DCIT 9(2), MUMBAI vs. KISMAE EXPORTS & INVESTMENTS P.LTD, MUMBAI

Date of Hearing –15.03.2017 Date of Order -03.05.2017

O R D E R PER: SHAMIM YAHYA

These are cross appeal by the revenue and assessee directed against order of CIT-A for assessment year 2009-10, 2010-11 respectively.

The revenue‟s appeal assessment year 2009-10 1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in treating the amount of Rs.2,16,114/- received by the assessee from the sale of 2

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 mutual funds units as long term capital gain as against its being taxable as business income since the assessee is engaged in the business of trading in shares.

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in deleting the disallowance of Rs.35,00,355/- made u/s. 14A r.w.r. 8D, while the assessee has earned exempt income.

3. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing officer be restored.

4. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary. Revenue appeal A.Y-2010-11 1. “Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is correct in treating the amount of Rs.1,08,92,468/- received by the assessee from the sale of Mutual funds units as long term capital gain as against it being taxable as business income since the assessee is engaged in the business of trading in shares? 2. The appellant prays that the order of the Ld. CIT(A) be set aside on the grounds mentioned above and that of the Assessing Officer be restored.

3. The appellant craves leave to add, amend or alter all or any of the Grounds of appeal. Assessee appeal A.Y-2009-10 1. “Business Loss” or “Short Term Capital Loss” a. The Ld. CIT(A) erred in holding that the loss of Rs.3,15,58,406/- incurred on account of sale of shares, 3

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 under the head “Business Loss” or “Short Term Capital Loss” as declared by the Appellant. b. The Ld. CIT(A) erred in holding the entire short term capital loss of Rs.3,15,58,406/- as Business Loss, based on the activity of purchase and sale of a single share being Kotak Mahindra Bank, wherein the Appellant has incurred Short Term capital loss of Rs.8,892/- and Long term capital loss of Rs.4,88,961/- in that one scrip only. The Appellant craves leave to add, alter or amend the Grounds of Appeal at or before the hearing of the appeal. Assessee appeal A.Y-2010-11 1. "Business Income" or "Short Term Capital Gain" a. The learned CIT(A) erred in holding that the gain of Rs. 4,02,39,307/- incurred on account of sale of shares, under the head "Business income" as against "Short Term Capital Gain" as declared by the Appellant. b. The learned CIT(A) failed to take into consideration that the Appellant is only an Investor and is engaged in systematic activities of holding a portfolio through a PMS Manager, who have invested the funds of the Assessee in shares and securities for the enhancement of wealth of the Assessee and therefore the income arising from these portfolios are to be accounted under the head 'Capital Gains' and not Business Income.

2. Disallowance u/s. 14A

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 a. The Ld. CIT(A) erred in making an adhoc disallowance u/s. 14a r.w. Rule 8D of Rs.65,11,822/- being estimated expenses which have been incurred on earning tax free income of Rs.23,08,970/- (being Dividend income). b. The Ld. CIT(A) erred in not considering that no expense can be disallowed, if the nexus cannot be established for incurring expenditure for earning tax free income and section 14a cannot be merely applied on presumption. c. Without prejudice, the Ld. AO failed to take into consideration that Rule 8D(2)(ii) & (iii) is not applicable where the income arising on sale of securities is chargeable to tax as Business Income, since s.14A r.w. Rule 8D are not applicable to traders who deal in shares as is held in the decisions of:- DCIT vs. Gulshan Investment Co. Ltd (ITAT Kolkatta)-14.03.2013 DCIT vs. India Advantage Securities Ltd. (ITAT Mumbai)-12.10.2012 Yatish Trading Co. Ltd vs. ACIT (129 ITD 237(Mum) CIT vs. Smt. Leena Ramachandran (339 ITR 296 (Ker. HC) 3. Prior Period expences: The Ld. CIT(A) erred in confirming the addition in respect of interest on delayed payment of Rs.1,46,712/- which is although pertaining to previous year, was crystallized only during the year under consideration. The Appellant craves leave to add, alter or amend the Grounds of Appeal at or before the hearing of the appeal.

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014

3.2 During the year appellant has declared short term capital' loss of Rs.3,15,58,406/- and long term capital gain of Rs.2,16,114/- which is claimed as exempt u/s. 10(38) of the Income Tax Act. According to the Assessing Officer appellant is indulging in transactions of shares and the frequency and volume is so high that one can easily say that appellant is in this business. Due to this fact a show-cause notices was issued to the appellant for treating capital loss as business loss. In response to the show-cause notice appellant has given reply vide letter dated 12.12.2011 which has been considered by the Assessing Officer in para 4.3 to 4.7 of the assessment order. A.O was of the opinion that as per the appellant's own admission, the company is primarily an investment company which means business of the appellant is investment, therefore, in such background, whatever earning is there from share transactions, is to be regarded as business income. According to the Assessing Officer the head of capital gains is for gains for those 6

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 persons who are not in this business. A.O observed that in the instant case, the appellant is the regular dealer in the shares comes under definition of business u/s.2(13) of the Income Tax Act. According to the Assessing Officer these units were purchased at the time when their prices were very low and there is no evidence to prove that appellant had purchased 'these units to all the dividend income. Thus, natural conclusion which emerges that the units were with the objective of selling them subsequently at a profit. The units were, in fact, sold at a windfall profit subsequently. Therefore, entire activity of purchase and sale of units has been treated by the Assessing Officer as business activities and the profit received thereon is taxable income from business. Support of his contention Ld. Assessing Officer has also placed his reliance in the case of Dalhousie Investment Trust Company vs. CIT (968) 68 ITR 490,491 (SC). In para 4.6 Assessing Officer has described purchase and sale of I various securities and thereafter, has reach to the conclusion that appellant has indulged itself in business of shares and securities and hence according to him such loss is a business loss and not a capital loss.

3.3 Upon assessee’s appeal Ld. CIT-A confirmed the AO action by holding as under:

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014

“I have considered the finding of the AO as well as rival submission of the appellant, carefully. I find that arguments of Ld. A.R. is untenable because of the fact that appellant is apparently in investment business doing shares transactions. Ld. Assessing officer has rightly pointed out in para 4.3 that appellant itself has admitted that this company is primarily an investment company hence whatever earning is there is out of business activities. They pattern of share transactions clearly shows that the intents and motives of the assessee are that of trader in pursuit of profit rather than an investor. It can be seen from the details that on 01.08.2008 appellant has purchased 2500 shares of Kotak Mahindra Bank and after 10 days, appellant has sold it on 12.08.2008 similarly appellant has purchased 2000 shares of Kotak Mahindra bank on 22.08.2008 and there after further purchase is of 2000 shares on 27.08.2008 which has been sold out on 04.09.2008. Similarly, on 10.09.2008 appellant has purchased 3000 shares thereafter various purchases are also there and after that appellant has sold out these shares on 31.10.2008, 16.01.2009, 30.03.2009. The same pattern was also noticed in AY 2008-09. Further, I find force in the argument of Ld. Assessing Officer that share transaction pattern of Kotak Mahindra Bank Ltd. shows that there was no intention of the appellant to hold these shares as an investor. The details of such pattern has been demonstrated at Page no. 6 and 7 of the assessment order which clearly reveals that appellant is cautiously involved with profit motive in such purchase and sale of shares/securities. The timings of the purchase and sales also prove that there is no investment motive but to earn profit by way of purchase and sale of shares. These specific facts, as highlighted herein above suggests that none of the case laws or ITAT decision mentioned supra, is applicable to the facts of the case. The arguments that appellant company has hired the services of the port folio manager for making investment in several shares and securities is of no avails rather proves finding of the Assessing Officer that appellant is involved in shares transactions through port folio manager for 8

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 earning profits. Further the argument that purchases were made on a single day and was later on sold out in smaller lot proves the fact that appellant through port folio manager vigilantly decides the sale of the shares considering the fluctuations in the market. When it is very visible that main object of the portfolio is to make profit by sale of shares, the ratio of ITO vs. Radha Biruju Patel I.T.A. 0.5382/M/2009, goes against the appellant. Similarly, the ratio of Vinod K. Nevitia vs. ACIT I.T.A. 6656/M/2009 goes against the assessee because here is not the case where appellant purchases the shares from its own funds with a view to keep the funds in equity shares to earn considerable income earn account of investment in the value of shares over a period. On the contrary, appellant through PMS Manager use to purchase and sale shares only with a view to earn profit and in such activities also bears loss. Therefore, it cannot be presumed that appellant's intention is only to earn dividend out of investment. The period of holding of shares, frequency of sale of shares, the circumstances responsible for the sale of shares and the presence of discernible motive for the purchase of the shares and the treatment of shares and profit and loss, prove that appellant is in business activities. Therefore, I also reach to the conclusion that appellant has done business activities and comes under the purview of Section 2(3) of the LT. Act. Thus, the finding of the Assessing Officer that an amount of Rs.3,15,58,406/- is a business loss and is not short term capital loss. As such finding of the Assessing Officer is approved.” 3.4 Against above order assessee is in appeal before us. We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that this tribunal in assessee’s own case in and 8699/Mum/2011for assessment year 2008-09 has decided the same issue in favour of the assessee vide

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 order dated 14.01.2015. Furthermore Ld. Counsel of the assessee submitted that assessee is engaging into the investment activity through PMS (portfolio management services). Ld. Counsel submitted that in such cases Hon’ble High Courts have decided that investment activity engaged through PMS transactions cannot be treated as trading activity. For this proposition Ld. Counsel placed reliance upon Hon’ble Delhi High Court decision in ITA 485/2012 in the case of Radials International vs. ACIT vide order dated 25.04.2014. Per contra Ld. DR relied orders of the authorities below. He further submitted that it is also not clear from the order of the A.O that assessee is engaging into the investment activity through portfolio management services.

3.5 Upon careful consideration we find that this tribunal in assessee’s own case has decided similar issue in earlier year as mentioned above in favour of the assessee by holding as under:

“The revenue through its grounds of appeal has agitated the action of the CIT(A) in treating the profit of Rs.49,87,5149/- earned on redemption of mutual funds as Long Term Capital Gains(LTCG) as against business income treated by the AO. The contention of the revenue is that since the assessee is primarily an investment company, so the income earned should be treated as business income. We find that this issue has been dealt by the Ld. CIT(A) in Para 4 of his order. The Ld. CIT(A) after detailed discussion of the matter has observed that the assessee company had earned long term capital gains 10

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 on redemption of mutual funds held for more than 1 year. It had been consistently showing the same as investments and assessed as such for the last couple of years. There was nothing on the record that the assessee had traded in the said mutual units. Following the principle of consistency and in the absence of any evidence that the assessee had acted as a trader in the redemption of mutual funds, he held the assessee as investor and directed the. Assessing Officer to treat the same as LTCG. We are unable to agree with the contention of the revenue that since the assessee is primarily an investment company, so the income earned should be treated as business income. Law has been now settled on the point through various judicial decisions that even a company having business in trading in shares or securities can also maintain a separate investment portfolio. We therefore do not find any reason to interfere with the well reason order of the CIT(A) on this issue. The appeal of the revenue, thus having no merit is therefore dismissed.” “The assessee before us has submitted that the transactions were carried out through investment manage. It was submitted by the assessee company that 13,000 shares of the Kotak Securities Ltd were directed to be purchased to the investment manage, however, mistakenly 25000 shares were purchased by it. It was immediately directed to restrict the purchases to 13000 shares and rest of the 12000 shares were sold on the same day by incurring loss. The assessee did not carry out any other share transaction during the year. This was the singly transaction done by the assessee during the year. The shares of other companies purchased were held as investment. In view of the above explanation given by the assessee, in our view, the action of the lower authorities in treating the said loss resulting from single transaction of sale of shares for which the assessee has given the plausible explanation, cannot be held to be justified. This issue is accordingly decided in favour of the assessee and it is directed that the said loss to be treated as short term capital loss.” 11

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 3.6 Furthermore we also note that Hon’ble Delhi High Court in the case of Radials International (supra) has held as under “head notes only”:

“Business income or capital gains Sale of shares under Portfolio Management Scheme--Assessee-firm earned gain on sale of equity shares under the Portfolio Management Schemes (PMS) and treated gains realized on sale of shares as business income. Assessee in its reply to AO stated that the shares were depicted as investments and not "stock-in-trade" in the accounts of the assessee and hence, the gains resulting from their sale were to be considered capital gains. AO noted that motive of transactions was the earning of profit and not a dividend and holding period was ranging from a few days to a few months, therefore, the gain from sale of shares was business income. CIT(A) confirmed the views of AO. Tribunal upheld the order of CIT(A) on the ground that intention of assessee was to maximize the profit at the time of deposit of amount in PMS. Assessee contended that the PMS agreement, by its terms alone or by the fact of agency being handed over to the portfolio manager, could not be the basis for inferring an intention to profit or that the transactions were in the nature of trade. Of the total of 1248 transactions that had taken place in the relevant period, revenue submitted that there were on average, about 4-5 transactions daily, only 8 of which entailed a holding period of longer than 365 days. Thus, the order of the Tribunal must be upheld. Held: The PMS Agreement was a mere agreement of agency and could not be used in infer any intention to make profit. The intention of assessee must be inferred from conduct of assessee, circumstances of transactions and not just from seeming motive at the time of depositing the money. Since large volume of shares purchased were reflected from the holding period, intended towards the end of investment, gain arising

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 from sale of shares must be treated as capital gains, and not as business income.” 3.7 A reading of above case laws makes it clear that similar issue was decided in favour of the assessee by the tribunal in assessee’s own case. Furthermore in the order of Ld. CIT-A it is noted that assessee is engaging into the activity of investment through PMS. In such situation the ratio from Hon’ble Delhi High Court cited above applies to the facts of the case. Thus in earlier year similar transactions were treated by the ITAT as transactions of investment giving rise capital gains/loss. Furthermore Hon’ble Delhi High Court has held that investment activity through PMS agreement doesn’t given arise to business activity of making profit. Hence we hold that assessee’s investment activity cannot be held to be business activity. Accordingly the gain/loss on account of share transactions are to be assessed under the head of capital gains. Accordingly, we set aside orders of authorities below, and decide the issue in favour of assessee.

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014 4.2 Upon hearing of both the counsel and perusing the records. We find that we have already held under the assessee’s appeal above that assessee cannot be held to be engaged into trading activity of shares and its transaction fall under the realm of capital gains/loss. Hence on the same reasoning, we do not find any infirmity in the order of Ld. CIT-A on this issue. Furthermore the case laws dealt with in the above portion of the above order also apply here. Accordingly we affirm the order of Ld. CIT-A.

5.1 We have heard both the counsel and perused the records. We find that similar issue was considered by this tribunal in assessee’s own case for assessment year 2008-09 in above, and the tribunal had adjudicated the issue as under:

“We have considered the rival submissions of the Ld. Representatives of the parties. It may be observed that in the case of „Godrej & Boyce Manufacturing Co. Ltd.‟328 ITR 81, the Hon‟ble Bombay High Court had held that Rule 8D r.w.s. 14

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014

14A(2) is not arbitrary or unreasonable and also not retrospective and applies from A.Y. 2008-09. It has been further held that u/s.14A of the Income Tax Act, resort can be made to Rule 8D of the Income Tax rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. However, a perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon‟ble Bombay high Court in the case of Godrej & Boyce (supra) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The Ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance.

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014

So keeping in view of the overall facts and circumstances of the case, we restore this issue back to the file of the AO with a direction that the AO will give opportunity to the assessee to place on record all the relevant facts including its accounts and then examine the computation/calculation made in this regard by the assessee having regard to the accounts of the assessee. The AO will be at liberty to call for any record/evidences or statement etc. from the assessee as may be required by him for deciding the issue under consideration. After going through the details provided by the assessee, if the AO will be satisfied with the claim/calculation made by the assessee, then he will assess the income accordingly. However, if the AO does not agree with the computation made by the assessee and in that event, he will have to record his dissatisfaction with reasoning for the same by way of a speaking order, then he will be at liberty to resort to the provisions of Rule 8D. Needless to say, the assessee will co-operate and promptly supply the necessary details etc. to the AO for deciding the issue under consideration.” 5.2 Upon careful consideration we find that on issue of disallowance u/s.14A earlier the tribunal has remitted the issue to the file of the A.O with certain directions. On the facts of the circumstances of the case, in our considered opinion the issue in the present appeals also need to be remitted to the file of the A.O with similar directions. Both the counsel fairly aggrieved to this proposition. Accordingly respectfully following precedent from tribunal in assessee’s own case as above we remit the issue to the file of A.O with similar direction to examine the issue accordingly.

Kismet Exports & Investments Pvt. Ltd. & 1598/Mum./2013, ITA no. 5043 & 5610/Mum/2014

(i) Appeal by the revenue for assessment year 2009-10 is partly allowed for statistical purposes.

(ii) Revenue’s appeal assessment for year 2010-11 stands dismissed. (iii) Assessee’s appeal for 2009-10 is allowed. (iv) Assessee’s appeal for 2010-2011 is allowed for statistical purposes.