ITO, WD-31(4), KOLKATA, KOLKATA vs. SHRI SHYAMA DEVI DALMIA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH (SMC), KOLKATA [Before Shri P.M. Jagtap] I.T.A. No. 1422/Kol/2016 Assessment Year 2009-10 Income Tax Officer.............................…………………………………………………..Appellant 31(4), Kolkata 10B, Middleton Row, Kolkata – 700 71 Shyama Devi Dalmia....................……………………………………………Respondent Dalmia Mansion, 5, A.J.C. Bose Road, Kolkata – 700 020 [PAN: AGBPD 5911 E] Appearances by: Shri Sailen Samaddar, Addl. CIT, Sr. DR appearing on behalf of the Revenue. Shri Ravi Tulsiyan, FCA appearing on behalf of the Assessee. Date of concluding the hearing : November 28, 2017 Date of pronouncing the order : January 05, 2018 ORDER This appeal is preferred by the revenue against the order of Ld. CIT (A) – 9, Kolkata 31.03.2016. 2. The first issue involved in this case relating to the claim of the assessee for loss of Rs. 23,40,887/- from mutual fund transactions is raised by the revenue in ground no 1 and 2 as under: “1. That on the facts and circumstances of the case and on law, the Ld. CIT(A) is not justified in allowing set off of loss of Rs. 23,40,887/- from Mutual Fund transactions with the profit out of transactions in shares, securities etc., without considering the fact that the assessee has treated these under the head “Investments” and did not audit her accounts as prescribed in section 44AB of the I.T. Act, 1961 for claiming the transactions as business transactions. 2. That on the facts and circumstances of the case and on law, the Ld. CIT(A) is not justified in holding that provisions of section 94(7)/94(8) of the I.T. Act, 1961 is not applicable in this case for earning exempt income

2 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia in the form of Dividend reinvestment and incurring loss out of redemption of Mutual Funds within four months of purchase.” 3. The assessee in the present case is an individual who is engaged in the business of share trading. The return of income for the year under consideration was filed by her on 09.03.2010 declaring Nil income. In the said return, loss of Rs. 23,40,887/- was shown by the assessee from the transactions in mutual funds and the same was set off against the profit arising from the transactions in shares, securities etc. During the course of assessment proceedings, it was found by the A.O. that the relevant mutual funds were held by the assessee as investment and the loss was a result of redemption of units of these mutual funds. He, therefore, held that the loss from the transactions in mutual funds incurred by the assessee was a capital loss. The A.O. also found that the units of mutual funds were redeemed by the assessee within 4 months of purchase and since dividend was earned by the assessee before such redemption resulting in sharp fall in the NAV of the units, the loss was a result of dividend stripping. Accordingly, he invoked the provisions of section 94(7) and ignored the loss of Rs. 23,40,887/- even for computing the income under the head ‘Capital Gains’. 4. The action of the A.O. in treating the loss from the transactions in mutual funds as a capital loss and ignoring the same even for computing the income under the head ‘Capital Gains’ by applying section 94(7) was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A)

3 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia decided this issue in favour of the assessee from the following reasons given in paragraph no 9.3 to 9.7 of his impugned order: “9.3. The first issue arises in this case is regarding the applicability of section 94(7) of the Income Tax Act, 1961 in respect of the loss in Mutual Funds allegedly on Dividend stripping. Before me, the appellant has submitted that the provisions of section 94(7) of the Income Tax Act, 1961 are not applicable to the case of the assessee since the Mutual Funds were of dividend reinvestment plan and therefore, the correct provisions applicable would be section 94(8) of the Income Tax Act, 1961. The appellant has submitted that the requirements of section 94(8) of the Income Tax Act, 1961 are not met in the hands of the assessee in the present case and therefore, even it cannot be invoked in the present case. 9.4. I have examined this aspect from the details filed by the assessee in the Paper Book and the provisions of sections 94(7) & 94(8) of the Income Tax Act, 1961 and find the contention of the assessee as correct since section 94(7) of the Income Tax Act, 1961 is not applicable in the case of Dividend reinvestment plan and section 94(8) of the Income Tax Act, 1961 would be applicable in such a scenario. One of the criteria for invoking section 94(8) of the Income Tax Act, 1961 is that the assessee should continue to hold all or any of the additional Unit allotted on the reinvestment of the dividend which is absent in the case of the assessee since on sale of the mutual funds all the units were sold by the assessee. 9.5. The next issue in respect of the loss in mutual fund and profit in share trading that arises is whether these two transactions can be split up to be treated differently under different heads of income. Before me, the appellant has submitted that both the activities are conjoined and one activity cannot be split up to be given different treatment by treating one part as business and the other as capital gains. It is the submission of the appellant that the entire activity of shares as well as mutual funds are carried out as one and the same and in an organized, continuous manner with a set purpose and with the intention of earning profit and in such a scenario, the activities have to be treated as business in terms of the decision of the Hon’ble Supreme Court in the case of Karnani Properties Ltd. vs CIT, W.B. Even factually, the assessee has demonstrated that for the purpose of dealing in mutual funds, the assessee borrowed funds during the year and has incurred various administrative expenses including salary for earning such profits and therefore, it clearly fails in the definition of business income under the Act.

4 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia 9.6. I have examined the above contention of the appellant together with all the submissions, assessment order and the facts of the case and I am inclined to accept the contention of the appellant that the transaction in shares and mutual funds cannot be split up to be given different treatment for the purpose of computing the income of the assessee since both the activities are one and the same and are carried out in an organized manner to earn profit and therefore, fall under the definition of business under the Act as has been interpreted by various courts including the Hon’ble Supreme Court. 9.7. In view of the same, the A.O. is directed to set off the entire loss of mutual funds with the profits on share dealing by treating both the activities as one having been earned in the course of carrying on of business by the assessee. In view of the same, the ground Nos. 2, 3 & 4 are allowed in the hands of the assessee. 5. I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the mutual funds and shares were held by the assessee as investment and the activities to deal with the shares as well as mutual funds was carried on by the assessee as one conjoint activity in an organized manner. The assessee also had borrowed funds for this activity and had incurred various administrative expenses including salary in connection with the said activity. After having recorded these findings on the basis of submissions made by the assessee, the Ld. CIT(A) held that the transactions in shares and mutual funds could not be split up to give different treatment for the purpose of computing the income of the assessee since both the activities were one and the same and were carried on in an organized manner to earn profit. He accordingly directed the A.O. to treat the loss incurred by the assessee in the transactions of mutual funds as business loss and set off the same against the profits of the assessese from share

5 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia trading. At the time of hearing before the Tribunal, the learned DR has not been able to raise any material contention or bring any relevant material to rebut or controvert the findings recorded by the Ld. CIT(A) while giving relief to the assessee on this issue. I, therefore, find no justifiable reason to interfere with the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue. 6. As regards the application of provisions of section 94(7), the Ld. CIT(A) has held that the said provisions are not applicable in the case of the assessee as it involved investment in dividend reinvestment plan. Moreover, as submitted by the learned counsel for the assessee at the time of hearing, the assessee had not received any dividend from the relevant mutual funds. Keeping in view these factual aspects which are relevant and which have remained uncontroverted by the learned DR, I find myself in agreement with the Ld. CIT(A) that provisions of 94(7) are not applicable in the case of the assessee. As held by the Ld. CIT(A), the provisions of section 94(8) were relevant and since the assessee had not continued to hold all or any of the additional unit allotted on the reinvestment of the dividend, the same was also not applicable. I, therefore, uphold the impugned order of the Ld. CIT(A) giving relief to the assessee on this issue and dismiss ground no 1 and 2 of the revenue’s appeal. 7. The next issue involved in this case relating to the deletion by the Ld. CIT(A) of the disallowance made by the A.O. under section 14A is raised by the revenue in ground no 3 and 4 as under: “3. That on the facts and circumstances of the case and on law, the Ld. CIT(A) is not justified in deleting disallowance of Rs. 29,69,773/- u/s 14A

6 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia by holding that dividend was earned out of shares etc. in stock in trade, without considering the fact that the assessee has categorised these under the head ‘investments’. 4. That on the facts and circumstances of the case and on law, the Ld. CIT(A) is not justified in deleting disallowance of Rs. 29,69,773/- u/s 14A by holding that dividend was earned out of shares etc. in stock in trade, without considering several judicial pronouncements in which it has been held that disallowance u/s 14A can be made for the shares etc. categorised under the head ‘stock in trade’ also.” 8. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has made investment in shares from the funds borrowed on interest. Since the income from the said investment was exempt from tax, the A.O. was of the view that the expenses incurred by the assessee in relation to the investment made in shares was liable to be disallowed under section 14A of the Act. He accordingly applied Rule 8D to work out the expenditure to be disallowed under section 14A at Rs. 29,69,773/- and made a disallowance to that extent. 9. The disallowance made by the A.O. under section 14A read with Rule 8D was challenged by the assessee in the appeal filed by the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the disallowance made by the A.O. under section 14A for the following reasons given in paragraph no 9.9: “9.9. I have considered the contention of the appellant and I am in agreement that no disallowance u/s 14A is called for when dividend income is holding stock in trade is to earn taxable income and dividend is simply a windfall or an unintended gain on the said stock in trade. This view has also been held by a number of High Courts that no disallowance

7 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia u/s 14A of the I.T. Act, 1961 is called for on exempt income earned from stock in trade. Further, the funds invested in earning interest on F.D. is obviously allowable while computing the income. Therefore, the entire disallowance of Rs. 29,69,773/- u/s 14A of the Income Tax Act, 1961 is deleted in the hands of the assessee. This ground of appeal accordingly allowed.” 10. I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that this issue is squarely covered in favour of the assessee by the decision of the Hon’ble Kolkata High Court in the case of CIT vs G.K.K. Capital Markets (P) Ltd. 392 ITR 196 (Cal) wherein it was held that no disallowance under section 14A can be made on account of expenditure incurred in relation to the investment made by the assessee in shares held as stock in trade. Respectfully following the said decision of the Hon’ble Kolkata High Court in the case of CIT vs G.K.K. Capital Markets (P) Ltd., I uphold the impugned order of the Ld. CIT(A) deleting the disallowance made by the A.O. under section 14A and dismiss ground no 3 and 4 of the revenue’s appeal. 11. In the result, the appeal of the revenue is dismissed. Order Pronounced in the Open Court on 5th January, 2018. Sd/- (P.M. Jagtap) ACCOUNTANT MEMBER Dated: 05/01/2018 Biswajit, Sr. P.S.

8 I.T.A. No. 1422/Kol/2016 Shri Shyama Devi Dalmia Copy of order forwarded to: 1. Shyama Devi Dalmia, Dalmia Mansion, 5, A.J.C. Bose Road, Kolkata – 700020. 2. ITO, Ward 31(4), 10B, Middleton Row, Kolkata – 700071. 3. The CIT(A) 4. The CIT 5. DR True Copy, By order, Sr. P.S. / H.O.O. ITAT, Kolkata