MARUTI TRADERS & INVESTORS,KOLKATA vs. ACIT CIRCLE 31, KOLKATA, KOLKATA

Per M.Balaganesh, AM

ITA No. 846/Kol/2017 – Assessee Appeal

2 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 10/C-35/2016-17/Kol dated 16.02.2017 against the order passed by ACIT, Circle-35, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 22.03.2016 for the Assessment Year 2013-14.

2.1. The brief facts of this issue are that the assessee is a partnership firm engaged in the business of trading in securities and derivatives on stock exchange through their broker. The return of income for the Asst Year 2013-14 was filed by the assessee on 29.9.2013 declaring total loss of Rs 1,65,13,565/-. The assessee offered a sum of Rs 10,329/- for disallowance u/s 14A of the Act in the return of income as expenses incurred for earning exempt income. The assessee firm derived dividend income of Rs 30,03,253/- and claimed the same as exempt in the return of income. The assessee held all the shares as stock in trade and did not possess any shares as investments. The ld AO show caused the assessee as to why disallowance u/s 14A of the Act should not be made in accordance with the method prescribed in Rule 8D(2) of the Income Tax Rules. The assessee explained that since the shares are held by it only as stock in trade, the dividend income earned thereon is a by-product of share trading operations and that no purchase and sale of shares were made with a specific motive to earn dividend. The firm had earned dividend due to its day to day operations which were carried out in its normal course of business and no specific expenditure was incurred by the firm for the purpose of earning such dividend income, except the depository charges amounting to Rs 10,329/- which may be assumed as indirect expenses related to the dividend earned. It was also submitted that the said sum of Rs 10,329/- was voluntarily offered by the assessee for disallowance in the return of income. It was explained that the interest debited in the profit and loss account to the tune of Rs 6,12,03,084/- represents interest 2

3 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 paid on borrowed funds utilized for the purpose of business activities of the firm and are specifically admissible expenses. The ld AO however disregarded the contentions of the assessee and by placing reliance on the special bench decision of Mumbai Tribunal in the case of ITO vs Daga Capital Management P Ltd reported in 117 ITD 169 and Hon’ble Jurisdictional High Court in the case of Dhanuka & Sons vs CIT reported in 339 ITR 319 (Cal) arrived at the average of shares held as stock in trade and applied 0.5% thereon and made disallowance u/s 14A of the Act in the sum of Rs 28,41,850/-.

2.2. The assessee clearly pointed out from its audited financial statements for the year under consideration as well as in the subsequent assessment years that it had retained the investments only as stock in trade. The assessee firm strongly objected the nature of business mentioned by the ld AO in the first page of the assessment order that nature of business is ‘Trading & Investment in Shares’ as against the true nature of business of the firm consisting of ‘Trading in Shares , Commodities and Currency Derivatives’. The assessee pleaded that when the shares are held as stock in trade , the computation mechanism provided in Rule 8D of the Rules would fail and hence the same should not be applied. The ld CITA observed that the onus is cast upon the assessee to demonstrate firstly that the investment in shares have been made out of own funds and secondly to demonstrate the one to one correlation between the funds available and funds deployed in the investment, which has not been done by the assessee in the instant case. Accordingly, he upheld the action of the ld AO in making the disallowance u/s 14A of the Act in the sum of Rs 28,41,850/- . Aggrieved, the assessee is in appeal before us.

2.3. We have heard the rival submissions. At the outset, we find from the audited accounts of the assessee, that the shares were held as stock in trade by the assessee and not as investments. Hence the computation mechanism provided in Rule 8D of the Rules cannot be applicable. We find that the ld AO though had not mentioned that the 3

4 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 disallowance has been made in accordance with third limb of Rule 8D(2) of the Rules explicitly in his order, however, resorted to take the computation mechanism provided therein at 0.5% of average value of investments. We hold that since Rule 8D of the Rules contemplates consideration of average value of investments only and not as stock in trade, the same cannot be adopted in the facts of the instant case. Now it is well settled by the Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC) that the disallowance u/s 14A of the Act is to be made even if the shares are held as stock in trade. Since Rule 8D cannot be adopted herein, the disallowance should be made based on the accounts of the assessee.

2.3.1. We find that the Hon’ble Supreme Court in the case cited supra in para 39 of the order had also observed that eventhough the dividend has been earned as an incidental activity in respect of shares held as stock in trade, it triggers the applicability of section 14A of the Act and depending upon the facts of each case, the expenditure incurred in acquiring those shares and maintaining those shares would have to be apportioned between taxable and exempt income. The ld AR placed reliance on the decision of the co-ordinate bench of this tribunal in the case of DCIT vs S.G. Investments & Industries Ltd reported in 89 ITD 44 (Kol) dated 29.5.2003 wherein the ld AO determined the sum of Rs 19,14,940/- out of total interest paid of Rs 3,69,36,637/- as interest relatable to earning of exempted dividend by working out the percentage of dividend vis a vis total turnover during the year. The dividend earned in that case was Rs 41,38,924/- which worked out to 5.27% of total earnings and accordingly proportionate interest debited in profit and loss account at the same percentage was disallowed u/s 14A of the Act in that case. This action of the ld AO was upheld by this tribunal. The ld AR before us stated that the name of S.G. Investments & Industries Ltd got changed to ISG Traders Ltd. We find that this tribunal decision dated 29.5.2003 had been upheld by the Hon’ble Jurisdictional High Court in the case of ISG Traders Ltd vs CIT in ITA No. 264 of 2003 dated 22.9.2011. Hence by respectfully following the said decision , we hold that the 4

5 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 expenditure to be disallowed u/s 14A of the Act is to be worked out in the similar fashion. We find that the ld AR had fairly placed the workings of the said disallowance in page 156 of the Paper Book which is reproduced as under:-

2.3.2. Accordingly we hold that the disallowance u/s 14A of the Act should be restricted to Rs 2,74,633/- in the facts and circumstances of the instant case in the light of the aforesaid decision of Hon’ble Jurisdictional High Court. Accordingly, the Grounds 1(a) to 1(c ) raised by the assesee are partly allowed.

6 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14

4.1. The brief facts of this issue are that the assessee purchased the shares of M/s Tuni Textile Mills Limited in Asst Year 2013-14 for Rs 3,00,68,816/- and sold the same in Asst Year 2013-14 itself for Rs 5,10,54,500/-. The assessee offered the gains derived on sale of shares as its business income. Since the main activity of the assessee is trading in shares, the gains received on sale of shares of M/s Tuni Textile Mills Limited was also offered to tax by the assessee as income from business in the return of income. The ld AO observed that the assessee was involved in a long drawn process of rigging of stock market prices in collusion with the various entry operators. He observed that the assessee had invested in the shares of M/s Tuni Textile Mills Limited, a company, not having any sound financial position or business activity so as to justify the huge gains in issue. The cases of Sumati Dayal vs. CIT 214 ITR 801 (SC) and CIT vs. Durga Prasad More (1971) 82 ITR (SC) were quoted in support to plead that the assessee had acted in collusion with various entry operators for the purpose of bogus LTCG in issue. This observation of ld AO was admittedly based on the report of the investigation wing of Kolkata Income Tax Department. The assessee specifically pleaded before the ld AO in the assessment proceedings that it had not offered any short term capital gains on sale of shares at concessional rate of tax nor had claimed any exemption towards long term capital gains as alleged by the ld AO. The assessee stated before the ld AO that it had declared a sum of Rs 2,09,85,684/- as profit in share trading earned on shares of 6

7 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 M/s Tuni Textile Mills Ltd during Asst Year 2013-14 which was offered to tax as business income by the assessee. The assessee submitted the following details :-

a) Ledger account of M/s Tuni Textile Mills Ltd as appearing in the books of the assessee for the Asst Year 2013-14.

b) Scrip wise ledger account of Tuni Textile Mills ltd as appearing in the books of Broker M/s Eureka Stock & Share Broking Services Ltd for Asst Year 2013-14.

c) Demat Transaction Statemetn of Tuni Textile Mills LTd, Unno Industries Ltd and Comp Disc In .

d) Ledger Account of Eureka Stock & Share Broking Services Ltd as appearing in the books of the assessee for the months of July & November 2012 .

e) Copies of bank statement of relevant pages wherein payments made to Eureka Stock & Share Broking Services Ltd are highlighted.

f) Copies of contract notes related to transactions regarding Tuni Textile Mills Ltd.

4.2. It was specifically pointed out that the assessee had purchased and sold the shares of Tuni Textile Mills Ltd at prevailing market prices on the date of purchase and sale of shares. The assessee also gave the high , low, average price of shares of Tuni Textile Mills Ltd, number of shares traded, number of trades, opening rate of share, closing price of share , quantity etc on the relevant dates in July and Nov 2012. The assessee also requested the ld AO to provide the copy of transaction details / evidences available with the revenue authorities, if any, SEBI Order etc as mentioned in the show cause notice to enable it to make further submissions in the matter. Without prejudice to the above, the assessee also submitted that there were no bogus purchases / sales transactions carried out by it and accordingly pleaded that no adverse inference be drawn on the third party documents submitted by the assessee. The ld AO however, did not heed to the contentions of the assessee and classified the relevant scrip as penny

8 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 stock and simply relied on the investigation report of Kolkata Income Tax Department by alleging that the assessee was involved in price rigging of shares artificially which the relevant company did not deserve with a malign intention to either derive exempt long term capital gains or short term capital loss so as to evade payment of taxes. Accordingly, he proceeded to treat the profit from sale of shares as ingenuine by stating that the assessee had connived with its brokers and entry operators for artificial price rigging of share prices and thereby legalized his unaccounted money in the form of sale proceeds of shares. Hence he treated the gains received on sale of shares of Rs 2,09,85,684/- as unexplained cash credit u/s 68 of the Act and taxed under income from other sources in the assessment. He also added the corresponding expenditure ought to have incurred by the assessee for obtaining these bogus credits and added commission at the rate of 0.50 per Rs 100 and made addition towards unexplained expenditure in the sum of Rs 2,55,273/- (5,10,54,500 * 0.5%) . In effect, he made an addition of Rs 2,12,40,957/- ( 2,09,85,684+2,55,273) under the head income from other sources.

4.3. The ld AO computed the total income of the assessee as under:-

Net Loss for the year as claimed in the return of income (-) 1,65,13,565 Profit and gains from Speculative business Add: (i) Disallowance u/s 14A 28,41,850 (ii) Disallowance u/s 94(7) 22,415 -------------- 28,64,265 -------------------- Assessed Income (-) 1,36,49,300

Unexplained cash credit u/s 68 for trading in Bogus Penny Stock 2,12,40,957 _____________

9 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 4.4. The assessee submitted before the ld CITA that addition made towards unexplained cash credit in the sum of Rs 2,09,85,684/- was already included by the assessee in the returned loss figure of (-) Rs 1,65,13,565/- and taxing the same once again u/s 68 of the Act amounted to double taxation. The assessee effectively contested the following additions / disallowances before the ld CITA :-

Taxing of already offered income Rs 2,09,85,684 Disallowance u/s 14A Rs 28,41,850 Disallowance u/s 94(7) Rs 22,415 Unexplained cash credit u/s 68 for trading in Bogus Penny Stock Rs 2,09,85,684 Unexplained commission for trading in Bogus Penny Stock Rs 2,55,273

4.5. The ld CITA did not consider the aforesaid contentions of the assessee and dismissed the appeal by upholding the assessment framed in the hands of the assessee. Aggrieved, the assessee is in appeal before us.

4.6. We have heard the rival submissions. At the outset, we find that the lower authorities had proceeded on an erroneous assumption that the assessee had claimed bogus long term capital gains as exempt or bogus short term capital loss with a view to evade payment of tax on sale of shares of M/s Tuni Textile Mills Ltd. Factually, we find that the assessee is engaged in the business of trading in shares and had practically traded in 191 scrips during the year under consideration. We find that the assessee had earned profit of Rs 2,09,85,684/ on sale of shares of M/s Tuni Textile Mills Ltd and had offered the same as business income in the return of income. Infact we also find that the assessee had incurred loss from trading in shares and securities to the tune of Rs 8,81,58,685/- after adjusting the profit of Rs 2,09,85,684/- on sale of shares of Tuni Textile Mills Ltd. In effect, the assessee during the year had incurred loss on trading of 9

10 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 shares under the head ‘business’ to the tune of Rs 10,91,44,369/-. The ld AO had accepted the transactions of trading in shares in respect of 190 scrips as falling under the head ‘ business’. The documentation maintained by the assessee is the same for all the 191 scrips and when the said documents are accepted by the ld AO for 190 scrips, there is no reason to disbelieve the same for shares of Tuni Textile Mills Ltd alone. There is absolutely no dispute that the assessee had duly filed the requisite documents in connection with the purchase and sale of shares as detailed supra and that the prices thereon were market driven. Apart from this, the assessee had also earned profit from trading in commodities to the tune of Rs 24,40,680/- during the year under consideration among other indirect incomes in the form of interest, dividend and interest on IT refund. We find that the ld AO called for the details on purchase and sale of shares of Tuni Textile Mills Ltd in the questionnaire issued along with notice u/s 142(1) of the Act which are enclosed in pages 49 to 50 of the paper book which was specifically on the point of claim of long term capital gains and short term capital loss. We find that the assessee had clarified before the ld AO more than once in writing that it had not claimed any long term capital gains as exempt or claimed any short term capital loss in the return of income. The evidences in this regard are enclosed in pages 51 to 56 of paper book. Since the lower authorities had proceeded on an erroneous assumption that the assessee had claimed bogus long term capital gains as exempt or incurred short term capital loss with a view to evade tax, the entire findings given by them in their respective orders becomes totally irrelevant. Moreover, we find that the lower authorities grossly erred in making an addition in the sum of Rs 2,09,85,684/- twice in view of the fact that the ld AO had started the computation of income from “Net loss as per profit and loss account” and that the said net loss of Rs 1.65 crores is after crediting Rs 2.09 crores profit on sale of shares of Tuni Textile Mills Ltd. Moreover, we find the issue of gains arising out of shares of Tuni Textile Mills Ltd had been the subject matter of adjudication by this tribunal in the case of Smt. Savita Bhura

11 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 vs DCIT in ITA No. 12/Kol/2017 dated 19.9.2018 for Asst Year 2013-14 wherein it was held as under:-

“3. We have heard rival submissions and gone through the facts and circumstances of the case. At the time of hearing, Ld. AR brought to our notice that in a similar case wherein the assessee had purchased shares of M/s. Tuni Textile Mills Ltd. and sold the same in AY 2013-14 the Tribunal has deleted the addition in the case of Kiran Kothary, HUF Vs. ITO in ITA No. 443/Kol/2017, AY 2013-14 by order dated 15.11.2017 wherein the Tribunal in that case has held that sale of shares of M/s. Tuni Textile Mills Ltd. was a genuine transaction. The Ld. DR, on the other hand, could not controvert this fact which was brought to our notice in respect of sale of shares of M/s. Tuni Textiles Mills Ltd. that the Tribunal in similar case for the same assessment year has dealt similar addition made by the AO/Ld. CIT(A) in respect of the claim of the assessee of LTCG on sale of share of M/s. Tuni Textile Mills Ltd. which is reproduced as under: “9. We have heard the rival submissions and perused the records. We note that in the present case, the appellant had purchased 13500 shares of M/s. Tuni Textile Mills Private Limited on 06.04.2011 from a stock broker in off-market transactions from M/s Badri Prasad & Sons, who was a member of Calcutta Stock Exchange. These shares were held in the demat account of the assessee maintained with M/s CD Equisearch Pvt. Ltd , a member of Mumbai Stock Exchange and ultimately these shares were sold through M/s. CD Equisearch and on such sale, Security Transaction Tax was duly paid. Payments were duly received in the bank account of the assessee. We take note that the purchase of shares by off-market transactions for purchase of shares is not illegal as was held by the Coordinate Bench of this Tribunal in the case of Dolarrai Hemani vs ITO in ITA NO.19/Kol/2014 dated 02.12.2016. The transactions were all through a registered broker (pages 18 and 19 of the paper book), backed by a contract note (page 22 of the paper book) and shares were credited in the demat accounts (page 25 of the paper book) and duly reflected in the books of account. In the light of these evidences on record we are of the opinion that the purchase of shares per-se cannot be held to be bad. 9.1. We note that there was a survey conducted u/s 133A of the Act by the Mumbai Investigation Wing against M/s. Tuni Textile Mills Pvt. Ltd on 02.06.2015 and in the survey a deposition was taken on oath wherein the Managing Director of the said company Shri N.P.Surekha was examined and he stated that 47 persons were allotted preference shares on 25.01.2010 and a sum of Rs.7.50 crores was raised by the company. He further submitted that this entire deal was done by one Shri Manish Baid and then these 47 investors used the shares allotted to them, sold the same at jacked up price and in the process they earned bogus long term capital gain from such transactions which was stage managed by Shri M.Baid. Based on this statement, the lower authorities concluded that the transactions of the assessee were also part of the bogus transactions and the same was accordingly held to be unexplained cash credit

12 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 u/s 68 of the Act. We do not subscribe to the said view taken by the authorities below for the reasons stated below:- We note that the assessee was not a part of 47 persons, who the managing director has named in the list of 47 persons and we also note that there is no material to remotely suggest that the assessee dealt with the said entry operator Shri Manish Baid, who is said to have stage managed and undertaken the entire transactions. We also find that the assessee has not dealt with any person or broker named in question no.28 of the statement which has been recorded on oath by the survey team and which has been reproduced by the ld. CIT(A) from pages 31 to 36 of the impugned order(Question no.28 finds place in page-35 of the impugned order). We therefore find merit in the submissions of the assessee that the statement recorded on oath during the survey cannot be the sole basis for adverse finding against the assessee. For this we rely on the decision of the Hon’ble Supreme Court in the case of CIT vs Khader Khan Son 352 ITR 480 (SC) wherein it has been held that section 133A (survey) does not empower any income tax authorities to examine any person on oath, hence any such statement lacks evidentiary value and any admission made during the survey cannot by itself be made the basis of addition. We therefore hold that the statement of Shri N.P.Surekha recorded on oath during the survey proceedings cannot be the sole basis to make the impugned addition. We note that the assessee had not purchased the shares by the Preference Share Route as stated by the party before the survey party. The allotment made in preference share was on 25-01-2010, whereas the assessee purchased the shares on 06-04-2011 through the broker. ( i.e after more than one year and three months) We find that the transactions of capital gains as claimed by the assessee was duly backed by relevant documentary evidences which include the following :- (i)The balance sheet of the assessee for the financial year 2011-12 wherein the investment made in these shares were duly recorded and reflected (page 16 of the paper book); ii) The bills of purchase of shares of M/s. Tuni Textile Mills Pvt. Ltd (page 18 of the paper book) iii)Copy of the demat statement maintained with M/s. CD Equi Search where the shares were held (page 24 of the paper book) iv) Copy of the contract notes issued by M/s. CD Equi Search Ltd, Member of Mumbai Stock Exchange having SEBI Registration No.INB010781133 and Code No.087 (page 19 to 22 of the paper book v) The bank statement maintained by the assessee with Bank of Maharshtra reflecting the payment received for the sale of shares (page 23 of the paper book). 9.2. We find force in the contentions of the ld. AR that the AO and CIT(A) was not justified in rejecting the claim of the assessee on the basis of theory of surrounding circumstance, human conduct and preponderance of probability 12

13 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 without bringing on record any relevant legally admissible evidence against the assessee. For the said proposition we rely on the judgment of the Special Bench of Mumbai Bench in the case of GTC Industries Ltd. (supra). The various facets of the contention of the AO, to rope in the assessee for drawing adverse inferences which remain unproved based on the evidence available on record are not reiterated for the sake of brevity. The principles laid down in various case laws relied upon by the ld. AR are also not reiterated for the sake of brevity. We further find that neither the reports relied on by the AO has not been brought on record nor is there any reference of finding of such report to impute the assessee is there on record. The AO has merely carved out certain features/modus- operandi of companies indulging in practices not sanctioned by law and as mentioned in such report. However, we note that neither any investigation was carried out against the assessee nor against the brokers to whom the assessee dealt with the purchase and sale of shares in question. Thus the AO has failed to bring on record any material contained in the purported reports which are having so called adverse impact on the assessee. We further find that the company under scanner was having share Capital as on 31.03.2013 of Rs.13.18 crores and was having assets worth Rs.24.25 crores and a turn over of Rs.19.32 crores and profit of Rs.1.35 crores. Thus the allegation that these companies did not have financial credentials is not correct and so is perverse and therefore we do not subscribe to the said finding and necessarily negate the finding. At the cost of repetition, we find that the transactions of sale of shares by the assessee was duly backed up by material/evidence including contract notes, demat statement, bank account reflecting transactions, the stock brokers have confirmed the transactions (pages 24-25 of the paper book), the shares having been sold on the online platform of the stock exchange and each trade of sale of shares were having unique trade number and trade time. It is not the case of the AO that the shares which were sold on the date mentioned in the contract note were not the traded price on that particular date. The AO doubted the transactions due to the high rise in the stock price and for that the assessee cannot be blamed unless there was any material/evidence to prove that the assessee or any one on his behalf has rigged the stock price. It should be noted that the Stock Exchange and SEBI are the statutory authorities appointed by the Govt. of India to ensure that there is no stock rigging or manipulation. The AO has not brought any evidence on record to show that these agencies have alleged any stock manipulation against the assessee or the brokers or the company in question. In absence of any evidence to back the conclusion of AO/CIT(A), it cannot be said that merely because the stock price moved sharply, the assessee was to be blamed for bogus transitions. It is also pertinent to note that the assessee has purchased the stocks through registered brokers and thereafter the assessee has sold the shares through the registered share/stock brokers with Calcutta Stock Exchange, and both have confirmed the transactions and have issued valid contract notes as per law; and in similar case, the Hon’ble Calcutta High Court in the case of Principal CIT vs Rungta Properties in ITA No.105 of 2016 dated 08 May, 2017 wherein it was held that “on the last point, the tribunal held that the AO had not brought relevant material to show that the transactions in shares of the company involved were 13

14 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 false or fictitious. It is the finding of the AO that the scripts of this company was executed by a broker and the broker was suspended for some time. It is the assessee’s contention that even though there are allegations against the broker, and for that reason the assessee cannot be held liable on this point, the tribunal held that – “As a matter of fact the AO doubted the integrity of the broker and the broker firm and also AO observed that the assessee had not furnished any explanation in respect of any discussion of trading of shares. The AO relied the loss of Rs.25,30,396/- only on the basis of information submitted by stock as fictitious. The AO has also not doubted the genuineness of the documents placed by the assessee on record. The AO’s observation and conclusion are merely based on information. Therefore on such basis, no disallowance can be made and accordingly we find no infirmity in the order of the ld. CiT(A), who has rightly allowed the claim of the assessee. This ground no.1 of the revenue is dismissed.” We agree with the reasoning of the tribunal on this point also. We do not find any reason to interfere with the impugned order. The suggested question, in our opinion do not raise any substantial question of law.” 9.3. In the light of the documents stated i.e. (i to v) in Page14(supra) we find that there is absolutely no adverse material to implicate the assessee to the entire gamut of unfounded/unwarranted allegations leveled by the AO against the assessee, which in our considered opinion has no legs to stand and therefore has to fall. We take note that the ld. DR could not controvert the facts which are supported with material evidences furnished by the assessee which are on record and could only rely on the orders of the AO/CIT(A). We note that the allegations that the assesse/brokers got involved in price rigging/manipulation of shares must therefore consequently fail. At the cost of repetition, we note that the assessee had furnished all relevant evidence in the form of bills, contract notes, demat statement and bank account to prove the genuineness of the transactions relevant to the purchase and sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the ld. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence. In the aforesaid facts and circumstance, for allowing the appeal we rely on the decision of the Hon’ble Calcutta High Court in the case of M/s. Alipine Investments in ITA No.620 of 2008 dated 26th August, 2008 wherein the High Court held as follows : “It appears that there was loss and the whole transactions were supported by the contract notes, bills and were carried out through recognized stock broker of the Calcutta Stock Exchange and all the 14

15 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 bills were received from the share broker through account payee which are also filed in accordance with the assessment. It appears from the facts and materials placed before the Tribunal and after examining the same, the tribunal allowed the appeal by the assessee. In doing so the tribunal held that the transactions cannot be brushed aside on suspicion and surmises. However it was held that the transactions of the shares are genuine. Therefore we do not find that there is any reason to hold that there is no substantial question of law held in this matter. Hence the appeal being ITA No.620 of 2008 is dismissed.”

4.7. We further find that the ld AO had observed that the gains of Rs 2,09,85,684/- is treated as bogus and sought to tax the same u/s 115BBE of the Act to be consequentially taxed at 30% on that income. In the instant case, we have already held hereinabove that the profits from sale of shares of Tuni Textile Mills Ltd is to be taxed as income from business as offered by the assessee and not u/s 68 of the Act under the head ‘income from other sources’, the provisions of section 115BBE of the Act cannot be made applicable in the instant case.

4.8. In view of the aforesaid findings in the facts and circumstances of the case and respectfully following the judicial precedent relied upon hereinabove, we hold that the lower authorities had erred in making and confirming the addition of Rs 2,09,85,684/- being gains on sale of shares of Tuni Textile Mills Ltd as bogus and consequentially

16 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 adding a sum of Rs 2,55,273/- as unexplained expenditure towards commission . Both the additions totaling to Rs 2,12,40,957/- are hereby directed to be deleted. Accordingly, the Grounds 3 to 7 raised by the assessee are allowed.

ITA No. 637/Kol/2018 – Asst Year 2013-14 – Assessee Appeal

9.1. The brief facts of this issue are that the assessee is engaged in trading in shares and commodities and had filed its return of income for the Asst Year 2013-14 on 29.9.2013 16

17 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 declaring total income of Rs Nil and claiming carry forward of losses. The assessment was completed u/s 143(3) of the Act on 22.3.2016 making various additions and disallowances. One such disallowance made by the ld AO thereon was u/s 14A of the Act in the sum of Rs 28,41,850/- being 0.5% of average value of shares held as stock in trade. The ld AO specifically observed in his order that the provisions of section 14A of the Act are indeed applicable even if the shares were held as stock in trade. The ld AO also placed reliance on the decision of Special Bench of Mumbai Tribunal in the case of ITO vs Daga Capital Management P Ltd reported in (2009) 117 ITD 169 , among other decisions, wherein the applicability of provisions of Rule 8D of the Income Tax Rules 1962 was discussed at length and that the disallowance is to be made as per the computation mechanism provided in Rule 8D of the Rules. Finally, the ld AO while concluding the assessment made disallowance of Rs 28,41,850/- being 0.5% of average value of investments , purportedly applying the third limb of Rule 8D(2) of the Rules , though no specific mention of Rule 8D was made by the ld AO in his order. This action of the ld AO was upheld by the ld CITA in first appeal. Aggrieved, the assessee had preferred an appeal before this tribunal which had been already adjudicated elsewhere in this order.

9.2. While it is so, the ld CIT sought to invoke his revisionary jurisdiction u/s 263 of the Act by holding that the order of the ld AO is erroneous and prejudicial to the interests of the revenue in view of the fact that the disallowance u/s 14A of the Act was not made by the ld AO by applying the computation mechanism provided in Rule 8D of the Rules. The ld CIT accordingly showcaused the assessee in this regard. The assessee replied that the provisions of Rule 8D perse cannot be made applicable in the facts of the instant case as the shares were held by the assessee only as stock in trade and that Rule 8D talks about shares held as ‘investments’ and hence the computation mechanism provided thereon fails. The assessee brought to the notice of the ld CIT that it is 17

18 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 engaged primarily in the business of trading in shares and commodities and is offering business income thereon and that the shares held thereon were only stock in trade of the assessee and were not held for the purpose of earning dividend. It was also submitted that even though the ld AO in the original assessment framed u/s 143(3) of the Act had made a disallowance u/s 14A of the Act in the sum of Rs 28,41,850/-, the same was agitated in appeal before the ld CITA and that the said appeal was disposed off by the ld CITA in Appeal No. 18/CIT(A)-10/C-35/2016-17/Kol dated 16.2.2017 wherein the action of the ld AO was upheld in this regard. It was also stated that the appeal against this CITA order was pending before this tribunal. It was also pointed out by the assessee before the ld CIT that the assessee had duly submitted before the ld AO regarding the non-applicability of provisions of section 14A of the Act read with Rule 8D of the Rules and that specific explanation for non-applicability of provisions of Rule 8D(2)(ii) of the Rules were also made regarding non-applicability of calculation of proportionate interest. These submissions were duly considered by the ld AO and the ld AO accordingly held that the interest paid on borrowings were used for share trading activities of the assessee and not for the purpose of earning any dividend and accordingly admissible u/s 36(1)(iii) of the Act. It was also specifically pointed out by the assessee before the ld CIT that since the issue of applicability of provisions of section 14A of the Act read with Rule 8D of the Rules had been elaborately dealt by the ld AO in the assessment proceedings and some disallowance made thereon, which action was also upheld by the ld CITA in first appeal, the same cannot be the subject matter of revision proceedings in view of specific provisions contained in Explanation 1 clause (c ) of section 263(1) of the Act. It was further pointed out that there was already pointed out that on the date of passing of an order by the ld AO u/s 143(3) of the Act dated 22.3.2016, there was already a decision of this tribunal in the case of DCIT vs Gulshan Investment Co. Ltd in ITA No. 1012/Kol/2010 wherein it was held that no disallowance u/s 14A of the Act by applying Rule 8D of the Rules could be made if the shares were held as stock in trade. Hence the view taken by the ld AO in the assessment 18

19 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 could be considered as one of the possible views taken and the ld CIT trying to substitute his view on the very same issue in the revision proceedings u/s 263 of the Act was not warranted. It was further submitted that the Hon’ble Jurisdictional High Court in the case of CIT vs G K K Capital Markets Private Limited vide order dated 10.2.2017 had held that the provisions of section 14A read with Rule 8D would not apply to shares held as stock in trade and in this judgement, the earlier decision of Hon’ble Calcutta High Court in the case of Dhanuka & Sons vs CIT (339 ITR 319) was analysed and considered. The ld CIT however ignored all the contentions of the assessee and proceeded to treat the order of the ld AO as erroneous and prejudicial to the interests of the revenue u/s 263 of the Act and set aside the order with a direction to make necessary investigation on the issue of computation of disallowable expenditure under Rule 8D of the Rules and pass a fresh assessment order thereon. Aggrieved, the assessee is in appeal before us.

9.3. We have heard the rival submissions. The facts stated hereinabove are not reiterated for the sake of brevity. It is not in dispute that the provisions of section 14A of the Act are applicable even if the shares are held as stock in trade as decided recently by the Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC). We find that we have already held elsewhere in this order , more particularly in paras 2.3, 2.3.1 and 2.3.2 of the order hereinabove, wherein we have held that the disallowance u/s 14A of the Act should be restricted to Rs 2,74,633/- in the facts and circumstances of the instant case in the light of the decision of Hon’ble Jurisdictional High Court in the case of ISG Traders Ltd vs CIT in ITA No. 264 of 2003 dated 22.9.2011. In view of our aforesaid finding and decision, wherein we have held that the disallowance u/s 14A of the Act cannot be made by applying the computation mechanism provided in Rule 8D of the Rules in the facts and circumstances of the

20 ITA No.846/Kol/2017 ITA No.637/Kol/2018 Maruti Traders & Investors A.Yr. 2013-14 instant case, we have no hesitation in quashing the revision proceedings u/s 263 of the Act. Accordingly, the grounds raised by the assessee in this regard are allowed.

Order pronounced in the Court on 28.11.2018 Sd/- Sd/- [S.S. Godara] [ M.Balaganesh ] Judicial Member Accountant Member

Dated : 28.11.2018 SB, Sr. PS Copy of the order forwarded to: 1. Maruti Traders & Investors, C/o Ramesh Kumar Somani, No.7, Lyons Range, Kolkata-700001. 2. ACIT, Circle-31, Kolkata, Aayakar Bhawan Poorva, 110, Shantipally, 8th Floor, Kolkata-700107. 3..C.I.T.(A)- 4. C.I.T.- Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.