ITO WARD-10(4),KOLKATA, KOLKATA vs. M/S AUM CAPITAL MARKET PVT. LTD., KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA ‘C’ BENCH, KOLKATA [Before Sri J. Sudhakar Reddy, Accountant Member& Sri S.S. Godara, Judicial Member] I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 Income Tax Officer, Ward-10(4), Kolkata..………....................................….….……………….…......Appellant M/s. Aum Capital Market Pvt. Ltd.....................…..…….……………………………………………..……Respondent 5, Lower Rowdon Street Kolkata – 700 020 [PAN: AAACO 7624 B] Appearances by: Shri Ravi Tulsiyan, FCA, appeared on behalf of the assessee. Shri Saurabh Kumar, Addl. CIT, DR appearing on behalf of the Revenue. Date of concluding the hearing : July 7th,2018 Date of pronouncing the order : September 28th,2018 ORDER Per S.S. Godara, JM :- This revenue’s appeal for the assessment year 2010-11 arises against the Commissioner of Income Tax (Appeals) – 4, Kolkata’s order dated 18/11/2016 passed in case no. ITA No.1125/CIT(A)-4/Range-10/Kol/14015 involving proceedings u/s 143(3) of the Income Tax Act, 1961 (in short ‘Act’).

3.1. The assessee preferred appeal. Its case before the CIT(A) was that it had rather earned interest income of Rs.10,88,543/- against interest expenditure of Rs.1,00,525/- as per schedule 1 of P&L Account. It made out a case of positive interest therefore. Case law of DCIT vs. Trade Apartment Ltd. in ITA No.

2 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd 1277/Kol/2011 also stood quoted in support. The assessee further placed on record all of its details including interest free funds of Rs.11,70,47,650/- as against its investments under exempt income earning instruments to the tune of Rs.2,42,44,506/-. The CIT(A) hold in this backdrop of facts that the Assessing Officer’s action invoking the impugned disallowance is not sustainable.

3 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd (3) (4) (5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a)a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association 6a [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),] shall not be deemed to be a speculative reproduced. A clear reading of the foregoing provision suggests that transactions of purchase and sale of any commodity, stock or shares when settled without actual delivery, falls under the category of "speculative transaction". During the relevant assessment year, the appellant's intra day share trading and currency derivative transactions have been treated as speculative transactions. The appellant earned a profit of Rs.19,872/- and a loss of RsA,728/- respectively, from its speculative business. Thereafter, the appellant would like to submit that profit and loss being the two segments of speculative transactions, as per section 73(1) of the Income Tax Act, 1961 loss, if any incurred out of a speculation business can be set off against profits of speculation business only. Also, section 73(2) envisages that if loss of any speculative business cannot be fully adjusted/set off against speculative profits in the assessment year in which it is incurred, then the unadjusted loss can be carried forward for set off against the speculative profit earned, in the next assessment year and so on. In view of the above, it can thus be contended that outcome of speculative transactions is either a profit or loss. In the appellant's case for the relevant assessment year, the appellant earned a profit of Rs.19,872/- (from intra-day share trading) and loss of RsA,728/- (from currency derivative transaction). On set off of the loss of Rs. 4,728/- against the profit of Rs.19,872/- from speculative transaction, the appellant earned a net profit of Rs.15, 144/- from speculation business. Thus, the appellant earned a real net profit of Rs.15, 144/- from speculation business during the relevant Assessment Year. However, the Ld. AO went ahead to artificially apportion expenses to the appellant’s speculation business to the tune of Rs. 41,89,920/- on pro rata basis after the loss out of speculation business was set off against profit of speculation business as per Section 73 of the Income Tax Act, 1961 to further create a loss of Rs. 41,74,776/- artificially when real profit of Rs. 15,144/- already existed. Thus, this action of the ld.

4 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd AO led to a doubles set off by artificial apportionment of expenditure which is clearly not the intendment of Section 73 of the Income Tax Act, 1961. In this regard, the appellant would humbly like to submit that as already stated earlier, section73 of the Income Tax Act, 1961 envisages a single outcome of speculation transactions which is either profit or loss. Where loss on set off results in real net profit, the net profit is treated as the final outcome of the speculation business and vice versa. Nowhere does Section 73 of the Income Tax. Act, 1961. or any other provision of the Income Tax Act, 1961 mandates artificial apportionment of expenditure to speculation business, once section 73 of the Income TAX Act, 1961 has been complied with. The Ld. AO in the instant case artificially apportioned expenses of Rs. 41 ,89,920/-, to the resultant net profit of Rs.15, 144/- of the appellant's speculation business (arrived at by setting off loss of Rs. 4,728/-) thus converting the net profit of RS.15,144/-, derived out of speculation business into a loss of Rs.41,74,776/-, for set off in subsequent assessment years, which is clearly not what the Income Tax Act, 1961 provides for. Thus, this artificial apportionment of expenses by the Ld. AO, to the appellant's real of it earned from speculation business is bifurcation from the provisions laid down in .the Income Tax Act, 1961. In view of the above, it is being humbly submitted by the appellant that the Ld. AO's action of apportioning expenditure of Rs.41,89,920/-, to the appellant's real profit earned from speculation business is unjustified and bad in law. In view of the above, it is thus urged by the appellant that the Ld. AO's action of artificially apportioning expenditure of Rs.41,89,9201-, to the appellant's real profit earned from speculation business being unjustified and bad in law may kindly be deleted." 5.2. I have considered the submission of the AR of the appellant. I find that the appellant earned a profit of Rs. 19,872/- (from intra-day share trading) and loss of ,Rs. 4,728/- (from currency derivative transaction). On set off of the loss of Rs. 4, 728/- against the profit of Rs. 19,872/- from speculative transaction, the appellant earned a net profit of Rs. 15,144/- from speculation business. Thus, the appellant earned an actual net profit of Rs. 15, 144/- from speculation business during the relevant assessment year. I find that the AO in the instant case artificially apportioned expenses of Rs. 41,89,920/-, to the resultant net profit of Rs. 15,144/- of the appellant's speculation business (arrived at by setting off loss of Rs. 4,728/-) thus converting the net profit of Rs. 15, 144/-, derived out of speculation business into a loss of Rs. 41 ,74,7761, for set off in subsequent assessment years, which is against the provisions of the Act. I find that this artificial apportionment of expenses by the AO, to the appellant's realised profit earned from speculation business is without any legal support of the Act. The AO is directed to delete the addition made on this count. These grounds of appeal are allowed.”

6.1. It is clear from above backdrop of facts that the sole dispute between the parties is that of apportionment of assessee’s expenditure. We make it clear that there is no dispute about the assessee having derived net profit in speculation business. Relevant clinching fact that of the assessee having set off its intraday

5 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd share trading of Rs.19,872/- against losses in current year derivative transactions of Rs.4,728/- resulting in net gain of Rs.15,114/-, after taking into account all the computation leaves no scope behind for any further estimation. We find that the Assessing Officer has not followed any statutory method for the impugned apportionment. So is the factual position emanating from rival pleadings during the course of hearing. We conclude in these peculiar facts and circumstances that the CIT(A) has rightly gone by the actual figures of assessee’s computation than the Assessing Officer’s allocation not based on any method leading to the impugned disallowance. The Revenue fails in this second substantive ground as well in seeking to revive disallowance/addition of allocated expenditure amounting to Rs.41,74,776/-.

6 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd reflected by the appellant as long-term capital gain and the same was accepted by the AO. The AO however, gave different treatment to the shares held in the same portfolio, held for a period of less than one year which is not justifiable in view of the facts of the case. I also find that the appellants own funds were sufficient for investments made by it during the relevant Assessment Year, on sale of which it earned the STCG, therefore, the borrowed capital theory of the AO also does not hold good. Thus it is held that the gain should be treated as short term capital gain instead of business income. The. AO is directed to do so. These grounds are allowed.” 7.1. Learned senior departmental representative vehemently contends during the course of hearing that the Assessing Officer had rightly held the assessee to have derived business income from sale of its shares. Some key facts emerge from the case records qua the impugned issue. The assessee admittedly maintains two portfolios for its investments and business in shares. The Revenue is fair enough in not disputing the fact that the assessee has shown its shares as investments in its books. The assessee has also proved not to have utilized any borrowed funds for acquiring the five scrips in question. We find that this tribunal’s co-ordinate bench’s decision in ITO vs. Sri Sailesh Jalan in ITA No. 1880/Kol/2012, decided on 02/03/2016, reiterates the following parameters to be relevant for adjudicating the issue before us of business income versus capital gains in case of sale of shares as follows:- “8. We have given a careful consideration to the rival submissions. The issue to be decided is as to whether the STCG on transaction of purchase and sale of shares undertaken by the assessee during the previous year is to be assessed under the head 'income from business' as claimed by the revenue or income under the head 'capital gain' as contended by the assessee. Before we deal with the facts of the case of the assessee, we will briefly narrate the principles applicable in deciding the above issue as laid down in several judicial pronouncements :- (a) Whether a transaction of sale and purchase of shares were trading transactions or whether they were in the nature of investments is mixed question of law and fact. CIT Vs. Holck Larsen, 60 ITR 67 (SC). (b) It is possible for an assessee to be both an investor as well as a dealer in shares. Whether a particular holding is by way of investment or formed part of stock in trade is a matter which is within the knowledge of the assessee and it is for the assessee to produce evidence from his records as to whether he maintained any distinction between shares which were hold by him as investments and those hold as stock in trade. (CIT Vs. Associated Industrial Development co. Ltd., 82 ITR 586 (SC). (c) Treatment in the books by an assessee will not be conclusive. If the volume, frequency and regularity with which transactions are carried out indicate systematic and organized activity with profit motive, then it would be a case of business profits and not capital gain. CIT Vs. Motilal Hirabhai Spg. And Wvg. Co. Ltd., 113 ITR 173 (Guj); Raja Bahadur Viswshwara Singh Vs. CIT, 41 ITR 685 (SC).

7 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd (d) Purchase without an intention to resell where they are sold under changed circumstances would be capital gains. CIT Vs. PKN, 60 ITR 65 (SC). Purchase with an intention to resell would render the gain profit on sale business profit depending on the circumstances of the case like nature and quantity of article purchased, nature of the operation involved. Saroj Kumar Mazumdar Vs. CIT, 37 ITR 242 (SC). (e) No single fact has any decisive significance and the question must depend upon the collective effect of all the relevant materials brought on record. Janki Ram Bahadur Ram Vs. CIT, 57 ITR 21 (SC). 9. The above tests have again been reiterated by the CBDT in its Circular referred to by the AO in the order of assessment. Keeping in mind, the above broad principles, we shall now examine the case of the assessee. The assessee during the previous year had entered into transactions of purchase of shares giving raise to long term capital gain as well as short term capital gain. The long term capital gain arose out of sale of shares which were held for periods ranging from 9 years to more than 1 year. As far as short term capital gain is concerned, there were in all about 21 purchase and sale transactions in shares of 10 different companies. The period of holding varies between 6 days to less than 1 year. The above transactions were effected by actual delivery of shares at the time of purchase and sale. The factors which go in favour of the Assessee that the income in question is to be assessed under the head "Capital Gain" are the fact that as follows: 1. The fact that in the earlier AY on identical volume of transaction, the AO in Assessment u/s.143(3) of the Act, accepted the case of the Assessee that income from purchase and sale of shares is not business income. 2. The Assessee had not borrowed funds to make investment in shares. 3. The volume and frequency of the transactions are not very high. 4. The Assessee held the shares as investment in its books of accounts and not as stock-in-trade. 10. In the light of the above circumstances prevailing in the case of the assessee, we are of the view that the conclusion of the CIT(A) that the income from sale of shares declared by the assessee as capital gain has to be accepted as correct and calls for no interference. 11. In CIT Vs. Gopal Purohit 228 CTR 582 (bom), the question of law raised was regarding whether STCG declared by the Assessee was to be assessed as business income or not. Question (b) considered by the Hon'ble Bombay High Court was as follows: "(b) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified inholding that principle of consistency must be appliedhere as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as resjudicata to preclude the authorities from holding such transactions as business activities in current year?" The Hon'ble Bombay High Court held as follows: "3. In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1 of 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 revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. 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

8 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question." 12. The above decision of the Hon'ble Bombay High Court is clearly applicable in this case. For the reasons given above, we uphold the order of the CIT(A) and dismiss the appeal of the Revenue.” 7.2. We keep in mind the above fine tuned principles to revert back to the facts of this case. The assessee has admittedly derived its short-term capital gains from shares held as investments not acquired through use of any borrowed funds. It successfully demonstrated during the course of lower appellate proceedings that going by the Assessing Officer’s conclusion, it would rather be entitled for business loss claim of Rs.51,71,149/- than short term capital gains of Rs.1,11,99,92/-. We take into account all these peculiar facts and circumstances to affirm the CIT(A)’s finding holding assessee’s profits derived from sale of shares to be short term capital gains instead of business income.

Kolkata, the 28th day of September, 2018.

Sd/- Sd/- [J. Sudhakar Reddy] [S.S. Godara] Accountant Member Accountant Member Dated :28.09.2018 {SC SPS}

9 I.T.A. No. 302/Kol/2017 Assessment Year: 2011-12 M/s. Aum Capital Market Pvt. Ltd Copy of the order forwarded to: 1. M/s. Aum Capital Market Pvt. Ltd 5, Lower Rowdon Street Kolkata – 700 020