ITO, WD-8(2), KOLKATA, KOLKATA vs. M/S THE BOND COMPANY LIMITED, KOLKATA

The grievances raised by the Revenue are as follows:-

That on the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating Rs.6,51,373/- as STCG instead of business income as determined by the AO in his assessment order.

The brief facts qua the issue are that the assesse company filed its return of income for the assessment year under consideration on 24-09-08, disclosing total income at Rs. NIL. The return was processed under section 143(1) of the Act on 07-07-2009. Later, the return of income was selected for compulsory scrutiny assessment under section 143(3) of the Act. During the course of the hearing, it was noticed by AO that assessee has shown long term capital gains (exempted income) and short term capital gains from numerous sale and purchase transactions of units of mutual funds. Accordingly, the assessee was asked to justify as to why the profit on sale of units be treated as short term capital gains and not as business profit. In response, the assessee submitted before the AO that assessee company has been holding a number of shares and securities as a 'Capital Asset' with a long-term investment objective, classifying the same as such in preparing financial statements in the past. These investments have been distinctly kept separate from 'Current Investment' held as 'Stock in trade' or 'Inventory'. Sometimes it so happens that the shares and securities held as a 'Capital Assets' or long term 'Investments' are needed to be liquidated a lot earlier than planned, in order to appropriately respond to the changing market conditions/restrict losses. In such situations, short term capital gains take place which are entirely different from trading income. It may not be out of place here to mention that it is the prerogative of assessee to treat every particular share or security in the manner it deems fit and proper, either as a long term investment or as an item of trading inventory. The assessee also pointed M/s. The Bond Company Ltd 2 out that majority of the Capital Gains has arisen out of redemption of the units of Mutual Funds, which are, as a matter of fact, not transferable/non-negotiable instruments, not capable of being traded. The above facts amply substantiate assessee's plea that the transactions were not in the nature of Business where the frequency and intensity of the transactions have to be too high and any gain or loss arising therefrom should not be treated as Business income.

Aggrieved by the stand so taken by the AO, the assesse carried the matter in appeal before the ld. CIT(A), who has deleted the impugned addition made by the AO. Aggrieved, the Revenue is in appeal before us.

We have given a careful consideration to the rival submissions and perused the material on record including the detailed paper book filed by the assessee before us. Learned Departmental Representative relied upon the order of the AO. On the other hand, the ld. AR of the assessee has relied on the order of the ld. CIT(A). We note that the assessee is having exempt income in the form of dividend of Rs.4,37,35,086/- which has been earned from investments held by the assessee. From the huge dividend income earned by the assessee which is one of the guiding factors for determination whether an assessee is a trader or an investor. It shows that the primary purpose of the assessee was that of being an investor. We further note that the assessee is holding the shares as well as mutual funds under the head of investments from where the income from capital gains has been earned. The treatment of holding of the shares/mutual funds in the books of accounts of the assessee is also one of the guiding factors for determination of generation of income as to whether it is business income or income under the head Capital Gains. The assessee is maintaining separate accounts for investments and for stock in trade. The assessee's books of account maintained has always disclosed funds deployed in shares under the head investments and income derived from variations made in investment portfolio was disclosed under the head capital gains. This fact M/s. The Bond Company Ltd 3 was narrated by the assessee which was never disputed by the revenue authorities in the assessment orders passed for earlier years. The assessee has adopted the method and basis for recording transaction in investment in accounting shares in the books of account consistently and in all past assessments, income derived from investment in shares was assessed under the head capital gains either as short term or long term depending upon the period of holding.

We note that the assessee at the appellate stage filed complete details of assessment and accounts for AY 2001-02 to 2006-07 which clearly reveals that the variation in investment was accepted by the AO as income from capital gains. Once, this is an established position that the assessee maintained the distinction in books of account between its investments and stock in trade and also maintained distinction of short term investment as well as long term investment and such investments were accepted by revenue in earlier years all along, now they cannot take u-turn and change the head of income without any basis. No doubt the principle of Res Judicata does not apply to Income tax proceedings but the principle of Consistency should always apply when there is no material change in the facts and circumstances of an assessee's case. Therefore, considering the entire facts of the case, the treatment provided by the AO for holding short term capital gains to be that of business in nature, is erroneous and is therefore ld CIT(A) has rightly deleted the addition. Therefore, there is no infirmity in the impugned order of the ld. CIT(A), as the department/revenue itself is accepting, in past, the assessee’s treatment of showing investment as short term capital.

Ground nos. 2 to 4 raised by the revenue relate to deletion of additions made by AO under section 14A of the Act/ R.W.R 8D(2)(ii) of the I.T. Rules.

Brief facts of qua the issue are that on Perusal of profit and loss account, and Balance Sheet, the AO noticed that assessee company has earned dividend income of Rs. 2,85,84,197/- which is exempt to tax under the Income Tax Act whereas other incomes accounted for is only a small portion of the total receipts. The assessee was asked to explain as to why expenditure in relation to earning of exempted dividend income be not disallowed as provided u/s 14A of the I.T. Act and Rule 8D. In response, the assessee submitted the explanation. However, the AO rejected the contention of the assessee and computed the disallowance under section 14A read with rule 8D of the I.T.Rules:

Aggrieved by the order of the AO, the assesse carried the matter in appeal before the ld. CIT(A), who has partly deleted the impugned addition. Aggrieved, the Revenue is in appeal before us.

We have given a careful consideration to the rival submissions and perused the material available on record including the detailed paper book filed by the assessee. Before us, Learned Departmental Representative submitted that he relied upon the order of the AO. On the other hand, the ld. AR of the assesse has relied on the order of the ld. CIT(A). We note that the assessee had sufficient own funds for such investment in shares and securities. Therefore, the disallowance made u/s. 14A r.w.r. 8D(2) (ii) does not arise. Apart from this, we note that the ld. CIT(A) has already directed the AO to consider the dividend bearing securities to compute the disallowance under Rule 8D(2)(ii) & (iii) of the Rules. For that, we rely on the judgment of the Coordinate Bench of ITAT Kolkata in the case of REI Agro Ltd. Vs. DCIT 144 ITD 141 (Kol-Trib) wherein it was held that only the investments which yields dividend during the previous year that has to be considered while adopting the average value of investments for the purpose of Rule 8D(2)(ii) & (iii) of the I.T. Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the Hon’ble Calcutta High Court in G.A.No.3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. (supra). Considering this factual position, we do not find any infirmity in the order of ld CIT(A). That being so, we decline to interfere in the order passed by the ld. CIT(A). His order on this issue is hereby upheld and the ground nos. 2 to 4 raised by the Revenue are dismissed.

In the result, the appeal of the Revenue is dismissed.