EVEREST FINANCE & INVESTMENT COMPANY,KOLKATA vs. JCIT, RANGE-34, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH KOLKATA BEFORE SHRI N.V. VASUDEVAN, JM &DR. A.L.SAINI, AM आयकरअपीलसं./ITA No.2056/Kol/2014 (िनधा�रणवष� / Assessment Year: 2011-12 Everest Finance & Investment Vs. J.C.I.T, Range - 34,Kolkata Co. M/s. G.P. Agarwal & Associates, 7A, K.S.Ray Road, 2nd Floor, Kol - 1. �थायीलेखासं./जीआइआरसं./PAN/GIR No. : AABFE7233Q (APPELLANT) .. (RESPONDENT) Appellantby :Shri S.S Gupta & Arvind Agarwal, Advocate Respondentby :Shri G. Mallikarjuna, CIT DR सुनवाईकीतारीख/ Date of Hearing : 12/07/2017 घोषणाकीतारीख/Date of Pronouncement : 11/10/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: The captioned appeal filed by the assessee, pertaining to assessment year 2011-12, is directed against the order passed by the ld. Commissioner of Income Tax (Appeals)-XX, Kolkata, in Appeal No.232/CIT(A)-XX/Range-34/2013-14/Kol, dated 10.07.2014, which in turn arises out of an order passed by the Assessing Officer u/s.143(3) of the Income Tax Act 1961, (hereinafter referred to as the ‘Act’), dated 24.01.2014. 2. The grounds of appeal raised by the assessee reads as under:

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 “1. Because that the ld. Commissioner of Income Tax (Appeals) was erred in law as well as in facts in sustaining the addition made by the ld. JCIT in treating the short-term capital gain income of Rs.1,95,94,294/- as income under the head, Profit & Gains from business, and his such conclusions are contrary to the facts and material on record and provisions of law. 2. Because that the ld. Commissioner of lncome Tax (Appeals) was erred in law as well as in facts in holding that there was no merit in the argument of the appellant, and sustaining the addition of Rs.1,95,94,294/- as business income as against Short-term Capital Gains income, and his such conclusions are based on his surmises and guesses and are contrary to the facts and material on record and provisions of law. 3. Because that the ld. Commissioner of lncome Tax (Appeals) was erred in law as well as in facts in applying the ratio of judgement of the Hon'ble ITAT SMC Bench, Mumbai judgement in the case of Shri Shreyas M. Jhaveri under ITA No. 2437/Mum/2010, dated 2nd January 2013 in sustaining the addition, which is distinguishable on facts and issue of law. 4. Because that the ld. Commissioner of lncome Tax (Appeals), in the given facts of the case, ought to have accepted the argument on facts and the ratio of the judgement as relied upon by the appellant before him and should have reversed the judgement of the ld. A.O. in treating the short-term capital gains income of Rs.1,95,94,294/- as income under the head, Business. 5. Because that the ld. Commissioner of lncome Tax (Appeals) was erred in law as well as in facts in upholding the disallowance made by the ld A.O. on account of interest of Rs.24,87,354/- on the alleged ground that the same was prior period expenses and as such his conclusions are based on his surmises and guesses and are contrary to the facts and material on record. 6. Because that the ld. Commissioner of lncome Tax (Appeals) was erred in law as well as in facts in not accepting the arguments in the given facts of the case before him that the interest of Rs.24,87,354/- was allowable while computing the cost of 51382 Equity Shares of DQ Entertainment (lnternational) Ltd. 7. Because that the ld. Commissioner of lncome Tax (Appeals) ought to have accepted the arguments and the ratio of the judgements relied upon by the appellant before him with regard to the allowability of the interest of Rs.24,87,354/-. 8. The appellant craves leave to add further grounds of appeal or alter the grounds at the time of hearing.” 3.Ground Nos. 1, 2, 3 & 4 raised by the assessee relate to one issue, that is, the assessee claimed the income of Rs.1,95,94,294/- under the head Capital gain Page | 2

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 whereas the Assessing Officer assessed the same under the head Business Income. 4.The brief facts qua the issue are that the assessee is a partnership firm, engaged in investment in shares and securities and financing. For the asst. year 2011-12, the assessee had declared income from long term capital gains of Rs.15,20,12,846/- ( claimed exempt), dividend of Rs.1,98,86,617/-(exempt), and short term capital gain of Rs. 9,42,76,136/- ( taxed @ 15%).This income has been set off against B/f Losses before computing total income of Rs.6,60,24,296/- and tax had been paid thereon at the rates in force.The assessee’s case was selected for scrutiny and during the course of hearing the assessing officer asked for the detailed working of the short term capital gains of Rs.9,42,76,136/-. The assessee submitted the detailed working of short term capital gains. Out of the total short term capital gains of Rs. 16,04,19183/- earned by the assessee, the assessing officer treated the short term capital gains of Rs.1,95,94,294/- ( That is,Rs. 20,2,73,515–6,79,221), earned by the assessee, being short term capital gains on sale of shares of Coal lndia Ltd. of Rs. 20,2,73,515/- and short term capital loss of Rs.6,79,221/- incurred by the assessee on sale of shares of DQ Entertainment (lnternational) Ltd, under the head income from Business. The reasoning given by the assessing officer for treating the short term capital gains of Rs.1,95,94,294/- as income from business was that the assessee had acquired the shares of these two companies from borrowed funds and the assessee had purchased these shares with an intention to earn short term profits. It is pertinent to mention here that the shares of both the above companies were acquired in the initial public offer made by such companies and the financing arrangement was limited to only the amount required for applying in such initial public Page | 3

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 offer, which also only till the date of allotment. Once such shares were allotted, the function of the financer was over. This fact is evident from the fact that the assessee had paid interest to the financer only for eight days and eleven days for the financed amount of Coal India Ltd. and DQ Entertainment (lntl) Ltd. respectively. It is a well known fact that whenever there are IPO of reputed companies, the applicants to such IPO are allotted either nil or a fraction of shares applied for. Therefore, a number of investors who wish to invest in the shares of such companies make large share application and for this purpose the assessee approached finance companies and enter into an arrangement whereby the financer finances the application on behalf of the investor in consideration of finance charges. Besides, the shares mentioned above, the assessee has not acquired any shares through any financing arrangement. During the assessment proceedings, the assessee submitted before the AO that, under the facts and circumstances of the case such as method of valuation of investments at balance sheet date, the classification of shares as investments in balance sheet, the substantial earning of dividends on investments, the fact that the investments were mainly made out of own fund and not borrowed fund, the consistent acceptance by the income tax authorities of profits/loss on sale of investments under the head capital gains, no change in activities and operations of the assessee, etc. and materials on record prove the fact that the assessee is an investor in shares and the transaction in the aforesaid shares were made by the assessee as an investor and not as a business activity as alleged by the assessing officer. Out of the total short term capital gains in shares of Rs. 16,04,19,183/-. The assessing officer had accepted Rs. 14,08,24,889/- as short term capital gains. The assessee submitted before the AO thatjust because the assessee had earned Rs. Page | 4

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 1,95,94,294/- as capital gains by acquiring the shares of two companies in the initial public offer under a financing arrangement does not in any way changes the intent of the assessee nor the nature of transactions. However, the Assessing officer held that the intention of the assessee is to do business in shares and securities therefore, he assessed the income of Rs.1,95,94,294/- under the head “Business Income” instead of under the head “Capital gain”, as claimed by the assessee. 5. Aggrieved by the order of the AO,( treating the short term capital gain Rs. 1,95,94,294/- as business income instead of short term capital gain, as claimed by the assessee),the assessee filed an appeal before the CIT(A) who has confirmed the action of the AO and held that AO was right in treating Rs.1,95,94,294/- as business income. The CIT(A) observed that the assessee had shown short-term capital gain of Rs.1,95,94,294/-, (Rs.2,02,73,515 - Rs.6,79,221), which includes Rs.2,02,73,515/- from sale of shares of Coal India Ltd, and loss of Rs.6,79,221/- on sale of shares of DQ Entertainment (International) Ltd. The AO treated the same as business income, because the assessee had availed huge funding of over Rs.200 crores, on which huge interest was paid. The shares were purchased by the assessee at steep interest rates. These shares bought from borrowed funds and were purchased with an intention to earn short term profits. The CIT(A) noted that the terms and conditions of the agreement was that the financing company had kept the interest rate floating as well as there was a minimum interest period and had sought mortgage in the form of collateral securities and most importantly it had reserved the right to dispose of the securities both bought from its finance and further collaterals in case of default. Therefore, the AO rightly concluded that the transactions in these Page | 5

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 shares of the company were in the nature of trade and not capital gain as shown by the assessee. The Ld. CIT(A) observed that the shares were purchased through IPO. The entire shares were purchased out of the loan fund on which huge interest was being paid by the assessee. The holding period of shares of Coal India Ltd. was 3 to 9 days and DQ (Entertainment) International was 197 days. The rate of interest on the loan related to shares of Coal India Ltd. was at 15% and on DQ (Entertainment) International was of 8%. Therefore, the CIT(A) noted that the facts show that the intention of the assessee was not to hold the shares but to sale them immediately after allotment to get minimum profit. Therefore, based on these facts, the Ld. CIT(A) held that the AO had rightly treated the income as business income. This way the Ld. CIT(A) had treated the business income at Rs.1,95,94,294/- instead of short-term capital gain and confirmed the action of the Assessing Officer. 6. Not being satisfied with the order of CIT(A), the assessee is in appeal before us. The Ld. Counsel for the assessee has submitted, before us, that the assessee has earned short-term capital gain of Rs. 1,95,94,294/- which should be assessable under the head “capital gain” and not under the head income from business or profession, as the assessee has been following constantly this practice since a long and the assessee has not shown any shares in the closing stock. The Ld. CIT(A) in the given facts of the case ought to have accepted the argument on facts and the ratio of the judgment as relied upon by the assessee before him and should have reversed the judgment of the Ld. AO in treating the short-term capital gain income of Rs. 1,95,94,294/- as income under the head business and profession. The Ld. Counsel has stated that the assessee under consideration is involved in investment activities with a view to earning dividend income. The assessee has been making Page | 6

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 investments regularly in shares and securities in the past and the income from shares and securities has been assessed as capital gain. The Ld. Counsel stated that for the previous assessment years such as A.Ys. 2005-06, 2006-07, 2008-09 and 2010-11 which have completed u/s. 143(3) of the Act and the profits or losses arising out of sale of shares had been assessed under the head capital gain in all the previous years. Therefore, based on the principles of consistency, the income from sale of share should be assessable under the head of capital gain in the year under consideration also. In the assessment year 2009-10, the assessee had suffered loss under the head capital gains and had carried forward the losses under the head capital gains. There has neither been any change in the activities and operations or the assessee, as compared to past years nor any change in the facts and circumstances of the case of the assessee as compared to past year. The Ld. Counsel stated that the shares were purchased by the assessee with an intention to hold the same. However, the vagaries of the stock market are well-known, as it transpired, in some cases the assessee was suddenly faced with the risk of losing its investment. In some cases, the assessee was suddenly faced with the risk of losing its investment. In some cases, the sudden rise in share prices was such that it would have been imprudent to hold on to the shares in the expectation that long term holding may fetch a better return. In such cases, the assessee considered it prudent to sell the shares. The ld. Counsel further submitted that it would be evident from the records that there was no regular, systematic and organized activity of purchase and sale which can indicate that the same were by way of business. Such purchase and sales are investments made in usual course. Therefore, the Ld. Counsel stated that the activities of the assessee in shares and stocks are that of an investor and not of a trader. Page | 7

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 The ld Counsel relied on the judgment of Hon`ble ITAT Mumbai in the case of Shri Dhruv H. Patel, ITA No.7587/Mum/2010,A.Y.2006-07, wherein it was held that the assessee had applied in the shares of the IPO of the a company from borrowed capital. Merely because the shares were applied through borrowed capital cannot be a ground for treating the capital gains as business income. The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. There were no repetitive purchase and sale of the same script which means that there was no churning of shares. Therefore, considering all these facts in totality, the Hon`ble ITAT treated the assessee as investor. The ld Counsel also relied on the judgment of Hon`ble ITAT Mumbai in the case of Shri Mahendra C. Shah Vs.ACIT, ITA No.6289/Mum/2008. A.Y.2005-06, wherein it was held that there was enough evidence to show that the assessee is an investor in shares and, therefore, surplus arising on the sale of shares is to be assessed as short-term or long-term capital gains, depending on the period of holding, and not as business income. The contention of the Department that the assessee cannot be treated as an investor in shares since almost 1/4th of the total investment of the assesseewas in speculation and F&O business cannot be accepted, as the CBDT circular had itself recognized that a person can have two portfolios. Also, the fact that the assessee paid interest on borrowings cannot be held against him when there are other predominating natures which give clear impression that the assessee intended only to invest on shares and not to hold them as stock-in-trade. Page | 8

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 7.On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the AO, which we have already noted in our earlier para and is not repeated for the sake of brevity. 8.Having heard the rival submissions and perused the materials available on record, we are of the view that the Department has been accepting the assessee as an investor in the past Assessment Years, that is, in A.Y. 2005-06, 2006-07, 2008-09 and 2010-11and these past assessment years had been completed u/s 143(3) of the Act, treating the assessee as an investor. The assessee has not change its activities and operations as compared to past years and there was no regular, systematic and organized activity of purchase and sale of shares and securities. An undisputed fact is that the assessee has applied in the shares, acquired through IPO of the company from borrowed capital. Merely because the shares were purchased through borrowed capital cannot be the ground for capital gain, to be assessed as business income. The fact that the assessee paid interest on borrowings cannot be held against him, treating it business income, when there are other predominating natures which give clear impression that the assessee intended only to invest on shares and not to hold them as stock-in-trade. Therefore, we are of the view that assessee has worked as an Investor and not Trader.The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. There were no repetitive purchase and sale of the same script in the assessee`s case under consideration, which means that there was no churning of shares. Besides, the assessee has accumulated past losses, that is, short term/long term capital losses, and as per the assessment done by the Department in past years, he Page | 9

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 is entitled to set-off these losses form short term/long term capital gain in subsequent years, if the Department is changing its stand and treat the assessee as a trader in shares then assessee would not be able to set off these losses and this would be an harassment to the assessee, which is not acceptable. We note that the Department has been consistently accepting the assessee as an Investor in scrutiny proceedings, therefore, we do not uphold the order of the ld. CIT(A) following the Rule of consistency. For that we rely on the order of the Hon’ble Supreme Court in RadhasoamiSatsang vs. CIT 193 ITR 321 (SC). Considering the factual position discussed above, we do not find any reason to treat the assessee as a trader. We are, therefore, set aside the findings of the Ld. CIT(A) and direct the AO to treat the short-term capital gain / long-term capital gain as income under the head capital gain and treat the assessee as an Investor. 9. In the result, the appeal filed by the assessee( Ground No.1 to 4), is allowed. 10. The Ground Nos. 5, 6 and 7 raised by the assessee relate to the issue of disallowance of ( Cost of acquisition of shares), interest of Rs.24,87,354/-. 11. The facts leading to the issue may be briefly stated.The assessing officer had disallowed interest of Rs. 24,87,354/- paid by the assessee to the financer in respect of application money provided by the financer for initial public offer of DQ Entertainment (International) Ltd, during the previous year relevant to asst. year 2010-11. The fact is that the said shares were acquired in the asst. year 2010-11 and were not sold during the asst. year 2010-11 and were held by the assessee as investments as at March 31st 2010. The cost of 51382 shares of DQ Entertainment (International) Ltd. including interest of Rs.24,87,354/- was at Rs.65,97,914/- and Page | 10

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 was reflected under closing value of investments in the assessee's Balance Sheet as at 31.03.2010 and the same appeared as opening value of investments in assessees' accounts for the asst. year 2011-12. Furthermore, the fact is that the interest paid by the assessee was accepted by the assessing officer as cost of investment and not revenue expenditure in the assessment for the asst. year 2010- 11. During the assessment proceedings, the assessee submitted that amount of Rs.24,87,354/- is cost of acquisition for the said shares, however, the AO did not accept the claim of the assessee and made addition of Rs. 24,87,354/-. 12. Dissatisfied with the addition made by AO, the assessee carried the matter to CIT(A), who confirmed the addition made by AO.Regarding the interest on borrowed fund of Rs.24,87,354/- which was capitalized by the assessee, the Ld. CIT(A) held that the shares were purchased through borrowed funds on which interest was paid by the assessee. The assessee purchased shares of Coal India Ltd. and the DQ (Entertainment) International. However, the AO while treating the income as income from business allowed the interest on the transaction of shares of Coal India Ltd. as the interest on the same accrued during the year. However, the interest on the loan for shares of DQ(Entertainment) International was disallowed on the ground that the interest thereon had accrued during the previous year and not during the current year. The Ld. CIT(A) held that AO was justified to disallow the part of interest related to the loan which was utilized for purchase of shares of DQ (Entertainment) International as the interest had accrued in the previous year, being prior period expenses, the A.O had rightly disallowed the same. Therefore, the Ld. CIT(A) confirmed the addition made by the AO. Page | 11

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 13. Not being satisfied with the order of CIT(A), the assessee is in appeal before us.The Ld. Counsel for the assessee has stated that AO wrongly treated the interest paid on loan as prior period expenses. The Ld. Counsel for the assessee has stated that purchase of shares of Coal India Ltd. and DQ Entertainment (International) Ltd. after getting the borrowed fund, therefore shares of these companies were purchased through borrowed fund on which interest of Rs.24,87,354/- was paid by the assessee. The assesseecapitalized the interest. The AO while treating the income from business allowed the interest incurred by the assessee for purchase of shares of Coal India Ltd. However, the interest on loan for shares of DQ Entertainment (International) was disallowed on the ground that the interest thereon had accrued during the previous year and not during the current year. The Ld. Counsel submitted that assessee is a partnership firm and the interest paid on loan has been capitalized for ascertaining cost of shares of Coal India Ltd. and DQ Entertainment (International). The Ld. Counsel argued that said shares were acquired in the A.Y 2010-11 and were not sold during the A.Y. 2010-11 and were held by the assessee as investments as at March 31st 2010. The cost of 51382 shares of DQ Entertainment (International) Ltd. including interest of Rs.24,87,344/- was at Rs.65,97,914/- and was reflected under investments in the assessee’s Balance Sheet as at 31.03.2010. The ld. Counsel also stated that the interest paid by the assessee was accepted by the AO as cost of investment and not revenue expenditure in the assessment for the A.Y. 2010-11. The Ld. Counsel further submitted that the assessee is in the capacity of an investor not of a trader; therefore interest on loan should be treated as cost of acquisition of shares. The ld. Counsel also submitted that the interest was paid by the assessee on the application amount in the initial public offer of the above companies. It is pertinent to note that the Page | 12

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 interest paid by the assessee was pre-acquisition of such shares. The interest so capitalized was directly attributable to the said shares and therefore were a part of cost of acquisition. In addition to this, the Ld. Counsel for the assessee has relied on the judgment of Hon`ble ITAT Mumbai in the case of Smt. Sunita A. Damani, ITA NO 5770/Mum/2010, A.Y. 2006-07, wherein it was held that the assessee had borrowed the money for IPO application but all the shares were not allotted as applied for and part of the shares was allotted and balance amount was refunded to the assessee in respect of non-allotment of shares. The assessee has to pay the interest on the entire finance which was borrowed for making the payment with the application money. It has been observed by the Tribunal that the entire money has been borrowed by the assessee with the sole purpose of acquiring the shares of Punjab National Bank and NTPC Ltd. Though the applied shares were not allotted in full that will not deprive the assessee from claiming the entire interest paid as part of the cost of acquisition of the shares allotted as the money borrowed has direct nexus with the acquisition of the shares. It was held by the Tribunal that the interest paid by the assessee to both the financiers as part of cost of acquisition of the shares be allowed as deduction. 14. On the other hand, ld DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our above para and is not being repeated for the sake of brevity. 15.Having heard the rival submissions and perused the materials on record, we are of the view that the assessee under consideration is an investor and the interest paid on loan by the assessee was accepted by the AO as cost of investment and revenue expenditure in the assessment for the A.Y. 2010-11. The interest paid by the Page | 13

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 assessee, on the money borrowed for acquiring the shares, which is the cost for acquisition of shares. We, therefore, hold that the interest paid by the assessee on the money borrowed for purchase of shares should be treated as cost of acquisition in computing the short-term capital gain / long-term capital gain as the case may be.In the absence of any distinguishing feature or contrary decision brought on record by the Revenue and keeping in view that it is not the case of the Revenue that there is no nexus or the interest expenditure is personal expenses of the assessee, we, respectfully following the consistent view of the Tribunal,in the case of Smt. Sunita A. Damani, ITA NO 5770/Mum/2010, A.Y. 2006-07 (supra), hold that the interest paid by the assessee on the money borrowed for IPO application is part of the cost of acquisition and the same is to be allowed as the cost of acquisition in computing the short-term capital gain/long term capital gain. We hold and direct accordingly. The grounds taken by the assessee are, therefore, allowed. 16. In the result, the appeals filed by the assessee (Ground No.5 to 7), are allowed. Order pronounced in the open court on this 11/10/2017. Sd/- Sd/- (N. V. VASUDEVAN) (DR. A.L.SAINI) �ाियक सद� / JUDICIAL MEMBER लेखा सद� / ACCOUNTANT MEMBER कोलकाता /Kolkata; िदनांक Dated 11/10/2017 [RS, SPS] आदेशकी�ितिलिपअ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Appellant –Everest Finance & Investment Co. 1. ��थ�/ The Respondent-JCIT, Range - 34, Kolkata 2. आयकरआयु�(अपील) / The CIT(A), :Kolkata. 3. आयकरआयु�/ CIT 4. Page | 14

Everest Finance & Investment Co. ITA No.2056/Kol/2014 Assessment Year: 2011-12 िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, कोलकाता/ DR, ITAT, 5. Kolkata गाड�फाईल / Guard file. 6. स�ािपत�ित