ACIT, CIR-36, KOLKATA, KOLKATA vs. SRI KAMAL KUMAR DUGAR, KOLKATA

The assessee maintains another set of accounts in his personal name i.e ‘Kamal Kumar Dugar’ and the assessee records his investment in shares and the capital gains arising therefrom in this set of accounts. Thus, there are two sets of accounts which are being maintained by the assessee since long.

3.1. The assessee purchased 50000 shares of HFCL Infotel Ltd on 2.6.2005 for total amount of Rs 2,12,50,000/- which were noted in the books of the assessee maintained in the name ‘Kamal Kumar Dugar & Co.’. The name of HFCL Infotel Ltd was changed to Quadrant Televenture Ltd. On 1.4.2008, these shares were transferred from Trading Account to Investment Account and accordingly it formed part of the statement of accounts maintained in the name of Kamal Kumar Dugar which relates to investment portfolio of the assessee. Accordingly, these shares were appearing in the list of share investment maintained in the personal books in the name of Kamal Kumar Dugar. The ld AO had completed the assessments for the Asst Years 2008-09 and 2009-10 u/s 143(3) of the Act on 8.11.2010 and 16.11.2011 respectively, accepting the dual portfolios held by the assessee.

3.2. Accordingly, the assessee submitted that he had derived income from transactions in shares. One is trading profit and the other one is Capital Gains. The assessee submitted the details of gains derived from trading activity and capital gains derived on investment activity separately. On 1.4.2008, the assessee transferred 50000 shares of HFCL Infotel Ltd from its trading portfolio to investment portfolio by way of conversion from stock in trade to investment for Rs 2,12,50,000/-, being the cost price, as the market price for the same was below the cost price . These shares were 2

3 Shri Kamal Kumar Dugar A.Yr.2010-11 subsequently sold by the assessee in the open market and gains derived thereon were reported as long term capital gains by the assessee. The assessee also submitted his financial statements for the years ended 31.3.2008, 31.3.2009 and 31.3.2010. In the said financial statements, the assessee had declared the following:- 31.3.08 31.3.09 31.3.10 Credits in P&L Account Long Term Capital Gain 7,22,011.06 NIL 1,05,35,614.99 Short Term Capital Gain 2,31,707.55 NIL 82,87,036.00 Profit from Proprietorship 9,03,25,524.76 72,59,726.14 73,62,662.21 Balance Sheet Asset Side Kamal Kumar Dugar &Co (Proprietory concern) 4,06,84,560.24 (77,18,603.63) 2,41,90,059.51 Investment in Shares & Debentures 99,33,725.90 4,75,41,835.90 3,62,35,585.89 3.3. The assessee also submitted the financial statements of his Proprietory concern ‘Kamal Kumar Dugar & Co.’ for the years ended 31.3.2008, 31.3.2009 and 31.3.2010. In the said financial statements, the assessee had declared the following:- 31.3.08 31.3.09 31.3.10 Balance Sheet Asset Side Stock in Trade 3,87,87,632.50 7,08,95,876.36 9,53,96,985.47 Balance Sheet Liability Side Sundry Creditor – Ashika Stock Broking Ltd 1,76,26,157.00 Income in P&L Account Brokerage & Commission 89,064.06 2,74,092.89 79,754.18 3

4 Shri Kamal Kumar Dugar A.Yr.2010-11 Share Dealing Profit 7,59,00,158.42 82,52,064.48 45,69,718.25 Sales 50,73,97,067.01 15,67,38,010.88 93,74,98,835.71 Closing Stock 3,87,87,632.50 7,08,95,876.36 9,53,96,985.47 Expenses in P&L Account Opening Stock 5,05,54,229.14 3,87,87,632.50 7,08,95,876.36 Purchases 47,73,91,010.39 18,71,47,376.00 94,98,62,502.31 Securities Transaction Tax 21,09,500.28 3,43,934.00 22,85,152.00 Net Profit transferred to Capital Account 9,03,25,524.76 72,59,726.14 73,62,662.21 3.4. The assessee also furnished the summary of share trading account for the Asst Years 2008-09 , 2009-10 , 2010-11 and 2011-12 as under:- ASST YEAR CLOSING SHARE TRADING TOTAL STOCK TRADING INCOME INCOME INCOME (DELIVERY) (INTRA DAY) 2008-2009 3,87,87,632.50 7,59,00,158.42 1,82,39,459.98 9,41,39,618.40 2009-2010 7,08,95,876.36 82,52,064.48 16,98,878.74 99,50,943.22 2010-2011 9,53,96,985.47 45,69,718.25 1,21,37,442.51 1,67,07,160.76 2011-2012 2,29,42,009.74 2,74,44,530.98 24,65,981.58 2,99,10,512.56 3.5. The assessee sold 50000 shares of HFCL Infotel Ltd on different dates during the year. The total sale consideration was Rs 3,18,91,865/- and the acquisition cost of the same were Rs 2,13,56,252/- resulting in gain of Rs 1,05,35,613/-. The assessee disclosed the same as long term capital gains. It was submitted that the assessee carries on the business of dealing in shares as proprietor under the trade name & style of ‘Kamal Kumar Dugar & Co.’ , wherein the profit and loss in respect of dealing in shares from the said concern were always treated as business income and never as capital gains

5 Shri Kamal Kumar Dugar A.Yr.2010-11 irrespective of the period of holding. Shares of HFCL Infotel ltd were acquired by the assessee on 2.6.2005 and recorded in the proprietorship concern and were held since then as stock in trade till 31.3.2008. Shares of the company were not listed at the time of purchase and subsequently till 31.3.2008. These were held by the assessee to be retained for a longer period and there being no value addition due to non-listing of the shares in the stock exchange, the assessee thought it fit and prudent to transfer the shares from Trading Account to Investment Account and accordingly on 1.4.2008 , passed a Journal entry in the accounts of the proprietorship business by debiting the Personal Capital Account and Crediting the Stock Account at the cost price of the shares. This resulted in non-appearance of the stock in the books of accounts of ‘Kamal Kumar Dugar & Co.’ during the period ending on 31.3.2009 and consequently the same appeared in the Personal Balance Sheet of Kamal Kumar Dugar in self account. Necessary sale bill was made by the concern M/s Kamal Kumar Dugar & Co., to the assessee’s individual account. The fair market value for the shares as on 31.3.2008 based on the book value was lesser by Rs 7 than the cost price but still keeping in view the fact that the same were not being sold , the assessee transferred the shares from the Business Account to the Personal Account at Cost price. These shares were later sold and capital gains arose on the same which were offered to tax in the return of income. The ld AO treated the said gains of Rs 1,05,35,613/- as business income of the assessee in the assessment.

6 Shri Kamal Kumar Dugar A.Yr.2010-11 Account. The assessee also placed reliance on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Dhanuka and Sons reported in [1979] 124 ITR 24 (Cal) dated 21.7.1978, it had been categorically held that profit and gains on shares transferred from trading account to investment at prevailing market rate is not a transaction at all because a person cannot have transaction with himself and in turn such profit cannot be taxed. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. It was also submitted that in so far as the reference made by the ld AO to the decision of the Hon’ble Apex Court in the case of CIT vs H.Holck Larsen reported in 160 ITR 67 (SC) , that the same refers to the repeated and regular activity of buying and selling of shares and infers that the same is to be considered as business activity. Admittedly, the regular activity of buying and selling of shares which the assessee carries in his proprietorship concern are all along treated as his business income. The assessee had only transferred the shares from stock which was being held in the proprietorship concern to the investment account much earlier than the date of sale i.e about 16 months back. Further , during the course of assessment proceeding for the Asst Year 2009-10, the assessee had submitted full details of transfer of shares from Business Account to Investment Account. Further the details of investment of Kamal Kumar Dugar (assessee herein) was also submitted which included the shares in question. Even in the ITR-4, the same were also incorporated. Accordingly, it was submitted that there being nothing which prevents the assessee to transfer the stock to investment account and which have been done as apparent from the records itself on 1.4.2008 the gain arising on sale of shares of HFCL Infotel Ltd is to be treated as gain on Long Term sale of shares and hence, therefore , are exempt u/s 10(38) of the Act.

7 Shri Kamal Kumar Dugar A.Yr.2010-11 “I have perused the assessment order and considered the submission of the appellant.. I find merit in the argument of the appellant that there were two separate books of account being maintained for trading and investment respectively. In the proprietary concern, the shares were being shown as stock in trade only whereas in the self-name the shares were held for the purpose of investment. At the time of conversion of the shares of M/s HFCL Infotel Ltd on 01.01.2008, the market price of these shares was below the cost price. The shares were sold after a gap of more than one year, therefore, future price of the shares on the date of conversion was unknown. The shares were converted with an intention to hold it for a longer period as the value of the same at that time was nominal. Further, in the case of CIT vs Dhanuka & Sons, the Hon'ble Calcutta High Court has categorically held that shares transferred from trading account to investment account at prevailing market rate is not a transaction at all because the person cannot have transaction with himself and in turn such profit cannot be taxed. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise. But in the present case, at the time of conversion of shares from trading account to investment account, the price of shares were below the purchase price on 01.04.2008. Therefore, in view of the facts, above discussion and also following the ratio of the judgment of Hon'ble,High Court (Cal) in the case of CIT Vs. Dhanuka & Sons, facts of that case are similar to the facts of the present case, I am of the opinion that the conversion of shares of M/s HFCL Infotel Ltd from trading account to investment account was legitimate, therefore the AO is directed to treat the income on sale of those shares as income from long term capital gain as against business income treated by him.”

1.On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in treating the transaction of conversion of shares from stock-in-trade to investment and its subsequent sales as LTCG and not business income. 2.On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in treating the above transaction as LTCG ignoring the fact that the real intention of the assessee behind converting the shares- from stock-in-trade to investment was only to evade tax.

3. The appellant craves the leave to make any addition, alteration, modification of grounds at the appellate stage.”

8 Shri Kamal Kumar Dugar A.Yr.2010-11 we proceed to dispose off this appeal after hearing the ld AR. The ld AR stated that the issue is squarely covered by the decision of the Hon’ble Jurisdictional High Court in the case of Deeplok Financial Services Ltd vs CIT in ITA No. 1 of 2017 dated 4.4.2017, in favour of the assessee.

"It is a fundamental principle of law that a natural person has the capacity to do all lawful things unless his capacity has been curtailed by some rule of law. It is equally a fundamental principle that in the case of a statutory corporation it is just 8

9 Shri Kamal Kumar Dugar A.Yr.2010-11 the other way. The Corporation has no power to do anything unless those powers are conferred on it by the statute which creates it." This view finds support from Kikabhai Premchand (supra) where the situation at hand was contemplated as would appear from the following as expressed in the dissenting view: “….. When the asset is withdrawn from the stock-in- trade of the business the position in my opinion would be no different. So far as this business is concerned the asset would go out and cease to be a part of its stock-in-trade and this again would be the measure of the profit or loss as the case may be of the business qua that particular asset "

In Dhanuka & Sons (supra) the same situation was contemplated where on stock transferred in investment account, the question of capital loss or capital gain, was held, would arise if such shares be disposed of at a value other than the value at which it was transferred from the business stock. We, on noticing that the Tribunal did not really hold otherwise but had held against the assessee on the point of resjudicata, had formulated the above question. Nevertheless for the reasons aforesaid we answer the question suggested by the assessee in the affirmative and in its favour. In that regard the said circular dated 29th February, 2016 has no application because the assessee's stand was not accepted by the Revenue. So far as the formulated question relating to resjudicata is concerned, in answering the same reference may be had to the decision in Amalgamated Coalfields Ltd. & Anr. vs. Janapada Sabha Chhindwara reported in AIR (1964) SC 1013 in which the Supreme Court said, inter alia, as follows:-

“……. Where the liability of a tax for a particular year is considered and decided does the decision for that particular year operate as res judicata in respect of the liability for a subsequent year? In a sense, the liability to pay tax from year to year is a seperate and distinct liability; it is based on a different cause of action from year to year, and if any points of fact or law are considered in determining the liability for a given year, they can generally be deemed to have been considered and decided in a collateral and incidental way. The trend of the recent English decisions on the whole appears to be, in the words of Lord Radcliffe, "that it is more in the public interest that tax and rate assessments should not be artificially encumbered with estoppels (I am not speaking, of course, of the effect of legal decisions establishing the law, which is quite a different matter), even though in the result, some expectations may be frustrated and some time wasted. “ (vide Society of Medical Officers of Health v. Hope Valuation Officer[ [1960] 2 W.L.R. 404, 563. ]. The basis for this view is that generally, questions of liability to pay tax are determined by Tribunals with limited jurisdiction and so, it would not be appropriate to assume that if they decide any other questions incidental to the determination of the liability for the specific period, the decisions of those 9

That apart, this assessee lost its right of appeal to this Court on the question arising in the previous assessment year on account of delay in preferring the same. There was no adjudication on merits, of its claim of conversion, on appeal to the High Court. The only reason given by the Tribunal in rejecting the claim of the assessee for the previous assessment year, as would appear from its order dated 13th May, 2011 (copy handed up), is that to the Tribunal it appeared there is no provision in the Act in respect of conversion of stock-in-trade into investment and its treatment. Hence, it held that the lower authorities rightly made the addition as there was understatement of income by analyzing the assessee's trading and investment account in shares. Thus, before us there is no impediment for the assessee to seek adjudication on the point. The question formulated is answered accordingly and in favour of the assessee. The appeal is disposed of. “

In view of aforesaid undisputed facts and respectfully following the judicial precedent relied upon hereinabove, we find no justifiable reason to interfere with the order of the ld CITA in this regard. Accordingly the grounds raised by the revenue are dismissed.

Order pronounced in the Court on 07.07.2017