MISRILALL MINES PVT LTD,KOLKATA vs. D.C.I.T CC - XI,KOLKATA, KOLKATA

आदेश /O R D E R

PER Waseem Ahmed, Accountant Member:-

Both appeals by the assessee are directed against the different orders of Commissioner of Income Tax (Appeals)-I, Kolkata of even dated i.e. 31.01.2013. Assessments were framed by DCIT, Central Circle-XI, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide their different orders dated 23.02.2012 and 26.12.2012 for assessment years 2010-11 & 2011-12 respectively. Shri Amitav Kothari, Ld. Authorized Representative appeared on behalf of assessee and Shri Vijyendra Kumar, Ld. Senior Departmental Representative represented on behalf of Revenue. 2. Both appeals are heard together and are being disposed of by way of a consolidate order for the sake of convenience.

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 2 First we take up ITA No.643/Kol/2013 for A.Y.10-11. 3. Grounds raised by assessee are reproduced below:- “1. That the Ld. Commissioner of Income Tax (Appeals) erred in confirming the order of the Assessing Officer in respect his conclusion in the assessment order that the Long Term Capital loss arising out of the investment made through Port Folio Management Services of Rs.60,83,332/- is speculation loss within the meaning of Explanation to Sec. 73 of the Income tax Act, 1961 and not Long Term Capital Loss claimed by the assessee. 2. That the Ld. Commissioner of Income Tax (Appeals) erred in confirming the addition of Rs.60,53,495/- made by the assessing officer under Sec. 14A of Income Tax Act, 1961 read with Rule 8D as against the claim of the assessee that no disallowance should be made u/s. 14A of IT Act, 1962, the rule 8D does not apply in the case of the assessee company and dividend income is not an income which does not form part of the total income under this Act as the same have already suffered tax u/s. 115O of Income Tax Act, 1961. 3. That the conclusion arrived at by the Ld. CIT(A) in the impugned order is based on wholly misconceived notion of facts, and on irrelevant considerations and misplaced case law and, therefore, the said order under appeal is bad in law and perverse.”

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 3 The assessee, in the year under consideration has shown following income under the head “capital gains”:- Sl. No. Head of loss/income Amount (Rs) 1. Long Term Capital Gain 9,040/- 2. Long Term Capital Loss 60,83,332/- 3. Short Term Capital Loss 15,81,221/-

During the course of assessment proceedings, it was observed by AO that all the aforesaid transactions were carried out through Portfolio Management Scheme (PMS for short). The AO called upon the assessee to explain whether this can be treated as business income. In compliance thereto, assessee submitted that the investment was made through PMS out of its surplus fund. All the transactions of purchase-sale were classified under the head “investment” which was shown in the balance-sheet by assessee all along. The income / loss from the above transactions were shown and assessed under the head “capital gains” only. The motive of assessee was to earn income through the activity of investment and not through trading activities. However, AO disregarded the claim of assessee by observing that volume, frequency and quantum of transactions suggests the transactions of sale- purchase of securities as in the nature of trade. The AO also observed that all the transactions were made through PMS with a view to maximizing the profit of business. Further, AO observed that the main activity of assessee is that of mining processing and export of chrome ore & other mineral. Therefore, the provision as contained in Explanation to Sec. 73 of the Act is applicable to the assessee. The above transactions do not fall in the exception provided under Explanation to Sec. 73 of the Act. Accordingly, AO treated the income from the sale-purchase of share as speculation business of assessee.

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 4 “3. In ground no. 1, it has been contended that the AO was not justified in treating the long-term capital loss of Rs.60,83,332/- and the short- term capital loss of Rs.1,58,121/- as speculation loss. The brief facts of the case are that the appellant has shown the loss made through the Portfolio Management Scheme PMS) as long or short term capital loss depending upon the period of holding. It was explained to the assessment stage that the appellant had parked its surplus fund in PMS with a view to maximize the profit on such investment; and, the same was shown as investment in the balance sheet. The AO did not accept the explanation. The AO noted that the issue has to be decided on the basis of the volume and frequency of transactions. The AO noted that the appellant has shown during the year total purchases of Rs.89,30,116/- and total sales of Rs.1,45,62,970/-. The Assessing Officer held that the volume as well as the frequency of the transactions made during the year clearly suggest that the appellant was involved in trading of share; and consequently, the profit arising thereby was assessable as business income. The Assessing Officer relied on the decision of the Hon'ble Delhi Tribunal to hold that the profit arising out of transactions in shares made through PMS had to be treated as business income. The AO noted that the appellant company was engaged in the business of mining. As the principal business of the appellant is not that of granting of loans and advances, and, as the gross total income of the appellant company does not consist mainly of income which is chargeable under the heads interest on securities, income from house property, capital gain or income from other sources; the provisions of section 73 were applicable. The AO then concluded that the loss arising out of share transactions through PMS had to be treated as speculation loss.”

Aggrieved by this, assessee has come up in appeal before us.

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 5 ld. AR in support of assessee’s claim submitted copy of assessment order for AY 2009-10 which is placed on pages 76 to 79 of the paper book. On the other hand, Ld. DR stated that all the transactions of sale-purchase of share were carried out through PMS in order to maximize its profit. He further submitted that considering the volume, frequency and quantum of transactions, assessee was engaged in nature of trade. Therefore, the income thereon should be treated as under the head “business”. Ld. DR further submitted that the income from source of dividend is of meager amount but the income from capital gains is much higher. Therefore, it is clear that assessee’s intention was to carry out business activities. He vehemently supported the order of Authorities Below.

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 6 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;

On perusal of the above circular we find that the CBDT has already curtailed the disputes by instructing to Income Tax Authorities for not disregarding treatment made by the assessee with regard to the share transactions. The assessee has shown LTCG and LTCL which indicates the period of holding more than 12 months and there is no dispute on the period of holding. So the stand taken by the assessee cannot be challenged. The similar analogy can also be applied to the STCL.

8.2 We also find in similar facts and circumstances the Hon'ble Delhi High Court has decided the issue in favour of assessee in the case of Radials International vs. ACIT in ITA No. 485/2012 dated 25.04.2014 and relevant extract of the judgment is reproduced below:- “a. The PMS Agreement in this case was a mere agreement of agency and cannot be used to infer any intention to make profit b. The intention of an assessee must be inferred holistically, from the conduct of the assessee, the circumstances of the transactions, and not just from the seeming motive at the time of depositing the money c. Along with the intention of the assessee, other crucial factors like the substantial nature of the transactions, frequency, volume etc. must be taken into account to evaluate whether the transactions are adventure in the nature of trade 18. Therefore the block of transactions entered into by the portfolio manager must be tested against the principles laid down, in order to evaluate whether they are investments or adventures in the nature of trade.”

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 7 From the above, it is very clear that the activities through PMS cannot be regarded as business activities on standalone basis. There are other factors which need to be considered. In the instant case the Revenue has been harping to treat the share transaction activity as business activity as the assessee has availed the services of PMS to maximize the profit. At the end we conclude that the assessee has been showing income under the head “capital gains” from the sale-purchase of securities which is held for a period more than 12 months consistently then the same has to be treated as income under the head “capital gains” only. Similarly, the transactions for the sale-purchase shares carried out through PMS cannot be regarded as business transactions for the reasons discussed above. Therefore, we are inclined to reverse the order of Authorities Below and this ground of assessee is allowed.

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 8 The assessee in the instant case does not maintain separate accounts for the exempted and non-exempted income. Therefore, there is no option except to resort the provision of Sec. 14A of the Act. Accordingly, AO invoked the provision of Sec. 14A r.w.s. 8D of the Rule and worked out the disallowance as under:- “Expenditure in relation to Exempted income (Demat Charges) Rs.1,489/- Opening value of investment as on 1-4-2009 (excluding the taxable investment) Rs. 99,19,25,865/- Closing value of investment Rs.142,88,76,462/- Average value of investment Rs.121,04,01,164/- 0.5% thereof comes to Rs. 60,52,006/- Total disallowance u/s. 14 read with Rule-8D Rs. 60,53,495/-

Aggrieved by this, assessee has come up in appeal before us. 12. Before us Ld. AR submitted that no borrowed fund was utilized in making such investment and there was sufficient fund available with the assessee in the form of share capital and free reserves. Ld. AR in support of assessee’s claim drew our attention on its balance sheet where shareholders

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 9 funds of ₹240,68,81,386/- was shown in the balance sheet which is placed on page 46 of the paper book. He further submitted that assessee has not paid any managerial remuneration to its Director. Therefore, no expenses can be attributed to the exempted income. Ld. AR further submitted that there a Notification with respect to provision of Rule 8D of the Rule and as per the Notification 1% of the annual average of monthly averages of the opening and closing balance of the value of investment needs to be disallowed. On the other hand, Ld. DR emphatically supported the orders of Authorities Below. 13. We have heard the rival contentions of both the parties and perused and carefully considered the material on records; including the judicial pronouncements cited and placed reliance upon. In the instant case the issue relates to the disallowance made by the AO under the provisions of section 14A read with rule 8D of Income Tax Rules 1962. The AO in the instant case invoked the provisions of rule 8D on the ground that the assessee fails to provide the necessary details of the expenses incurred in connection with the exempted income. As per the AO it was the duty of the assessee to maintain such details and it is not for the Revenue to work out the expenses incurred in relation to exempted income. The action of the AO was subsequently confirmed by the learned CIT(A). Now in the context of above arguments and facts, the point that arises for our consideration is whether the authorities below are justified in disallowing a sum of Rs. 60,53,495.00 over and above which was offered by the assessee under section 14A of the Act. At the outset we find that the AO has derived his satisfaction for invoking the provisions of section 14A read with rule 8D of income tax rules by observing as under:- “It is the duty of the assessee to bifurcate the expenditures incurred in relation to exempt income and taxable income. In the said case, it was further held that it is for the assessee to prove that the expenditure incurred by him is in relation to non-exempted income as it is assessee which is claiming deduction. This is so because all the material facts are in his special & exclusive knowledge. If the assessee fails to prove so adverse inference is liable to draw against him. It is not for the revenue

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 10 to prove that the expenditure incurred by the assessee was in relation to non-exempted income. It is for the assessee either to prepare separate accounts of expenditure for exempted income and non-exempted income, or alternatively, to substantiate as to how much of the composite expenditure incurred in relation to non-exempted income. If he fails to do so, they would have no option but to apportion the composite expenditure between exempted income and non-exempted income and disallow the expenditure in relation to exempted income in terms of provisions of Sec. 14A.”

Accordingly we’re of the view that there was no option available to the AO except to resort to the provisions of section 14A read with rule 8D of income tax rules. The argument of the learned AR that that is no managerial remuneration expenses claimed by the assessee in its profit and loss account is also not tenable. It is because the provisions of section 14A do not limit the disallowance to the extent of managerial remuneration. The disallowance envisaged in the section 14A of the Act extends to all the administrative expenses claimed by the assessee in profit and loss account. The learned AR drew our attention on page 54 of the paper book where the details of administrative & other expenses were placed. On perusal of the same we find that the assessee has claimed total expenditure of Rs.4,14,08,065/-. Out of the same a sum of Rs. 2 crores was donated to charitable trust which in our considered view has no nexus with the dividend income. However the balance expenses of Rs.2,14,08,065/- has been incurred and claimed by the assessee under the head administrative and other expenses. In the instant case the disallowance has been worked out to Rs.60,53,495/- out of total administrative expenses of Rs.2,14,08,065/-. Hence, the disallowance is not exceeding the total administrative expenses incurred by the assessee. Therefore the recent Notification issued by the CBDT No. SO 1949(E) dated 2.6.2016 and relied by the assessee where the disallowance was limited to the extent of total expenses will not be of any help. Hence, this ground of appeal of the assessee is dismissed.

ITA No.643-644/Kol/2013 A.Ys. 10-11 & 11-12 Misrilall Mines Pvt. Ltd. Vs. DCIT, CC-XI, Kol. Page 11 Coming to ITA No.644/Kol/2013 for A.Y. 11-12. 15. The facts of the case in the year under appeal is identical to the facts for the AY 10-11 except the amount involved. As the rest of the facts and circumstances are similar, so following our order for the AY 2010-11, we decide the effective ground appeal in terms of Para-8 to 8.1 & 8.2 and 13 of this order. We hold accordingly.