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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
ORDER
Per Shri A.T.Varkey, JM
This is an appeal filed by the revenue against the order of Ld. CIT(A)-4, Kolkata dated 27.08.2015 for AY 2008-09.
The first ground of revenue is against the action of the Ld. CIT(A) in deleting the addition made by the AO on notional interest income of Rs.88,168/-.
2.1. Brief facts of the case are that the AO in the course of assessment proceedings observed that no interest income has been shown in respect of the security deposit of Rs.7,34,735/-, even though the assessee produced the details of the security deposit which was enclosed at page 59 of the paper book and explained to him that these were deposits for obtaining the office premises on rent, broad band connection, telephone connection etc. and Rs.2 lacs was advanced to Electronic Corporation of India Ltd. (ECIL), because the assessee is a primary dealer of government securities, PSU Bonds on behalf of Govt. of India and in order to be empanelled with the ECIL, the assessee had advanced the same as security deposit to it. However, the AO disregarding the aforesaid facts computed notional Vistar Financiers (P) Ltd., AYs- 2008-09 interest @ 12% on such deposit and added a sum of Rs.88,168/- to the income of the assessee. Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who deleted the addition. Aggrieved, the revenue is before us.
2.2. We have heard rival submissions and gone through facts and circumstances of the case. We note that the assessee had to make deposits as security deposit for obtaining office premises on rent, broad band connection, telephone connections etc. and it had deposited a sum of R. 2 lacs with ECIL, since assessee is a primary dealer of Govt. securities, PSU Bonds on behalf of the Govt. of India and this deposit of Rs.2 lakh with ECIL was made in order to get empanelled with ECIL and the security deposit was a pre-condition for getting empanelled and thereby facilitating it from trading in government securities. The AO has computed interest @ 12% of the said deposits and computed notional interest which was rightly deleted by the Ld. CIT(A) since the security deposits were made for the purpose of business and there was no interest earned by the assessee on the security deposit. The Ld. CIT(A) has rightly noted that it was not the case of the AO that the aforesaid sum represented interest free loans made out of borrowed funds and accordingly, a portion of interest is disallowable u/s. 36(1)(iii) of the Act. Only income chargeable to tax as per the Act can be brought to tax by AO. The action of the AO smacks of arbitrariness and the Ld. CIT(A) has rightly deleted the addition and we confirm it and dismiss this ground of appeal of revenue.
Next ground of appeal of revenue is against the action of Ld. CIT(A) in treating the profit of Rs.72,49,491/- on sale of shares as short term capital gain instead of treating it as business income as done by the AO.
3.1. Briefly stated facts are that during the year, the assessee had earned profit on sale of shares held as investment of Rs.72,49,491/- which was offered by assessee in its return as short term capital gain. The AO having regard to the frequency, regularity of the transaction held that the assessee was a dealer and not an investor in shares. According to the AO, the profit on sale of shares was higher than the profit from trading in security i.e. (Rs.64,25,848/-) and he was of the opinion that majority of the income of the assessee was Vistar Financiers (P) Ltd., AYs- 2008-09 received from the share transactions. The AO also noted that the funds deployed in stock- in-trade were higher than the deployment made by the assessee in investment. Taking the aforesaid facts into consideration, he concluded that the profit earned on sale of shares was business income and not short term capital gain as contended by the assessee. Aggrieved by the action of the AO, the assessee preferred an appeal before the Ld. CIT(A), who was pleased to allow the claim of the assessee that the amount of Rs.72,49,491/- was to be treated as short term capital gain and not business income. Aggrieved by the aforesaid action of the Ld. CIT(A), revenue is before us. 3.2. We have heard rival submissions and gone through the facts and circumstances of the case. We note that the assessee submitted that it had maintained two portfolios, one for the purpose of trading in shares, where the shares were reflected as stock-in-trade; and another portfolio for the purpose of investment in shares, where shares were reflected as investment. From a perusal of Balance Sheet of the relevant assessment year and earlier years, we note that even in earlier assessment years the assessee had maintained two port folios for dealing in shares (i) for the purpose of trading in shares and (ii) for the purpose of investment in shares. We note that in the scrutiny assessment year for AY 2006-07, the department had accepted the gains from sale of investment of share as capital gains and not as business income which is revealed from the assessment order enclosed at pages 60 to 64 of the paper book. It was brought to our notice that in the subsequent years also i.e. AYs 2009-10 to 2012-13, the gains on sale of shares which assessee held in its investment portfolio has been assessed under the head ‘Capital Gains’. Copies of the orders are enclosed at pages 65 to 85 of the paper book. We find force in the argument of the Ld. Counsel for the assessee that when the fundamental aspect permeating through the different assessment years has been found as a matter of fact one way or the other, and have allowed the position to be sustained then by applying rule of consistency the AO ought not to have taken a different view in this assessment year as observed by the Hon’ble Supreme Court in Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC). 3.3. Further, we also take note that the CBDT notification no. 6 of 2016 dated 29.02.2016 wherein the CBDT has instructed the officers under the Act that if the assessee is Vistar Financiers (P) Ltd., AYs- 2008-09 irrespective of the period of holding of shares treated the transaction of sale and purchase of the shares as stock in trade or investment then the department shall not dispute on this matter. Only caveat is that the tax payer shall not be allowed to adopt a different/contrary stand in the subsequent assessment years which means assessee should be consistent in its approach and practice while dealing with sale of shares. We note that assessee had been holding two portfolios one that of a trader in shares where the assessee had shown in its Balance Sheet shares as stock in trade and second port folio wherein the assessee has shown the shares for the purpose of investment, which is reflected as investment in its Balance Sheet. The assessee has not changed or adopted a different stand in the subsequent assessment years or even previous years. Assessee has been consistently taking the same stand and, therefore, CBDT notification is binding on the authorities under the Act. The AO ought not to have taken a different view in this matter. We also find that the AO erred in wrongful assumption of facts in this matter which makes the order erroneous. We note that the AO has stated that the profit on sale of shares constituted majority of the assessee’s income and accordingly, the said activity constitutes business. We note that the interest income of the assessee constituted the majority of the assessee’s income which comes to the tune of Rs.5,23,29,730/- and interest on fixed deposit comes to Rs.28,21,121/- whereas profit from trading in securities is to the tune of Rs.64,25,848/- and the assessee’s income from capital gains is to the tune of Rs.72,49,491/- which do not even constitute 10% of the total income. Thus, the AO erred in making the aforesaid conclusion. Further, we note that AO’s contention that majority of funds have been deployed in shares that has been held as investment is contrary to the facts of the case. We note that from a perusal of the Balance Sheet, we note that the allocation of funds which was deployed by the assessee, it can be seen that the net current asset is Rs.40,13,89,921/- and investment is only to the tune of Rs.20,09,45,140/-. Therefore, the AO erred in making such a conclusion also. We find that the assessee is maintaining separate accounts for investment and trading. We note that the investments are disclosed under the head ‘investment’ and gains arising from the same i.e. gains arising from the sale of shares under that portfolio, therefore, has to be treated as LTCG/STCG, as the case may be. We find that the Ld. CIT(A) has rightly appreciated the aforesaid facts and has directed the AO to treat the income under the head ‘investment’ i.e.
Vistar Financiers (P) Ltd., AYs- 2008-09 gains arising from sale of shares there from as income from capital gains. We, therefore, find no infirmity in the order of the Ld. CIT(A) and we confirm the same and dismiss the appeal of the revenue. 4. The next ground of appeal of revenue is against the action of the Ld. CIT(A) in restricting the disallowance u/s. 14A of the Act to the extent of Rs.24,097/- instead of Rs.93,47,141/- as computed by the AO under Rule 8D. 4.1. Brief facts are that the AO noted that the assessee had earned tax exempt dividend of Rs.18,69,230/-. The AO applied Rule 82(2)(ii) and 8D(2)(iii) of the I. T. Rules, 1962 read with sec. 14A of the Act and made disallowance of Rs.93,47,141/- u/s. 14A of the Act as under: i) Amount of expenditure by way of interest Rs.86,72,733/- ii) 0.5% of average value of investments Rs. 6,74,408/- Total : Rs.93,47,141/- It was brought to our notice that in the present case the assessee earned tax exempt dividend of Rs.18,69,230/-. However, the dividend of Rs.18,39,910/- was received from shares held as stock in trade and dividend income of Rs.29,320/- was received from shares held as investments. We note that the law is well settled that once the assessee has treated the shares as stock in trade, then Rule 8D of the Rules will not apply and, therefore, the provisions of Rule 8D ought not to have been applied in a case where exempt income yielding asset were not held as investment related asset i.e. shares which was held as stock in trade all along, then Rule 8D cannot be invoked which view has been taken by the Coordinate Bench of the Tribunal in the case of DCIT Vs. Gulshan Investment Co. Ltd. 26 ITR (Trib) 674. The Hon’ble jurisdictional High court in GA No. 1150 of 2015 in of 2015 CIT Vs. G K K Capitals Markets Pvt. Dated 10.02.2017 has upheld the aforesaid view of the Tribunal that once the assessee has kept the shares as stock in trade, then Rule 8D of the rules shall not apply. Therefore, we note that the AO erred in applying Rule 8D on the shares held by the assessee as stock in trade which yielded Rs.18,69,230/- out of the total amount of dividend of Rs.18,69,230/-. We note that Ld. CIT(A) has applied Rule 8D(2)(iii) on the dividend bearing scrips and disallowed Rs.24,097/-, which computation the Vistar Financiers (P) Ltd., AYs- 2008-09 Revenue has not been able to controvert. So, relying on REI Agro Ltd. reported in (2013) 36 CCH 360 (Kol) (Trib.), we affirm the order of the Ld. CIT(A) and dismiss the appeal of the Revenue.
5. In the result, appeal of revenue is dismissed. Order is pronounced in the open court on 17.01.2018 Sd/- Sd/- (J. Sudhakar Reddy) (Aby. T. Varkey) Accountant Member Judicial Member Dated : 17th January, 2018 Jd.(Sr.P.S.) Copy of the order forwarded to:
1. Appellant – DCIT, Circle-10(2), Kolkata. 2 Respondent – M/s. Vistar Financiers (P) Ltd., 5, Lower Rawdon Street, Kolkata- 700 020. 3. The CIT(A) -4, Kolkata.