Case title: 

PR. Commissioner of Income Tax-18 v. M/S Wig Investment

Date of Order: 

15th January 2024

Bench: 

Hon’ble Mr. Justice Rajiv Shakdher

Hon’ble Mr. Justice Girish Kathpalia

Parties: 

Appellant: PR. Commissioner of Income Tax

Respondent: M/S Wig Investment

SUBJECT:

The present case dealt with by the Hon’ble High Court of Delhi (hereinafter referred to as ‘the High Court’ or ‘the Court’) involves an appeal regarding transactions related to mutual funds by the respondent/assessee. The appellant contends that despite not being directly traded on the stock exchange, these mutual fund transactions should be recognized as a business activity. The appellant emphasizes the substantial volume and quantum of transactions, along with significant investments, supporting the argument that the respondent was engaged in trading mutual funds. Additionally, the appellant disputes the addition of a certain amount as deemed a dividend, asserting that the capital contributions made by specific entities should not be treated as such. The court, after evaluating the facts and legal principles, upheld the findings of the CIT(A) and the Tribunal, concluding that the mutual fund transactions were in investment and not motivated by trade. The court also affirmed that the capital contributions could not be treated as deemed dividends, supporting the decision of the Tribunal and CIT(A). The appeal was consequently disposed of, with the court finding no substantial question of law for consideration.

IMPORTANT PROVISIONS:

The Income Tax Act, 1961 (the Act):

• Section 263
• Section 143(3)
• Section 2(22)(e)
• Section 234
• Section 271
• Section 150
• Section 160

OVERVIEW:

• Assessment Year (AY) 2006-07 is the subject of the appeal, where the appellant, PR. COMMISSIONER OF INCOME TAX-18, challenges the Income Tax Appellate Tribunal's decision dated 16.10.2018.
• In the initial legal proceedings, M/S WIG INVESTMENT, the respondent, appealed to the Tribunal against the Commissioner of Income Tax's (CIT) order dated 12.03.2011 under Section 263 of the Act.
• In the first round, the CIT set aside the assessment order dated 08.12.2008, contending that gains on mutual fund redemption should be treated as business income, and capital contributions received should be taxed as deemed dividends
• In the first phase, the Tribunal intervened, modifying the Commissioner of Income Tax’s (CIT) order and directing the Assessing Officer (AO) to conduct an independent reassessment. This led to a new assessment order on December 21, 2011, which incorporated the gains from mutual fund redemption and capital contributions as instructed by the CIT.
• Subsequently, the respondent took the matter to the Commissioner of Income Tax (Appeals). The CIT(A) partially allowed the appeal, determining that gains from mutual funds should be categorized as capital gains rather than business income.
• Additionally, the CIT(A) rejected the notion of treating capital contributions by the companies as deemed dividends.
• Following this, cross-appeals were initiated for AY 2006-07, and the Tribunal, in the impugned order, upheld the CIT(A)’s decision. This affirmed the treatment of gains from mutual funds as capital gains while rejecting the characterization of capital contributions as deemed dividends.

ISSUES RAISED:

• Whether the transactions carried out by the respondent concerning the mutual funds were in the nature of ‘investment’ or ‘stock-in-trade’?
• Whether the capital contributions made by KPFSE and KICIPL are taxable under section 2(22)(e) of the Act?

ARGUMENTS ADVANCED BY THE APPELLANT:

• Respondent’s intention to trade in mutual funds is demonstrated through the significant investments made in mutual funds.
• The gains derived from the transfer of mutual funds should not be treated as capital gains, instead they should be treated as business income even though mutual funds were shown as ‘investment’ in the account books.
• Despite not directly trading on the stock exchange, transactions with mutual funds should be acknowledged as a business activity.
• The volume and scale of these transactions, along with substantial investments, indicate the respondent's involvement in trading mutual funds.
• The Tribunal failed to consider the significance of the CBDT’s circular stating that income from shares and securities should be treated as capital gains only if held for more than a year.
• Mr. Pradeep Wig and Mrs. Neera Wig employed the receipt of the capital contributions by KPFSE and KICIPL as a colourable device.
• The Tribunal’s observation that the transaction was purely a commercial one was unsustainable, regarding the facts, and circumstances of the case.
• If a firm partner holds shares in a company, as the firm cannot be a registered shareholder, the partnership firm is considered one. According to this established legal position, the transaction in question is subject to assessment under Section 2(22)(e) of the Act and is thus assessable in the hands of the respondent.
• Reliance was placed on the case of CIT v. D&M Components Ltd, PVS Raju v. ACIT, and P M Mohammad Meerakhan v. CIT.
• The CIT(A)’s observations should have been treated as a direction under Section 150(1) of the Act by the Tribunal.

ARGUMENTS ADVANCED BY THE RESPONDENT:

• Interference with the Tribunal’s order was contested by the respondent.
• The authorities had correctly categorized mutual fund investments as capital gains stating that they did not fall under the designation of stock-in-trade, which is a crucial distinction to determine the tax implications of the gains made.
•  No loans or advances were extended by either of the partner companies, KPFSE and KICIPL.
• The Tribunal established that the respondent had received capital contributions and not loans from the partner companies, transactions which were exempt from the provisions of Section 2(22)(e) of the Act.
• The findings of the Tribunal were conclusive and binding unless proven perverse. The legal precedent of K. Ravidranathan Nair vs. CIT 2001, was cited to support the authoritative nature of these findings.
• There was no substantial question of law for the Court to deliberate upon. The Tribunal's findings were based on the evidence and material presented during the proceedings.
• To substantiate the facts relevant to the case, respondent referred to the orders previously issued by both the Tribunal and the CIT(A), aligning the ongoing proceedings with the established legal and factual framework.

JUDGEMENT ANALYSIS:

• The Court emphasized the fact-centric nature of determining whether mutual fund transactions were investments or stock-in-trade.
• It highlighted factors such as the intent of the assessee, magnitude, frequency, holding period, purpose, and disclosure practices.
• Various judgments, such as Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal, Mohammad Meerakhan v. Commissioner of Income Tax, Kerala, etc., were cited to establish that there is no presumption that share acquisition is necessarily for trade rather than investment.
• The CIT(A) and Tribunal findings, which concluded that the transactions were investment-oriented, were accepted and not challenged.
• The High Court acknowledged capital contributions of Rs. 14 crores by KPFSE and Rs. 47 crores by KICIPL.
• It was noted by the High Court that partners Pradeep Wig (HUF) and Mrs. Neera Wig made no capital contribution, and their share of the profit did not bear the burden of losses.
• The substantial equity stakes of Pradeep Wig and Mrs. Neera Wig in KPFSE and KICIPL supported the CIT(A)'s view that these contributions were not loans or advances.
• Section 2(22)(e) was discussed, clarifying its objective to address the distribution of accumulated profits through loans or advances to shareholders.
• Legal precedents cited by the appellant were deemed distinguishable, especially cases involving loans or advances, unlike the capital contributions in this case.
• The Court affirmed that findings of fact established that KPFSE and KICIPL made capital contributions, not loans or advances to the respondent.
• The addition could only be made in the hands of individuals Pradeep Wig and Mrs. Neera Wig, subject to their AO's evaluation and after providing them an opportunity to defend themselves.
• The Tribunal's conclusion that CIT(A)'s observations were not a direction under Section 150(1) of the Act was endorsed

CONCLUSION:

The High Court upheld the findings of the CIT(A) and Tribunal that mutual fund transactions were of an investment nature, citing legal principles and precedents. Regarding deemed dividends and capital contributions, it affirmed that KPFSE and KICIPL's injections were not loans but contributions, stating that additions could only be made in the hands of individuals. The court supported the view that CIT(A)'s remarks were not a directive under Section 150(1) of the Act. Ultimately, the appeals by the revenue were dismissed, endorsing the respondent's position. The Court found no grounds for intervention in the Tribunal’s order and asserted that no substantial question of law warranted consideration. The appeal was disposed of accordingly.