crores and considering the minimum required set up for conducting day-to-day business activity, I estimate an expense of Rs. 12 lacs (estimated of Rs 1 lac per month) having been incurred for this purpose u/s 69C of the Income Tax Act, 1961 as being a most reasonable estimate considering the facts discussed above in para 3.12."

3. Aggrieved, the assessee field appeal before Ld. CIT(A) and submitted various submissions and placed reliance on various case laws for the proposition that the income earned by assessee was not a business income but was capital gain. Ld. CIT(A) after going through the submissions, held that the claim of assessee with regard to capital gain was correct and therefore, he directed the A.O. to recomputed the income of the assessee treating the same under capital gain instead of business income. However he 8 ITA Nos.839 & 1263/Del/2012

did not adjudicate on the other addition of Rs.12 lacs. The relevant findings of Ld. CIT(A) are reproduced below:

"6.7 The AR of the appellant vehemently argued that merely because in the tax audit report the activities contemplated by the appellant was stated, it does not mean that the nature of the transactions relating to capital gains would change into business. Since the appellant did not carry on the business activity where the turnover exceeds the limit specified by the Income-tax Act, I find that there was no need for the audit. However, since the partners of the firm are all companies, the audit is mandatory in their cases. Therefore, it is seen that audit is not the criteria that can decide whether the nature of transactions pertaining to sale purchase of shares are investment or meant for business.

6.8 I find force a merit in the arguments put forth by the appellant for the reasons given below:

a) The balance sheet filed before the Assessing Officer in the course of assessment proceedings as well as the undersigned in the course of the appellate proceedings showed the investments at Rs.42, 19,89,569/- as on 31.3.2007.

b) It was categorically stated by the AR that during the A.Y. 2007-08, the appellant had two portfolios, one an investment portfolio and another trading portfolio. The appellant in this year traded in shares as trading activity and hence no stock was carried forward.

c) During the assessment year 2008-09 the appellant has not traded in shares as there was no stock and only sold investments out of the investment portfolio.

d) To substantiate the above transactions, the AR of the appellant filed details of shares in the investment portfolio where the investments were held for more than 12 months and also for less than 12 months.

Therefore, the computation of capital gains therefrom was accordingly shown in the statement of income as 'long term capital gains' and 'short term capital gains'. In this regard I place reliance on the judgment of the Hon'ble Delhi High 9 ITA Nos.839 & 1263/Del/2012

Court in the case of CIT vs. Rohit Anand reported in 327 ITR 445 where it was held as under:

16. In the facts and circumstances of the case as narrated hereinabove, viewing the matter in totality no inference other than one that the assessee has earned capital gains in its Investment Portfolio as declared by it in the computation of income can be drawn.

17. Assessing Officer's allegation that the entire activities of the Company is a colourable device, is without any basis as in any case the applicable tax rates to partnership firm and to the partners who are corporate entities is one and the same.

18. Reliance of the Assessing Officer on Me Dowell & Co. vs. CTO (supra) is of no relevance in view of the decision of the Supreme Court in Union of India vs. Azadi Bachao Andolan & Others (2003) 263 ITR 706 (SC), wherein the court held that an act, which is otherwise valid in law, cannot be treated as non-est, merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interest as per perception of the revenue. When the principles laid down in this case are applied to the facts of the present case, where capital is contributed by its partners in the form of shares and securities which were held by the firm for a period of more than twelve months after holding the same in Investment Portfolio and realized thereafter it has to be treated on Investment account resulting in capital gains rather than business income. This position has since been reiterated by the Supreme Court in CIT vs. Wallfort Share & Stock Brokers (P) Ltd.

(2010) 326ITR 1 (SC)."

6.9 After analyzing the issue and considering the judgments of various courts, and also on the basis of evidence filed by the appellant I find the intention of the appellant is to hold the investment for a certain period and to reap the profits at an appropriate time. It is also seen that the Assessing Officer has not brought sufficient evidence to prove that the activity of the appellant should be treated as business income. A prudent investor always keeps a watch on the market trends and there is no bar under law from liquidating the investment in shares.

10 ITA Nos.839 & 1263/Del/2012 The law itself has recognized this fact by taxing these transactions under the head capital gains. Section 111A stipulates that scripts and mutual funds that suffer securities transactions tax and held for 12 months are to be treated as short term capital gains. An intention is an anticipated outcome that is guided through a process and a purpose to obtain an end result. In the case of the appellant, such intention to make quick and high profits were not clearly brought out by the Assessing Officer.

In view of the above discussion the transactions under taken by the appellant were found to be correct. Therefore, the Assessing Officer is directed to re-compute the income of the appellant treating the same under capital gains only and not under business income."

4. Aggrieved, both the parties are in appeal before us. Revenue is aggrieved with the relief allowed to assessee whereas the assessee is aggrieved for not adjudicating on the addition of Rs.12 lacs.

5. At the outset, Ld. D.R. took up the appeal of Revenue and invited our attention to finding of A.O. and argued that the income declared by assessee was rightly held by A.O. to be the income from business and he heavily placed his reliance on the assessment order.

6. Ld. A.R. invited our attention to the ground taken by Revenue and submitted that the grounds raised by Revenue itself were wrong in view of the fact that Revenue has taken the amount of Rs.5,27,93,412/- whereas the amount should have been Rs.4,14,73598/- as remaining income was on account of dividend which is exempt under the provisions of Act. Explaining the facts of the case Ld. A.R. submitted that assessee is a partnership firm consisting of corporate partners and it was formed in March 2006 and was reconstituted in December 2006. It was submitted that partners had contributed towards capital of assessee firm in the form of shares and no cash was introduced. It was submitted that assessee during the 11 ITA Nos.839 & 1263/Del/2012

year had sold investments and had not dealt into trading of shares. Our attention was invited to paper book page 13 where the investment in shares were classified under the head 'investment'. Our attention was also invited to paper book pages 24-36 where a chart showing script wise details of purchases and sales of various shares along with number of days of holding was placed. Ld. A.R. submitted that from item Sl. No.1 to 282, the scripts mentioned were held for a period exceeding 365 days and, therefore, they were claimed as long term capital gain and for Scripts mentioned at Sl. No. 283 onwards, were held for less than 365 days and income from them was claimed to be as short term capital gain. Ld. A.R. invited our attention to relevant findings of Ld. CIT(A) and argued that Ld. CIT(A) had correctly arrived at the conclusion and, therefore, ld. CIT(A)'s order needs to be upheld.

7. Ld. D.R. in his rejoinder invited our attention to paper book page 24 onwards and submitted that long term capital gain claimed by assessee consists of only 8 scripts which can be classified as investment but the rest of shares cannot be classified as investment. Arguing upon assessee's appeal, Ld. A.R. submitted that the A.O. has made addition of Rs.12 lacs on account of estimated expenses which has been made on the basis of assumptions and surmises only. He submitted that the assessee consisted of corporate partnership and corporates might have contributed towards expenses. Ld. D.R. on the other hand heavily relied upon the orders of authorities below.

8. We have heard rival parties and have gone through the material placed on record. We find that Ld. CIT(A) has exhaustively and extensively dealt with the issue and after verification of facts and circumstances, has arrived at 12 ITA Nos.839 & 1263/Del/2012

the conclusion about the head of income under which the income needed to be assessed. From the facts, we find that assessee had classified the shares in its balance sheet as investment. The holding period for a number of scripts exceeds 365 days. The shares were not purchased but were contributed by partners as their part of capital. In view of the above facts and circumstances, we do not find any infirmity in the order of Ld. CIT(A) and therefore, appeal filed by Revenue is dismissed.

9. As regards assessee's appeal, we find that in the grounds of appeal taken by assessee before Ld. CIT(A), the assessee has not taken up this issue and, therefore, Ld. CIT(A) has not adjudicated on it. Ld. A.R.'s contention that though Ld. CIT(A) has noted in his order at pages 12-20 regarding this addition, but has not adjudicated upon, does not hold any force as we find that Ld. CIT(A) has only reproduced the written submissions of assessee and since assessee had not taken upon this addition as a ground of appeal/, therefore, Ld. CIT(A) has rightly not adjudicated upon it. Since the issue of Rs.12 lacs is not coming out of Ld. CIT(A)'s order as the same was not taken before him and, therefore, we are unable to adjudicate on above issue. In view of above, appeal filed by assessee is dismissed.

10. In nutshell, both the appeals filed by Revenue as well as by assessee are dismissed.

11. Order pronounced in the open court on 04.03. 2015.

Sd./- Sd./- ( G. C. GUPTA) (T.S. KAPOOR) VICE PRESIDENT ACCOUNTANT MEMBER Date: 04.03. 2015 Sp 13 ITA Nos.839 & 1263/Del/2012

Copy forwarded to:- 1. The appellant 2. The respondent 3. The CIT 4. The CIT (A)-, New Delhi.

5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.

By Order

(ITAT, New Delhi).

S.No. Details Date Initials Designation 1 Draft dictated on 23/2 Sr. PS/PS 2 Draft placed before author 24/2,2,3, Sr. PS/PS Draft proposed & placed before the 3 JM/AM Second Member Draft discussed/approved by Second 4 AM/AM Member 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement Sr. PS/PS 7 File sent to Bench Clerk Sr. PS/PS Date on which the file goes to Head 8 Clerk 9 Date on which file goes to A.R. 10 Date of Dispatch of order