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Income Tax Appellate Tribunal, KOLKATA BENCH “A” KOLKATA
Before: Shri Aby.T Varkey & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
The assessee as well as Revenue is in cross-appeals against the common order dated 12.03.2013 passed by Commissioner of Income Tax (Appeals)-XII, Kolkata. Assessment was framed by Addl. CIT, Range-10, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 27.12.2010 for assessment year 2008-09.
& 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 2 Shri, Subash Agarwal, Ld. Advocate appeared on behalf of assessee and Shri Vijyendra Kumar, Ld. Senior Departmental Representative represented on behalf of Revenue.
Both the appeals are heard together and are being disposed of by way of consolidate order for the sake of convenience. First we take up Revenue’s appeal in ITA No.2101/Kol/2013.
Only issue raised by the Revenue in this appeal is that ld CIT(A) erred in holding the income from transactions in shares as capital gain without appreciating the fact that the assessee is in business of share trading.
The assessee in the year under consideration has shown following sources of income : S.No. Sources of Income Amount 1. Long Term Capital Gain 61,78,630/- 2. Short Term Capital Gain 90,62,028/- 3. Dividend income 5,28,122/- 4. Readymade garments business 2,45,814/- The Assessing Officer, during the course of assessment proceedings observed that the income under the head “capital gain” is actually a business income of the assessee on account of the following reasons :
1. 1. The assessee has shown in the tax audit report the nature of business as export of ready-made garments and textiles and investment in shares.
2. The substantial part of the fund was invested in the activities of purchase and sale of shares whereas negligible fund was deployed in the business of ready-made garments.
3. The turnover from the activities of purchase and sales of shares was huge whereas the turnover from the ready-made business was negligible. The same pattern was also observed in the immediate preceding financial year. & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 3 4. The frequency of transactions of purchase and sale of shares was quite regular in almost in all the scripts except few. The period of holding of the securities was also arranging between 1 to 3 months.
In view of above, the AO sought clarification from the assessee for treating the income shown under the head “capital gain” as business income. In compliance thereto it was submitted that the assessee is in export business of ready-made garments since 1991 and it has first time made investment in the year 2001 out of its free own funds. Since 2001, the assessee has been showing the transactions for purchase and sale of shares under the head “investment”. There is no restriction under the Act for minimum holding the shares. However, the AO disregarded the contention of the assessee and held that frequency, magnitude of shares transactions in a systematic manner is business activity of the assessee.
Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under:- “5. Appeal on grounds no. 10 to 14 are against the addition of Rs.9062028/-on long term capital gains and Rs.6178630/- on account of short term capital gains. The AO in the am order has given his finding that the assessee company is engaged in share trading contradicting assessee’s claim that the purchases of shares were investment. The AR has submitted that appeal on this ground is squarely covered in assessee’s favour by CIT(Appeals)’s order in AY 2006-07 vide appeal No.243/XII?C-410/2008-09 dt. 25.02.2010 and in AY 2007-08 vide appeal No. 676/XIICir-10/2009-10 dt. 29.04.2010. I have considered the finding of the AO and written submission filed by the AR. I find that my predecessor has given a speaking ordered from this issue in AY 2006-07 and 2007-08. I find no reason to interfere with the findings of my predecessor on this issue in assessee’s own case. Accordingly, assessee’s appeal on grounds no. 10 to 14 are allowed.”
Being aggrieved by this Revenue has come in appeal before us on the following grounds of appeal:- “On the facts and in the circumstances of the case, ld. CIT(Appeal) has erred in accepting the assessee’s contention that the income from transactions in shares were capital gains without appreciating the fact that the assessee is engaged in frequent purchase and sale of shares being the principal business & 2101/Kol/2013 A.Y. 2008
09. Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng
10. Kol. Page 4 activities of the assessee with the motive behind the transactions being to earn profit.”
6. Ld DR for the Revenue before us vehemently supported the order of AO whereas the ld AR before us filed a paper book comprising of pages from 1 to 149. The ld AR before us submitted that the assessee has been maintaining its shares activities under the head investment which has been accepted by the Revenue in the earlier years. The ld AR before us relied on order of ld. CIT(A).
We have heard rival contentions of both the parties and perused the materials available on record. We find from the aforesaid discussion and submission that the AO has treated LTCG/STCG as “business income” of assessee considering the volume and frequency of the transactions in a systematic and organized manner. As per the AO numerous transactions of buying and selling of shares were carried out by assessee and which constitute business activity. It was also observed that many transactions were completed within a short span of time. Accordingly, the AO held such transactions as the business activity and therefore the profit from such transactions is business profit. 7.1 At this stage, we find that activity of sale-purchase of share has been the subject-matter of numerous disputes so as to treat the same as “business transactions or capital gain transactions”. Various courts have held the issue in favour of assessee and at the same time, various courts have also decided the issue in favour of Revenue. However, to stop the litigation between the Department and assessee, the CBDT very recently has came out with a Notification No.6/2016 dated 29.02.2016 and relevant operative portion of the said Notification reads as under:- “3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities (i.e., whether the same is in the nature of capital gain or business income), CBDT & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 5 realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following- a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income, b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different contrary stand in this regard in subsequent years; c) In all other cases, the nature of transaction (i.e whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.”
From the plain reading of clause (a) of the said Notification, we find that it has been instructed that if the assessee is irrespective of the period of holding treat the transaction for sale-purchase of the share as stock-in-trade then the Department shall not dispute on this matter. Accordingly, in this case, assessee has been treating the income arising from the sale-purchase of the share as STCG/LTCG, therefore, AO cannot dispute the same as “business income”. In this connection, we also rely in the judgment of Hon’ble Bombay High Court in the case of Commissioner of Income Tax vs. Gopal Purohit (2010) 228 CTR 0582 : (2010) 34 DTR 0052 : (2011) 336 ITR 0287 : (2010) 188 TAXMAN 0140 where it was held as under : “The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business. The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 6 short-term or, as the case may be, long-term capital gain, depending upon the period of the holding. The Tribunal has observed in its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue did not furnish any justification for adopting a divergent approach for the assessment year in question. There cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under s. 260A. No substantial question of law is raised.—Gopal Purohit vs. Jt. CIT (2009) 122 TTJ (Mumbai) 87 : (2009) 20 DTR (Mumbai)(Trib) 99 affirmed. Tribunal having entered a pure finding of fact that the assessee is engaged in two different types of transactions namely, investment in shares and dealing in shares for the purposes of business and held that the delivery based transactions are to be treated as investment transactions and the profit received therefrom is to be treated as short-term or long-term capital gain depending on the period of holding of shares and that there ought to be uniformity in treatment and consistency in various years when the facts and circumstances are identical, no substantial question of law arises.”
In view of the above, we find that magnitude of the transactions do not alter the nature of the transactions. Therefore, magnitude of transactions carried out by the assessee in our view should not be very material in coming to the conclusion that income in question is income from “business”. Though the res judicata is not applicable but the principal of consistency will definitely apply and on that basis the claim of the assessee should be held proper. In view of above we are inclined not to interfere with the order of Ld. CIT(A) and ground raised by Revenue is dismissed.
7. In the result, Revenue’s appeal is dismissed. Coming to assessee’s appeal in .
8. In this appeal various grounds raised out of which ground no.4 was not pressed and, therefore, same is dismissed as not pressed. Ground No.5 is of general nature and does not require separate adjudication. The only issue raised & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 7 by assessee in this appeal in ground No. 1 to 3 are that that Ld. CIT(A) erred in confirming the order of AO by sustaining the addition of ₹89,02,420/- as unexplained cash credit u/s 68 of the Act.
The assessee in this balance sheet has shown various sundry creditors inter alia the following trade creditors. SL. Name of Address as per Address as per Opening Transaction Closing No. company return Bill balance during the balance year (Rs) (Rs) 1 Laxmi C/o Pawan 6, Mandir Nil 7,64,830 7,64,830 Trading Kejjriwala, Balka Street,Kol-73 Co. Apartment, 164, Bangur Avenue, Block-B 3rd Fl, Kol-55 2 Mahima C/o Pawan 178/3, Roy Nil 16,20,545 16,20,545 Fashions Kejjriwala, Balka Bahadur Road, Apartment, 164, Bangur Avenue, Kol-34 Block-B 3rd Fl, Kol-55 3 Simran 85, N.S. Road, Room 23, Ganguli Nil 4,81,550 4,81,550 3rd Sarees No.313, Floor, Lane, Kolkata-7 Kolkata-1 4 Gita C/o Pawan Kejriwal, 53/10/3, Nil 11,62,648 11,62,648 Impex Balka Apartment, Bonbehari Bose 1164, Bangur Road, Howrah- Avenue, Block-B, 3rd 711101 Floor, Kolkata-55 5 Shree C/o Pawan Kejriwal, 100/1, 22,21,262 15,76,075 33,64,812 Salasar Balka Apartment, R.N.Mukherjee Traders 164, Bangur Avenue, Road, Kolkta-61 Block-B, 3rd Floor, Kolkata-55 6 Baba 85, N.S Road, Room 356/2, Upper 10,07,025 5,01,010 15,08,035 No 313, 3rd Floor, Sarees Chitpur Road, Kolkata-1 Kolkata-7 The AO during assessment proceedings directed the assessee to produce the above persons for examination along with documents in support of the above outstanding balance. The assessee accordingly submitted various supporting evidence but failed to produce the above parties in person before the AO. Thereafter the AO deputed Inspector to conduct the enquiries to verify the genuineness of the aforesaid parties. In turn the Inspector submitted that there exist no such parties. However the Inspector of the income tax collected the information about Shri Pawan Kejriwal (for Short SPK) who was the proprietor of two firms namely Mahima Fashions and Salasar traders. The statement of & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 8 SPK was recorded under oath under section 131 of the Act. As per the statement SPK denied to have any transaction with the assessee and further submitted that the cheques accepted from the assessee was en-cashed and the money was returned back to the assessee after deducting brokerage of 0.5% on the total amount credited in the account. In view of above the AO sought clarification from the assessee on the aforesaid amount shown in the name of sundry creditors. The assessee replied that all the necessary details such as copies of the ledger, PAN, Trade license, stock registers, bills, books of accounts, bank statements along with the export details were duly submitted. The assessee further submitted that no cash was received from SPK and requested the AO for cross examination before taking any adverse inference. The statement of the Director of the company was also recorded at the time of assessment proceedings where it was claimed that all are genuine creditors but expressed inability to produce them in person as it does not have any dealing with them now. However the AO disregarded the contention of the assessee and treated the aforesaid amount of sundry creditors as unexplained cash credit under section 68 of the Act and added to the total income of the assessee.
Aggrieved assessee preferred an appeal before ld CIT(A) who confirmed the order of the AO by observing as under:- “4. I have considered the finding of the AO in his assessment order dt. 27.12.2010 and the written submission filed by the AR during the appellate proceeding. Appeal on grounds no. 1 to 9 are against the addition of Rs.89,02,420/- u/s. 68 of the IT Act, 1961. The AO has given his finding that in the balance sheet of the assessee for AY 2008-09 outstanding liabilities of Rs.23393600/- was there. The AO asked the assessee to produce twelve creditors from the list of sundry creditors in order to verify outstanding against them. The assessee failed to do so. The AO then deputed an Inspector to make spot enquiries. The Inspector intimated that six parties about whom he was making enquiries were neither present on the given address nor any activities was going on there. From local enquiry it was found that the alleged creditors never existed on those addresses. Later on, the Inspector found once Sri Pawan Kejriwal who confirmed that he was only a broker of cloths he never did any trading. So there was no question of selling of & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 9 cloths/textiles to M/s Veda Commercial Pvt. Ltd. He also admitted that cheques were received by him his account and the same was encased and after deducting his brokerage @ 5%. Balance cash was returned back to M/s Veda Commercial. The AO wanted to send notices u/s. 133(6) and summons u/s 131 of the IT Act, 1961. But the assessee did not furnish complete postal address of parties. Accordingly, the AO made an addition of Rs.8902420/- outstanding amount against those parties. During the appellate proceeding the AR has submitted that the AO has not contradicted net profit ratio of the assessee. the AR has also submitted that the AO has not acted in a prudent manner and last that the AO did not produce Mr Pawan Kr Kejriwal for cross verification. I have considered the finding of the AO and the written submission filed by the AR. Despite different objections raised by the AR it is a matter of record that the AR himself could not produce creditors as required by the AR. It is also a matter of record that the AR did not furnish complete postal address of creditors for verification. In this situation a spot enquiries made by the Inspector become important. Accordingly, AO is justified in making addition on this basis. Thus, assessee’s appeal on grounds 1 to 9 are dismissed.”
Being aggrieved by the order of ld CIT(A) the assessee is in second appeal before us on the following grounds of appeal:- “1) For that the Ld. CIT(A) erred in dismissing Appeal Ground Nos 1-9 without passing a speaking order and without considering various objections raised by the Appellant. 2) For that the Ld. CIT(A) simply relied upon the Inspector’s report, completely ignoring the facts already on record w.r.t. creditworthiness/identity of the trade parties. 3) For that, alternatively, since the Appellant was a trader/Exporter hence even if purchase form few trade creditors are doubted, the same might have been purchased from others.”
The ld AR before us filed a paper book comprising of pages from 1 to 149 and submitted that the books of accounts, bills, vouchers and stock details were duly furnished before the AO at the time of assessment. No adverse inference was drawn by the AO. The ld AR further submitted that the sales shown by the assessee has been duly accepted by the AO and without purchase sales cannot be completed. The ld AR drew our attention on pages 1 and 2 of the paper book where the details with the creators were placed. Our attention was also further drawn to the stock summery which is placed on & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 10 pages 25 to 32 of the paper book. The necessary details such as trade license, PAN, Id. Proof etc. of the parties are placed on pages 84 to 103 of the paper book. On the other hand, ld DR before us vehemently supported the order of lower authorities.
We have heard rival contentions of both the parties and perused the materials available on record. From the foregoing discussion, we find that the balance of sundry creditors were added by AO u/s 68 of the Act on account of non response of notice issued u/s. 133(6) of the Act, statement of the party and non-availability of parties at the given addresses. The view of the AO was subsequently upheld by Ld. CIT(A).
12.1 We find that the addition was made in respect of outstanding creditors without disallowing the corresponding purchase claimed by assessee. Once the purchase has been accepted then the disallowance on account of sundry creditors cannot be made. In the case before us, the assessee has submitted all the necessary details of the parties as discussed above and no discrepancy was pointed out by the lower authorities. The books of accounts of the assessee were duly accepted and no defect was reported by the lower authorities. All the payments to the aforesaid sundry creditors were paid through the banking channel. We find that the assessee has discharged its initial burden by giving necessary details to the AO at the time of assessment proceedings. It was for the lower authorities to rebut the burden by proving otherwise by conducting enquiries with the bank of creditors, from the income tax PAN details, trade license Department of Kolkata Municipal Corporation etc. It is clear that the transactions of purchase and sale were recorded in the books of account and these transactions led to profit to the assessee, which was brought to tax. If sales have been effected out of purchases made from these parties, then, it cannot be said that the purchases were bogus. The finding of bogus sale can only lead to the inference that the corresponding & 2101/Kol/2013 A.Y. 2008-09 Veda Commercial Pvt. Ltd. Vs. Addl. CIT, Rng-10 Kol. Page 11 amount should be deleted from the turnover of the assessee. The AO has also not rejected the books of account to estimate profit on these transactions in case it was a firm finding that purchases and sales were bogus. In such a situation the addition u/s 68 of the Act cannot sustain. So far as the finding of lower authorities that the genuine existence of the parties has not been proved is concerned, their finding is correct and we sustain it for the reasons given by them. But the said finding does not automatically go to establish that the goods in question had not been purchased by the assessee during the year under consideration. The goods in question having been purchased and the profit arising therefrom having been accepted by the AO, it appears difficult for us to visualize as to how the debits made by the assessee with regard to the said purchases and the simultaneous credits to the sellers’ account could simultaneously be held by him to be cash credits. The credits in the accounts of the said parties are admittedly on account of the purchases. These purchases are not bogus, though the names of the persons, from whom the purchases have been made, are bogus. The absence of proof regarding the existence of the parties cannot, in our opinion, be confused with the question of genuineness of the purchases. If the goods purchased had been accepted by the Department, it would not, in our opinion, be possible for the Department to turn round and say that the debits appearing on account of these purchases in the name of parties were cash credits. But the lower authorities do not challenge the correctness of the trading profit, and in doing so, they impliedly accept the genuineness of the purchases. As purchases were on credit, corresponding debits for them should appear in some accounts. Such credits in those accounts would not be for cash but for goods and it would be wrong to call them cash credits. The names of the suppliers may be wrong, but the supplies of the goods were reality. For wrong names of suppliers, the reality of purchases cannot be negative. It is a case of purchases having been made by the assessee without properly disclosing the identity of the suppliers. Such a situation is not covered by s. 68 of the Act. We, therefore, delete the addition made on account of such credits.