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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: SHRI RAJPAL YADAV, HON’BLE & SHRI GIRISH AGRAWAL, HON’BLE
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER :
These are four cross appeals by two assessees for the Assessment Year 2010-11. There are certain grounds which are common for both the assessees. In the case of Smt. Yamini Khandelwal in ITA No. 425/Kol/2015, Ground No. 2 as originally filed in Form 36 was modified vide letter dt. 19/12/2017. Accordingly, Ground No. 1 and modified Ground No. 2 are reproduced as under:-
“1. FOR that on the facts and in the circumstances of the case, the Ld. CIT(A) erred in law as well as on facts in holding that the shares sold within 90 days be treated as business income. The Ld. CIT(A) passed the order on erroneous belief and misconception of law and facts in considering the capital gain arising on sale of investment in shares as business income. 2.a) For that the Ld. CIT(A) erred in law as well as on facts in holding that the disallowance u/s. 14A read with Rule-8D is to be made on the shares which were held more than three months, in spite of the fact that the Short Term Capital Gain is taxable, not exempt, hence provisions of sec.14A are not applicable. b) Without prejudice to the foregoing ground, the disallowance u/s. 14A if any is liable, it should be only on the shares which have earned dividend income. c) Without prejudice to the foregoing ground, if any disallowance u/s. 14A read with Rule-8D is liable, then it should not exceed the exempt income. d) Without prejudice to the foregoing ground, in case Short Term Capital Gain arising on sale of investment is being treated as business income then dividend earned is incidental to the trading business and provisions of sec. 14A are not applicable.”
In the case of department appeal for the same assessee in ITA No. 613/Kol/2015, department filed the revised grounds of appeal vide its letter dt. 17/03/2020, which are reproduced as under:-
“1. On facts and circumstances of the case and in law, the Ld. CIT(A) has erred in treating the assessee as investor and not share trader in respect of gains on sale of shares to the extent of trades executed after 90 days of purchase of equity. 2. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the disallowance u/s 14A read with Rule-8D upto Rs.46,57,011/- instead of original disallowance of Rs. 84,20,986/-.
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 3 3. The Appellant craves the leave to make any addition, alteration, modification of grounds at the appellate stage.”
Grounds other than the above, which are taken by the assessee in the case of Shri Suraj Khandelwal in ITA No. 1069/Kol/2015, are reproduced as under:-
“2. (a) THAT the Ld. CIT(A) erred in not giving decision fully in respect of amended ground No. 1(C) reads as "FOR that the Ld. JCIT erred in law as well as on facts in treating the Short Term Capital Gain of Rs.65,60,181/- arising on sale of shares held as investment as business income. He failed to notice that out of Rs.65,60,181/- the gain from sale of NIFTYBEES of Rs.43,47,480/- was Long Term Capital Gain as the same was held for more than 12 months".
(b) THAT the Ld. CIT(A) was wrong in confirming the Long Term Capital Gain from sale of NIFTYBEES of Rs.43,47,480/- in spite of the fact that the same was held for more than 12 months. 3. THAT the Ld. CT(A) was wrong and incorrect in confirming the addition of Rs.9,76,951/- in respect of interest. The Ld. CIT(A) confirmed the addition without considering the submissions made before him. 4. FOR that the Ld. CIT(A) erred in law as well as on facts in holding that the disallowance u/s.14A read with Rule-8D is to be made on the shares which were held more than three months, in spite of the fact that the Short Term Capital Gain is taxable and not exempt. 5. THAT the appellant craves leave to alter, amend, modify any of the grounds and/or take additional grounds before or at the time of hearing of this appeal.”
We first take up the grounds of appeal which are common for both the assessees by taking the facts from the case of Smt. Yamini Khanedlwal in ITA No. 425/Kol/2015.
Brief facts from the records are that the assessee is in the business of trading in derivatives. During the year under consideration, the assessee has earned income from speculation in share trading in derivatives (loss) as well as short term and long term capital gains on shares and mutual fund units as well as income from other sources. Return of income was filed on 13/10/2010 reporting total income at Nil. Total income as returned by the assessee consisted of the following:-
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 4 “i) Income from business 31,44,516/- a) Trading in derivatives (loss) (-) b) Income from speculation in shares 10,12,880/- Loss in business : (-) 21,31,636/- ii) Short Term Capital Gains in listed securities & units 2,05,68,467/- a) On listed securities … b) On listed units … (-) 69,341/- 2,04,99,126/- iii) Long Term Capital Gains NIL Net Long Term Capital Gain on listed securities exempted u/s. 10(38) 18,95,942/- 1,68,320/- iv) Income from other sources … 1,85,35,810/- Gross Total Income 1,85,35,810/- Less : Short Term Capital Loss brought forward adjusted NIL Deduction under Chapter-VIA allowable up-to Rs.1 lac not claimed as total income is NIL : NIL ------------------ NIL ---------------------- ----------------------
In the assessment completed u/s 143(3) of the Act, ld. Assessing Officer assessed the income at Rs.2,53,86,380/- by treating the long term capital gains and short term capital gains as business income and also a disallowance of Rs.84,20,968/- was made u/s 14A of the Act. Ld. Assessing Officer, while treating the capital gains on share transactions as business income, observed that the volume and frequency of transactions were high but systematic and were undertaken with profit motive. He listed certain criteria to treat the capital gains as business income/business of the assessee i.e., scale of activity, deployment of borrowed funds, shareholding period, time devoted in the impugned transactions, book entries made in the books of account of the assessee, number of scripts traded in, etc.
6.1 Ld. Assessing officer also placed reliance on certain decisions of the Hon’ble Supreme Court and came to a conclusion that transactions in shares were in the nature of trade and assessed the same as income from business. Ld. Assessing officer also made certain observations in respect of purchases which were made from borrowed funds and noted that approximately 80% of the funds were applied in share transactions as per the balance sheet, 99.5% of the sundry creditors were
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 5 brokers and managers, 62% of the interest paid was allotted to share transactions. Further, ld. Assessing Officer made a disallowance u/s 14A of the Act, in respect of the exempt income earned by the assessee. He resorted to the method of calculation under Rule 8D and arrived at an amount of Rs.77,08,745/- under Rule 8D(ii) and of Rs.7,12,222/- under Rule 8(2)(iii), totaling to Rs.84,20,968/-.
6.2 Aggrieved, assessee went on appeal before the ld. CIT(A).
Contention of the assessee was that she had been into both the activities i.e, investment of shares/mutual funds and doing derivative business. In addition to this, she had also undertaken intra-day transactions (same day purchase and same day sale) as speculation business income. It was submitted that the intention of investing in the stock market was always to earn capital gains and dividends by holding the shares and undertaking delivery-based transactions and thus, the short-term/long term capital gains and dividends are, all outcome of investing activity only which cannot be treated as business activity. It was submitted before the ld. CIT(A) that shares have been shown in the balance sheet under the head “investments” which were depicted as closing stock of shares held by the assessee on the closing date of the balance sheet. It was contended that the closing stock in the balance sheet denotes investments and not the trading stocks/inventory. To support this contention it was also submitted that under the income-tax return Form ITR-IV in part ATS, the value of shares is shown under the column “investments” and sub-column “short-term investment”. The valuation of shares was made at cost and the nature of business/profession in the Tax Audit Form No. 3CD in item no. 8A was mentioned as “trading in derivatives”. It was stated that its audit was undertaken since the turnover in derivatives exceeded the limit prescribed u/s 44AB of the Act. Out of the total turnover, the sale value of shares comprising of long term and short term capital gains, is of Rs.62,18,77,918/-, which is 10% of the total turnover of the assessee.
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 6 7.1 On the aspect of sundry creditors, which the ld. Assessing officer has noted that 99.5% of the creditors where brokers and managers, it was clarified by the assessee that the major three sundry creditors, namely, Citicorp Finance Ltd., ECL Finance Ltd. & Religar Finvest Ltd., are all loan creditors and not sundry creditors which were by mistake reported under the head sundry creditors. To support this contention and to provide clarification, reference was made to item number 24 in its audit report wherein the details of loans are to be furnished which contains details of loan from these three parties also.
7.2 Emphasis was also laid by the assessee on the fact of quantum of dividend income amounting to Rs.10,92,259/-, which was earned by the assessee during the year on the shareholding, forming part of the investment. Thus, the quantum of dividend income itself demonstrates the intention of the assessee to make investment in shares and earn capital appreciation as well as the dividend. It was also strongly submitted that all the transaction in shares which were delivery-based have been treated as capital gains and the transactions which were non delivery-based have been treated as business income.
7.3 Certain statistics were also furnished before the ld. CIT(A) which included minimum average length of holding of shares as 23 days, maximum average length of holding of shares as 633 days and total average length of holding of shares as 328 days. The average length of holding of shares which is shown as short-term capital gains is 141 days. Reference was also made to the assessment completed for assessment year 2009-10 wherein, loss in sale of shares was reported as short-term capital loss and was carry forward to the next year and the long-term capital loss was also reported which was accepted. Reference to the assessment made u/s 143(3) for Assessment Year 2006-07 was also made, wherein transactions for shares were accepted as capital gains. A chart was referred in respect of twelve assessment years starting from 2006-07 to 2017-18, placed at page 96 of the paper book, to demonstrate
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 7 how the transactions of shares have been reported and accepted by the Department. The same is reproduced as under:-
Remarks “Asst. Year I.T. Dept. Accepted Capital I.T. Dept. Not accepted Gain Under Section Capital Gain under Section ----------- ------------- --------------------------------- --------------------------------- - 2006-07 143(3) 2007-08 143(1) - 2008-09 143(1) - - 2009-10 143(1) Pending before ITAT 2010-11 - 143(3) 2011-12 143(1) - 2012-13 - 143(3) Pending before CIT(A) Due to small amount 2013-14 - 143(3) of loss, No appeal filed. 2014-15 143(3) - 2015-16 143(1) - - 2016-17 143(1) - 2017-18 143(1)
7.4. By referring to the above chart, it was submitted by the assessee that rule of consistency ought to be followed. In respect of disallowance made u/s 14A, it was contended before the ld. CIT(A) that even if the disallowance has to be made it can be made only on the value of shares on which dividend has been received and which have been held as investment by the assessee, by placing reliance on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs. REI Agro Pvt. Ltd. in G.A. 3022 of 2013 ITAT TAT 161 of 2013, dt. 23rd December, 2013. Computation in respect of disallowance which ought to have been made by the ld. Assessing Officer u/s 14A was also referred and was claimed that the disallowance if any, is to be made, should be restricted to an amount of Rs.10,35,603/-. The said computation under Rule 8D as claimed by the assessee is placed at page 35 of the paper book and is reproduced as under:-
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 8
After going through the submissions of the assessee and the judicial precedents, ld. CIT(A) drew a chart for the period of holding, gains and sale of shares sold within 90 days and corresponding purchases, which is reproduced as under:-
Number of days - holding Gains on sale (in Rs.) Sales (Rs. in Crore) Upto 7 days 90,59,983 23.76 Upto 15 days 1,46,54,764 33.56 Upto 21 days 1,87,64,423 44.04 Upto 30 days 2,29,32,236 44.04 Upto 45 days 2,77,23,051 49.44 Upto 60 days 2,87,34,474 51.58 Upto 75 days 2,52,22,063 55.15 Upto 90 days 2,61,79,028 57.15
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 9 9. Considering these workings, ld. CIT(A) observed that the assessee is acting as investor in some shares held for several months or a few years. He noted that in respect of shares which were sold after the holding period from four months to up to one year, the sale value is about Rs.4.4 Crores and the value of shares held for more than a year is about Rs. 60 Lakhs. He also noted that the borrowings by the assessee were from Portfolio managers/finance companies to finance the short-term purchases. Considering the volume of sales and purchases over a few weeks of holding which is more than 8 to 10 times the stock of shares as on the first date of the relevant financial year, the ld. CIT(A) observed that the intention of the assessee is to maximise profit and thus, held the assessee as a trader in the current year in respect of shares sold in days or weeks or a few months.
Contrary to the above observation, ld. CIT(A) also observed that while following the rule of consistency and having regard to the acceptance by the ld. Assessing officer in the earlier years of trading, the assessee is an investor. He noted that the assessee may be treated as “not a trader” in respect of shares sold for holding period of more than a few months or few year. Thus, he marked upon a reasonable timeline of three months i.e, 90 days of holding period based on which he bifurcated the share transactions for their treatment into capital gains versus business income. He thus, finally held that gains on sale of shares held for up to 3 months be treated as business income and for the gains on sale of shares held from three months to 12 months be treated as short-term capital gains and those for more than a year be treated as long-term capital gains, exempted under section 10(38) of the Act. He thus concluded, by holding the gains of Rs.2,61,79,028/- as business income, Rs.25,09,735/- as short-term capital gains and Rs.18,26,601/- as long-term capital gains, which was subjected to verification by the ld. Assessing Officer.
In respect of disallowance u/s 14A, ld. CIT(A) held that short-term holding of shares had to be excluded from investment value for calculation under Rule 8D. Thus, re-worked the calculation of disallowance under Rule 8D(2)(ii) & (iii) and thus
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 10 arrived at the figure of Rs. 42,61,293/- under Rule 8D(2)(ii) and Rs. 3,95,219/- under Rule 8D(2)(iii) totaling to Rs.46,57,011/- and thus, the appeal was partly allowed.
Both, the assessee and the revenue are in cross appeals before the Tribunal on the above two issues. Before us, Shri J.M. Thard, Advocate, represented the assessee and Shri Biswanath Das, Sr. D/R, represented the Department. Assessee has placed on record, paper books in two volumes containing total 134 pages. Before us, ld. Counsel for the assesse reiterated the submissions made before the authorities below which are not repeated for the sake of brevity.
Ld. Counsel for the assessee referred to the quantitative details of investments in shares placed in the paper book at page number 27 to 34 to demonstrate the holding period for the purpose of bifurcating transactions in shares into long-term and short-term capital gains. He pointed out to an exhaustive list containing certain shares which were purchased prior to 31/03/2006 and hence the number of days for holding has been counted from 31/03/2006. He further pointed out that the list contains quantitative details such as opening balance for certain scrips, purchases made during the year, sale of shares during the year and closing balance of quantity at the end of the year. He also stated that large number of scrips have been listed with opening balance of quantity.
Per contra, ld. Sr. D/R, vehemently argued on the issue and submitted that the frequency and volume of share transactions done by the assessee very evidently demonstrates that its income has been rightly assessed under the head profits and gains of business or profession by the ld. Assessing Officer and upheld by the ld. CIT(A). It was also contended that reference made by the ld. Counsel for the assessee for the past and subsequent years, are all relating to processing of returns u/s 143(1) of the Act and the one which was completed u/s 143(3) of the Act for Assessment Year 2014-15, is a case of loss. Ld. Sr. D/R placed strong reliance on the findings given by both, the ld. Assessing Officer and the ld. CIT(A) and submitted that the
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 11 appeal of the assessee be dismissed on this issue and appeals of the revenue be allowed.
We have heard the rival contentions and perused the material available on record. The moot point before us relates to treatment of income earned by the assessee on share/mutual funds transactions as capital gains or as business income. Before marching ahead, we draw attention to certain relevant aspects of the issue in hand to address it in proper perspective under the given facts and circumstances.
15.1 The co-ordinate bench of ITAT Rajkot in the case of Nemish Jaikishor Mehta vs. ACIT in ITA No. 15/Rjt/2013 dated 03.11.2017 has lucidly dealt with this issue of whether gain from sale of shares is to be assessed as a business income or short/long term capital gain which is a highly debatable one. In the said decision, it is stated that this issue has always puzzled the adjudicator even after availability of large number of authoritative pronouncements by Hon’ble Court. This is due to the reason that one has to gather the intention of an assessee while he/she entered into the transaction. The expression “intention” as defined in Meriam Webster Dictionary means, “what one intends to accomplish or attain, it implies little more than what one has in mind to do or bring out. It suggests clear formulation or deliberation”. Thus, it is always difficult to enter into the recess of the mind of an assessee to find out the operative forces exhibiting the intention for entering into the transaction. This gives rise to a debate. Nevertheless, we have to look into the criterion adopted by the ld. Assessing Officer in this case, which will goad us on just and proper conclusion.
15.2 As we embark on the journey to inquiry on the facts of present case so as to find out whether the assessee is to be termed as engaged in trading/business of shares or to be treated as an investor simplicitor, we refer to certain broad principles culled out by the co-ordinate bench of ITAT Lucknow in the case of Sarnath Infrastructure Pvt. Ltd. reported in 120 TTJ 216 (Lck) which are reproduced as under:-
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 12 “13. After considering above rulings we cull out following principles, which can be applied on the facts’ of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes: (1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset. (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchase goods for the purpose of trade and not for investing in an asset for retaining. (3) What is the frequency of such purchase and disposal in that particular item? If purchase and sale are frequent, or there are substantial transaction in that item, if would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation its value? Former will indicate intention of trades and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient of trade. (5) How the value of the items has been taken in the balance sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade. (6) How the company (assessee) is authorized in memorandum of association/articles of association? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity? And vice verse. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to Revenue to prove that apparent is not real. (8) The mere fact of credit of sale proceeds of shares ( or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made? (10) It is permissible as per CBDT’s Circular No. 4 of 2007 of 15th June, 2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.”
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 13
15.3 Hon’ble Gujarat High Court also had an occasion to consider this issue in the case of Commissioner of Income Tax vs. Riva Sharkar A Kothari 283 ITR 338 (Guj.). Hon’ble Court made reference to the tests laid by it in its earlier decision rendered in the case of Pari Mangaldas Girdhardas vs. CIT reported in 1977 CTR 647 (Guj.). These tests read as under:
“After analyzing various decisions of the apex court, this court has formulated certain tests to determine as to whether an assessee can be said to be carrying on business. (a) 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, it would furnish a valuable guideline. (b) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently. (c) The third test, which is frequently applied, is as to how the assessee dealt with the subject- matter of transaction during the time the asset was the assessee. Has it been treated as stock- in-trade, or has it been shown in the books of account and balance sheet as an investment. This inquiry, though relevant, is not conclusive. (d) The fourth test is as to how the assessee 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 the transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation. (e) The fifth test, normally applied in case of partnership firms and companies, is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity. (f) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transaction 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 proposition to the strength of holding then an inference can readily be drawn that the activity is in the nature of business.”
In the light of the above, we proceed to examine the facts of the present case. It emerges out from the record that assessee has consistently reported in the balance sheet right from 31/03/2006, wherein the balance of Rs.1,83,43,973/- in shares and debentures/mutual funds with other Indian companies has been disclosed under the head investments. Even after all the subsequent years till Assessment Year 2017-18,
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 14 including the impugned year, assessee has always disclosed the closing balance of shares and debentures/mutual funds held by her in the balance sheet under the head investments. Further, in income-tax return filed in Form-IV, details of holding of shares and debentures/mutual funds has been reported under the head investments and the sub-head long/short term investments. This also has been a consistent practice of reporting in the ITR Form for all the years. In the same return form, there is another column for reporting current assets, loans and advances and there is a sub- heading under the current assets which include inventories. Assessee has always reported her holding of shares and debentures/mutual funds under the column investments and not under the column current assets. Thus, we find that intention of the assessee of investing in shares/mutual funds through stock exchanges was always to earn capital gains and dividends by holding the shares and undertaking delivery-based transactions and therefore, the short-term/long term capital gains and dividends are, all outcome of investing activity which cannot be treated as business activity.
16.1 From the assessment details for 12 years for which the assessee has submitted the details from assessment year 2006-07 up to 2017-18 (refer the table above), it is noted that the assessee has been filing her returns for the source of income from share transactions under the head capital gains which have been processed u/s 143(1) of the Act and no question with regard to the head of income was raised by the authorities below, except for the impugned year and Assessment Year 2012-13 for which matter is pending before the ld. CIT(A). In respect of Assessment Year 2014-15, assessment was completed under section 143(3) of the Act vide order dated 28/12/2016 and from the computation of assessed income, it is noted that short-term capital loss on sale of shares/listed securities has been accepted which has been allowed to be carried forward by the ld. Assessing Officer.
16.2 We also refer to the two CBDT circulars vide Circular Nos. 6/2016 dt. 29/02/2016 and CBDT Circular No. 4/2007 dt. 15/06/2007. In the first circular No.
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 15 06/2016, it is noted that determination of character of a principal investment in shares or other securities, where the sum is in the nature of a capital asset or stock in trade, is essentially a fact specific recognition and with a view to reduce litigation and uncertainty in the matter, in partial modification to Circular No. 4 of 2007, further instructions have been issued to the Assessing Officers to take into account the following-
“a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years; c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.”
16.3 CBDT also noted in para 5 of this Circular that these principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income arising from transfer of shares and securities.
16.4 In Circular No. 4/2007, CBDT has taken into cognizance the decisions of Hon’ble Supreme Court and Authority for Advance Rulings (AAR), which are reproduced as under:-
“5. In the case of Commissioner of Income Tax (Central), Calcutta Vs Associated Industrial Development Company (P) Ltd (82 ITR 586), the Supreme Court observed that: "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."
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 16 6. In the case of Commissioner of Income Tax, Bombay Vs H. Holck Larsen (160 ITR 67), the Supreme Court observed: "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." 7. The principles laid down by the Supreme Court in the above two cases afford adequate guidance to the assessing officers. 8. The Authority for Advance Rulings (AAR) (288 ITR 641), referring to the decisions of the Supreme Court in several cases, has culled out the following principles :- "(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that 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 accounts, 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".
16.5 CBDT, thus advised the Assessing Officers that the above principles should guide them in determining whether in a given case, the shares are held by the assessee as investment (and therefore will give rise to capital gains) or as stock-in- trade (and therefore will give rise to business profits). Assessing Officers were further advised that no single principle would be applicable and the total effect of all the principles should be considered to determine whether, in a given case, the shares held by the assessee as investment or stock in trade.
We also take guidance from the jurisprudence available on the subject matter in respect of criterion adopted by the ld. AO.
17.1 While considering similar facts, the co-ordinate bench of ITAT Kolkata in the case of ITO vs. Divyam Tie-up Pvt. Ltd. in ITA No. 164/Kol/2016; Assessment Year 2010- 11, order dt. 26/04/2018, has dealt on the aspect of ‘intention’ of the assessee and application of ‘rule of consistency’ as under:-
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“6. We are of the view that on the issue, whether the income in question has to be assessed under the head income from capital gain or income from business, the assessee should demonstrate the intention and treatment in the books of accounts, whether he holds these shares and securities as an ‘investment’ or as a ‘stock in trade’. This intention can be judged by the entry made by the assessee in his books of accounts, that is, the treatment in the books of accounts of the assessee. We note that since, the assessee has shown the investment in its books of accounts under the head investment and not under the head stock in trade, therefore, the intention of the assessee is not to trade in shares but to treat them as an investment. 8. We note that the Department has been consistently accepting the assessee`s computation under the head ‘short term capital gain, therefore, we uphold the order of the ld. CIT(A) following the Rule of consistency. For that we rely on the judgment of the Hon’ble Supreme Court in Radhasoami Satsang vs. CIT 193 ITR 321 (SC), wherein the Hon`ble Supreme Court held as follows: “9. We are aware of the fact that, strictly speaking, res judicata does not apply to IT proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. On these reasoning, in the absence of any material change justifying the Revenue to take a different view of the matter—and, if there was no change, it was in support of the assessee—we do not think the question should have been reopened and contrary to what had been decided by the CIT/ in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under ss. 11 and 12 of the IT Act of 1961.” In the assessee’s case under consideration, the Department has been accepting the stand of the assessee, during the previous year as well as in subsequent years to disclose the income on account of sale of investments under the head ‘short term capital gain’. Moreover, the assessee`s intention is to be as an ‘Investor, as has been observed by the treatment in the books of accounts as ‘investment’. Therefore, we note that there is consistency in the ‘intention of the assessee’ as well as treatment in the books of accounts, and the said consistency has not been challenged by the department by bringing any new facts on the record.”
17.2 On this issue relating to application of ‘rule of consistency’, Hon’ble Jurisdictional High Court in the case of CIT vs. Amitabh Sonthalia in G.A. No. 2877 of 2013, ITAT No. 154 of 2013, judgment dt. 8th January, 2014, upheld the view taken by the Tribunal which is reproduced as under:-
“We have heard both the parties and are of the opinion that no interference is called for. The Tribunal in its order under challenge held, inter alia, as follows: "Once this is an established position, that assessee maintained the distinction in books of accounts between his investments and stock in trade and also maintained distinction of short term investments as well as long term investment and such investment were accepted by
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 18 revenue in earlier years all long, now they cannot take u-turn and change the head of income without any basis". We have considered the rival submissions and are of the opinion that in the facts and circumstances of the case the view taken by the Tribunal is unimpeachable.”
17.3 In this connection, we also refer to the judgment of Hon'ble Bombay High Court in the case of Commissioner of Income Tax vs. Gopal Purohit [2011] 336 ITR 0287 (Bom), wherein it was held as under:
"The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business. The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short- term or, as the case may be, long-term capital gain, depending upon the period of the holding. The Tribunal has observed in its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. There cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised. Tribunal having entered a pure finding of fact that the assessee is engaged in two different types of transactions namely, investment in shares and dealing in shares for the purposes of business and held that the delivery based transactions are to be treated as investment transactions and the profit received therefrom is to be treated as short-term or long-term capital gain depending on the period of holding of shares and that there ought to be uniformity in treatment and consistency in various years when the facts and circumstances are identical, no substantial question of law arises." 17.4 By placing reliance on the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income Tax vs. Gopal Purohit (supra), the Co-ordinate Bench of the ITAT Kolkata in the case of Shree Padmasagar Exports Pvt. Ltd. vs. DCIT in ITA No. 1125/Kol/2013; Assessment Year 2008-09, order dt. 12/08/2016, held that, magnitude of the transactions do not alter the nature of transactions. It also held that though the principle of res judicata is not applicable but the principle of consistency will definitely apply and on that basis the claim of the assessee should be held proper. The relevant finding of the Tribunal is reproduced as under:-
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“In view of the above, we find that magnitude of the transactions do not alter the nature of the transactions. Therefore, magnitude of transactions carried out by the assessee in our view should not be very material in coming to the conclusion that income in question is income from business. Though the res judicata is not applicable but the principal of consistency will definitely apply and on that basis the claim of the assessee should be held proper. Accordingly we are inclined to reverse the order of authorities below and ground raised by assessee is allowed.”
17.5 On the aspect of utilizing the service of the portfolio manager and deploying borrowed funds in purchase of shares, we refer to the decision of the Hon’ble High Court of Karnataka in the case of CIT vs. Kapur Investments (P.) Ltd. [2015] 61 taxmann.com 91 (Kar.), wherein the substantial questions of law dealt by the Hon’ble High Court were as under:-
“1. Whether the Tribunal was justified on the facts and circumstances of the case in confirming the order of the Commissioner of Income Tax (A) that the profit on sale of shares was assessable as capital gain without appreciating the fact that the assessee had employed a portfolio manager and the employment of the portfolio manager implies that the assessee was serious in earning income through strategic/planned transactions of specific shares and thus indulged in business? 2. Whether the Tribunal was justified, on the facts and in the circumstances of the assessee's case, in holding that no interference was warranted in the order of the Commissioner of Income Tax (A) without appreciating the fact that the assessee itself had admitted dealing in derivatives and mutual funds as business income in the previous assessment years and therefore, the assessee's generation of profits by purchase and sale of shares after availing loan of Rs.60 lakhs for dealing in shares during the year should also be treated as part of the trading activity?" 17.5.1 On the second substantial question of law for deployment of borrowed funds, Hon’ble High Court expressed its view that the Act does not prohibit the assessee from making investments in capital asset after using borrowed funds. The relevant finding is reproduced from para 12 as under:-
“12. As regards the second question of the assessee having taken loan and having invested borrowed funds in purchase of shares, we are of the view that the Income Tax Act does not prohibit the assessee from making investments in capital assets after using borrowed funds. The Tribunal has also considered this aspect of the matter and decided in favour of the assessee and we see no reason to differ with such opinion of the Tribunal.”
In light of the above discussion and understanding, we note that the assessee has consistently disclosed/reported her holdings in shares/mutual funds in the balance sheet under the head investments which manifests the intention of being an
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 20 investor. The same have been reported in the income-tax return form consistently under the head investments and not under the head current assets. Also the revenue has not disturbed the status declared by the assessee and accepted the returns u/s 143(3) of the Act, for which the details have been tabulated above and it is evidently oozing out that in the earlier years as well as subsequent years, the status of the assessee as investor was not disputed except for the impugned year and AY 2012-13 pending before the ld. CIT(A). Ld. Sr. D/R could not bring on record any material to demonstrate change in facts and applicable law in the year under consideration when compared with the preceding as well as subsequent years referred in the table above and therefore the rule of consistency is to be followed. We note that assessee has purchased the shares on delivery basis. Though the volume of transactions is high and certain borrowed funds have also been deployed but considering the judicial precedents referred above including that of Hon’ble jurisdictional High Court carrying force of binding nature, we have no hesitation in holding that mere volume of transactions and utilization of borrowed funds are not the criterion to alter the treatment given by the assessee about her investment in the books. Therefore, considering all these facts, and the judicial precedents referred above along with the CBDT circulars, we allow the appeal of the assessee and direct the ld. Assessing Officer to treat the income earned by the assessee on share/mutual funds transactions under the head capital gains by considering the assessee as an investor, whether short-term or long-term capital gains, depending upon the period of holdings of the relevant shares/mutual fund units. In the result, grounds taken on this issue by the assessee are allowed and those by the revenue are dismissed.
Findings given above in respect of ITA No. 425 & 613/Kol/2015, squarely applies in ITA No. 1069/Kol/2015 & 1105/Kol/2015 in the case of Shri Suraj Khandelwal, facts being similar. Accordingly, grounds taken on this issue by the assessee are allowed and those by the revenue are dismissed.
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 21 20. On the issue relating to the disallowance made u/s 14A, at the outset, ld. Counsel for the assessee submitted that it should be restricted to the extent of considering only those investments which yielded exempt income for which a detailed working is placed on record [extracted (supra) from page 35 of the paper book]. He thus, prayed that the matter may be remitted back to the file of the ld. Assessing Officer who may be directed to consider this computation after due verification.
On confrontation of this submission by the ld. Counsel to the ld. Sr. D/R, nothing was objected upon. Accordingly, we find it proper to remit the matter back to the file of ld. Assessing Officer for the limited purpose of verification of the calculations made by the assessee reproduced (supra) and accordingly consider the disallowance u/s 14A of the Act. This finding also applies equally in the case of Shri Suraj Khandelwal in ITA No. 1069 & 1105/Kol/2015.
Coming to Ground No. 2 & 3 in the case of Shri Suraj Khandelawal in ITA No. 1069/Kol/2015, for ground no. 2, at the outset, ld. Counsel for the assessee submitted that short-term capital gains has been inadvertently reported by the assessee as the income from long-term capital gains on NIFTY BEES amounting to Rs.43,00,000/- on which ld. CIT(A) has not given any finding. Accordingly, he requested that the matter be set aside to the file of ld. Assessing Officer for verification and due consideration. Similar prayer has been made in respect of Ground No. 3, wherein an addition in respect of notional interest has been made for which it was submitted that these loans/advances were given out of interest free funds. Ld. counsel prayed that the matter be set aside to the file of the ld. Assessing Officer for verification and due consideration of the claim made by the assessee.
Ld. Sr D/R raised no objection on the prayers made by the ld. Counsel on these two grounds and accordingly we find it proper to remit these two issues to the file of ld. Assessing Officer for the limited purpose of verification and due
ITA No. 425 & 613/Kol/2015 Yamini Khandelwal ITA No. 1069 & 1105/Kol/2015 Suraj Khandelwal AY 2010-11 22 consideration for the claims made by the assessee. Needless to say that the assessee be given reasonable opportunity of being heard and to make the submissions in this respect. Accordingly, these two grounds are allowed for statistical purposes.
In the result, appeals of both the assessee are partly allowed and appeals of the revenue are dismissed. Order pronounced in the Court on 27th September, 2022 at Kolkata. Sd/- Sd/- (RAJPAL YADAV) (GIRISH AGRAWAL) VICE PRESIDENT ACCOUNTANT MEMBER Kolkata, Dated 27/09/2022 *SC SrPs Pआदेश क� �ितिलिप अ�ेिषत/Copy of the Order forwarded to: 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent 3. संबंिधत आयकर आयु� / Concerned Pr. CIT 4. आयकर आयु� अपील / The CIT(A)- ( ) 5. िवभागीय �ितिनिध अिधकरण अपीलीय आयकर कोलकाता/DR,ITAT, Kolkata, , , 6. गाड� फाईल /Guard file. आदेशानुसार/ BY ORDER, TRUE COPY
Assistant Registrar आयकर अपीलीय अिधकरण ITAT, Kolkata