DCIT, CIRCLE - 10, KOLKATA, KOLKATA vs. M/S. VEDA COMMERCIAL PVT. LTD., KOLKATA

1 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]

I.T.A No. 1064/Kol/2010 Assessment Year: 2006-07

Deputy Commissioner of Income-tax, Vs. Veda Commercial Pvt. Ltd. Circle-10, Kolkata. (PAN: AAACV8506H) (Appellant) (Respondent) & C.O. No. 153/Kol/2010 In I.T.A No. 1064/Kol/2010 Assessment Year: 2006-07

Veda Commercial Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, Circle-10, Kolkata. (Cross Objector) (Respondent) & I.T.A No. 1527/Kol/2010 Assessment Year: 2007-08

Deputy Commissioner of Income-tax, Vs. Veda Commercial Pvt. Ltd. Circle-10, Kolkata. (PAN: AAACV8506H) (Appellant) (Respondent) & C.O. No. 154/Kol/2010 In I.T.A No. 1527/Kol/2010 Assessment Year: 2007-08

Veda Commercial Pvt. Ltd. Vs. Deputy Commissioner of Income-tax, Circle-10, Kolkata. (Cross Objector) (Respondent)

Date of hearing: 24.10.2016 Date of pronouncement: 16.11.2016

For the Revenue: Shri Rabin Chaudhury, JCIT For the Assessee: Shri Subash Agarwal, Advocate

ORDER Per Shri M. Balaganesh, AM:

2 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 Both these appeals by revenue and cross objections by assessee are arising out of separate orders of CIT(A)-XII, Kolkata vide Appeal Nos. 243/XII/Cir-10/08-09 and 676/XII/cir-10/09-10 dated 25.02.2010 and 29.04.2010 respectively. Assessments were framed by DCIT, circle-10, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AYs 2006-07 and 2007-08 vide his separate orders dated 26.12.2008 and 30.11.2009 respectively. Since issue is identical and facts are common, we dispose of all these appeals and the cross objection by this consolidated order for the sake of convenience.

2.1. We have heard the rival submissions. We feel that from the affidavit pryaing for condonation of delay, the assessee had adduced proper reasoning for the delay in filing the appeal and we hold that there is nothing wrong in assessee trying to take the advantage of a tribunal judgement which had been rendered in favour of some other assessee on a legal issue which would be otherwise applicable for assessee’s who had preferred appeal. Hence in order to avoid discrimination and in the interest of substantial justice, we condone the delay in filing of cross objections by the assessee for both the years under appeal and admit the same for adjudication.

CO No. 153/Kol/2010 – Asst Year 2006-07 – Assessee CO CO No. 154/Kol/2010 – Asst Year 2007-08 – Assessee CO

3 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08

Respectfully following the judicial precedent, we direct the Learned AO to disallow 1% of dividend income under this issue and accordingly, the cross objections of the assessee for both the years are set aside to the file of the ld AO with a direction to restrict the disallowance @ 1% of dividend income u/s 14A of the Act.

4 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 Ground No. 1 in ITA No. 1064/Kol/2010 for Asst Year 2006-07 Ground No. 1 in ITA No. 1527/Kol/2010 for Asst Year 2007-08

The facts in Asst Year 2006-07 are dealt with herein and the decision rendered thereon would be applicable with equal force for Asst Year 2007-08 also as the issue is identical except with variance in figures and in holding period of shares.

5.1. The brief facts of this issue is that the assessee is a private limited company engaged in the business of export of textiles to various countries such as Japan, Italy, France, Australia, Germany, Britain, South Africa, USA etc and also invests surplus money into equity market. The assessee declared short term capital gains of Rs. 68,68,361/- and long term capital gains of Rs. 30,03,970/- totaling to Rs. 98,72,231/- in the return of income. The assessee has been consistently following the practice of treating the investments in shares under the head ‘investments’ in its books of accounts for last several years and profits derived on sale thereon were duly offered to tax as short term or long term capital gains depending upon the period of holding. The same were also accepted by the revenue in the earlier years. During the Asst Year 2006-07 , the ld AO called for calculation of short term and long term capital gains from the assessee vide letter dated 23.9.2008. The details of the same were duly furnished by the assessee. From the same, the ld AO observed that in view of the frequency and magnitude of the transactions carried out by the assessee, he propose to treat the gains arising on sale of shares as business income as against capital gains offered by the assessee.

5.2. The assessee replied vide letter dated 20.10.2008 that every investor expects appreciation from the investment he puts his money into, be it investment in movable or immovable property. No investment is ever made with a motive of depreciation of the principal amount invested. However the motive has to be seen , whether the purpose of putting money into equity shares is to be a regular trader whereby one does various activities such as arbitrage, daily speculation, hedging , F&O, call / put option etc or the motive is to invest the money with expectation of capital appreciation and dividend earnings. Thus assessee’s motive have always been to see appreciation of investments in equity shares with a long term horizon but sometime due to market volatility , certain

5 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 decisions to exit has to be taken. There cannot be any comparison of ratio between purchase and sale since the same is immaterial and no connection with earning of income from investment in equity shares. However the magnitude of transactions in equity shares does not change the nature of transaction of investment in shares. It was pleaded that the entire investment in shares were made out of own funds of the assessee. The assessee had taken delivery of shares and had sold the same after holding it for a considerable period of time and had exited at the apt moment in order to maximize its profit or reduce the loss. It was also stated that any shares which were held for a period of more than 365 days from the date of its purchase and sold had been offered as long term capital gain and the shares which were held between 1 to 365 days from the date of its purchase and sold had been offered as short term capital gains which are in consonance with the provisions of the Act. The assessee has been consistently showing the purchase of equity shares under the head ‘investments’ in its books of accounts from the earlier years onwards. Hence the intention of the assessee to hold the shares only as investments and not held for trading has to be understood from the treatment given by it in its books of accounts from the inception . The said treatment together with the resultant short term/ long term capital gains had been accepted by the revenue in the earlier years. It was never the intention of the assessee to hold the shares as stock in trade.

5.3. The ld AO observed that the assessee had carried on transactions in a systematic and organized manner. Numerous transactions of buying and selling of shares or units in Mutual Funds for short term and long term capital gain is carried out. These constitute business activities. The computation statement indicates that not only has the assessee carried out large number of transactions but also large volumes. The ld AO also noted from the workings that some of the transactions were completed within a very short period. Accordingly he concluded that the motive of the assessee while buying and selling these shares and units of Mutual Funds was to earn profit. Hence going by the frequency of transactions, the same had to be construed only as business activities and not as investment activities. With regard to the claim of the assessee that such income was accepted as capital gain in the past is no way acceptable as the income disclosed was accepted by the department without examining the issue on this line. He placed reliance on the decision of

6 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 the Hon’ble Supreme Court in the case of CIT vs Distributors Baroda reported in 83 ITR 377 (SC) wherein it was held that the real, substantial and systematic or organized investment would constitute business. In the assessee’s case also, it was noted that the buying and selling activities were substantial. The assessee has been engaged in such activities for quite some time and has organized professional person as well as in the form of a company under its portfolio management scheme to look after its interests and such investment has given the assessee huge profits as well. Accordingly, the ld AO concluded that these shares were purchased and sold by the assessee with the motive of earning of profit by such purchase and sales and not with the object of investing its capital in these shares in order to derive income from that investment. Further, the volume of transactions, the frequency of transactions, the systematic and organized manner of undertaking the transactions strongly point to the conclusion that the shares could not have been purchased as an investment to earn income from dividends and that the purchase of these shares were with the object of selling them subsequently at a profit. The shares were in fact sold at considerable profits subsequently. Accordingly, he brought the entire gains (both long term and short term capital gain) of Rs. 98,72,231/- as business income.

5.4. Before the ld CITA , the assessee reiterated the submissions made before the ld AO and also stated that the assessee had derived substantial dividends of Rs. 5,22,731/- out of its investment activity. The entire investment in shares were made only out of own funds without any borrowings, thus the intention was to limit the investment only upto surplus funds available with the assessee which were derived out of main business activity of export of textiles. It was pleaded that the assessee had been consistently reporting the gains from shares as short term and long term capital gains even before the introduction of concessional rate of tax for short term capital gains and exemption granted for long term capital gains provided securities transaction tax (STT) was suffered in such transaction of sale. The assessee had not dealt with any transactions in Futures & Options, Hedge Funds etc and had not dealt with any speculation activity. The assessee company invested in equity shares of certain companies having a specific target, which when reached and achieved, the specific shares were off-loaded and a contra investment was made in equity shares of other companies. Hence the investment attitude is maintained by the assessee even after the sale

7 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 of a company’s share. Accordingly, the assessee tried to impress upon the ld CITA that the intention of the assessee was to stay invested in capital market and preserve and nourish the capital for growth. The assessee reiterated the example it quoted before the ld AO :- For illustration, an investor investing in certain equity mutual funds. The mutual fund does regular transaction in different equity shares and the Net Asset Value (NAV) of the said mutual fund changes day to day, but when the investor sells the same mutual fund at the NAV on that sale day, he is charged under capital gain. This being so why an investor who had invested in equity shares directly without any entry/exit load be charged as trading in shares rather than investment. It was specifically clarified that the assessee company had neither appointed / employed any share analysts nor acquired any equity research software for this purpose and hence no organized activity was carried out. The assessee company was concerned only with the rate of return on capital employed. The magnitude of transaction in equity shares do not change the nature of transactions. It was also pleaded that the assessee had duly distinguished all the case laws relied upon by the ld AO in his assessment order vide his reply to letter of AO dated 23.9.2008, but the ld AO for reasons best known to him had only reproduced the reply of the assessee from page 2 para 5 onwards. Hence for the sake of clarity on the same, the assessee submitted the same reply before the ld CITA again to avoid any ambiguity. It was also pleaded that the assessee in turn had relied on certain case laws which were neither mentioned nor countered by the ld AO in his assessment order. It was also clarified that the assessee had not invested even a single penny in mutual funds though the ld AO had erroneously mentioned in page 3 of his order that the assessee was buying and selling units of mutual funds.

5.5. The ld CITA after considering the submissions of the assessee and by placing reliance on various decisions of the judicial forums, held that the ratio laid down by the judicial forums in the above cases is that one has to see the basic ‘intention’ of the assessee in the books to distinguish whether the activity is in the nature of ‘trading’ or ‘investment’. Once this is established the other features like frequency, magnitude, volume etc do not alter the character of the transaction. Accordingly, he held that the resultant gains need to be treated only as capital gains by accepting the status of the assessee as an investor. Aggrieved, the revenue is in appeal before us on the following grounds:-

8 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 “Ground No. 1 AY 2006-07 1. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in accepting the assessee’s contention that the income from transaction of shares were to be assessed as capital gain without examining the fact of the case which showed that the frequent purchase and sale of shares were principal business of the assessee.” “Ground No. 1 AY 2007-08 1. On the facts and in the circumstances of the case, Ld. CIT(A) 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 of the assessee.” 5.6. The Learned DR argued the holding period of most of the shares were very less and hence the intention of the assessee was only to earn profits out of buying and selling of shares and not to hold the same as investment for long term purposes. He argued that the volume traded by the assessee in each of the scrips is more and frequency of transactions is also high. Hence the assessee never wanted to hold the shares as investments and was always planning to hold as stock in trade. With regard to acceptance of the treatment of the assessee in the earlier years including in Asst Year 2004-05 u/s 143(3) of the Act , he argued that resjudicata is not applicable in income tax proceedings. He heavily relied on the order of the ld AO.

5.7. In response to this, the Learned AR argued that the assessee has got only one portfolio i.e investment portfolio. He reiterated the submissions made before the lower authorities and laid emphasis on the following points :-

a) No borrowed funds were used by the assessee for investment in shares . b) The assessee has been consistently reflecting the purchase of shares as investments in its books of accounts for so many years, which has been accepted by the revenue in the earlier years and even in scrutiny assessment proceedings. c) The Memorandum of Association of the assessee company permitted investment in equity shares of various companies out of surplus derived from the main business of export of textiles, which has been actually done by the assessee. Hence if there was no surplus, there is no scope for assessee making any purchase of shares. This itself goes to prove that the shares from its inception were held only as investments and never meant for trading.

9 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 d) The assessee had only tried to exit the relevant scrip at a profitable moment when certain targets are achieved in the said scrip . e) The assessee had dividend income as high as Rs. 5,22,731/- in total from 32 companies. f) The assessee had been showing the shares as investments even prior to the amendment brought in Asst Year 2005-06 introducing STT and providing concessional rate of tax for short term capital gains and exemption for long term capital gains. g) The weighted average period of holding of shares was 132 days in Asst Year 2006-07 and 87 days in Asst Year 2007-08 as could be evident from the workings provided in the paper book. h) The assessee never converted its investment into stock in trade either in past or in future with an ulterior motive to evade taxes. i) The assessee never entered into any speculative transactions. j) The assessee did not carry out any transactions in futures and options, hedging etc.

5.7.1. The profit derived from investment activities are offered to tax as short term and long term capital gains depending upon the period of holding the shares and the profit derived from the business activity of trading in shares were offered as income from business. The Learned AR further argued that even the investment activities were carried out by the assessee only with an intention to make profits out of such investments which are duly offered to tax as capital gains by the assessee. Hence the reasoning of the Learned AO that the assessee had made profits would not vitiate the intention of carrying on the investment activities of the assessee. The Learned AR explained the entire transactions from the details filed in the paper book stating that most of the shares were held for more than one year also for which long term capital gains were reported by the assessee and it is for the assessee to decide when to exit from the relevant investment depending upon the favourable market conditions. With regard to shares held for less than one year, he stated that the shares held for a period of 1 to 365 days falls under the ambit of short term capital gains. Hence the investment decision of the assessee as to the point of entry and exit cannot be doubted and interfered with.

10 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 5.7.2. The ld AR distinguished the following cases relied upon by the ld AO in his assessment order :- CIT vs Distributors Baroda Pvt Ltd reported in 83 ITR 377 (SC) CIT vs Amalgamations Pvt Ltd reported in 108 ITR 885 (Mad) CIT vs K.S.Venkatasubbaiah Reddiar reported in 221 ITR 18 (Mad) G.Venkataswami Naidu and Co. vs CIT reported in 35 ITR 594 (SC) CIT vs Sutlej Cotton Mills Supply Agency Ltd reported in 100 ITR 706 (SC) Dalhousie Investment Trust Co. Ltd vs CIT reported in 68 ITR 486 (SC)

5.7.3. The ld AR further heavily relied on the following case laws in support of his various contentions :- ITO vs Lyons & Roses Pvt Ltd in ITA No. 1148 & 1437/Kol/2009 dated 20.1.2016 (Kolkata Tribunal)

DCIT vs The Diamond Co. LTd in iTA No. 16258/Kol/2010 for Asst Year 2007-08 dated 29.11.2011 (Kolkata Tribunal)

Vesta Investments & Trading Co.(P) Ltd vs CIT reported in 70 ITD 200 (CHD)

Ramnarain Sons (Pr) Ltd vs CIT reported in 41 ITR 534 (SC)

ACIT vs Kethan Kumar A Shah reported in 242 ITR 83 (Ker)

Motilal Oswal vs Addl CIT reported in 8 SOT 771 (Bom)

CIT vs N.S.S.Investments P Ltd reported in 277 ITR 149 (Mad)

Janak S Rangwalla vs ACIT reported in 11 SOT 627 (Mum)

CIT vs Gopal Purohit reported in 228 CTR 582 (Bom)

CIT vs Merlin Holding (P) Ltd reported in 375 ITR 118 (Cal)

ITO vs Manimaya Holdings Pvt Ltd in ITA No. 439/Kol/2009 for Asst Year 2005-06 dated 6.4.2016 (Kolkata Tribunal)

5.8. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We would like to briefly narrate the principles applicable in deciding the above issue as laid down in several judicial pronouncements :-

11 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 (a) Whether a transaction of sale and purchase of shares were trading transactions or whether they were in the nature of investments is mixed question of law and fact. CIT vs H. Holck Larsen reported in (1986) 160 ITR 67 (SC)

(b) It is possible for an assessee to be both an investor as well as a dealer in shares. Whether a particular holding is by way of investment or formed part of stock in trade is a matter which is within the knowledge of the assessee and it is for the assessee to produce evidence from his records as to whether he maintained any distinction between shares which were held by him as investments and those held as stock in trade. CIT vs Associated Industrial Development Co. Ltd reported in (1971) 82 ITR 586 (SC)

(c ) Treatment in the books by an assessee will not be conclusive. If the volume, frequency and regularity with which transactions are carried out indicate systematic and organized activity with profit motive, then it would be a case of business profits and not capital gain. CIT vs Motilal Hirabhai Spg. And Wvg. Co. Ltd reported in (1978) 113 ITR 173 (Guj) and Raja Bahadur Visheshwara Singh (Deceased) & Ors vs CIT reported in (1961) 41 ITR 685 (SC)

(d) Purchase without an intention to resell where they are sold under changed circumstances would be capital gains. CIT vs P.K.N. Co. Ltd reported in (1966) 60 ITR 65 (SC). Purchase with an intention to resell would render the gain profit on sale of businss profit depending on the circumstances of the case like nature and quantity of article purchased, nature of the operation involved. Saroj Kumar Mazumdar vs CIT reported in (1959) 37 ITR 242 (SC)

(e) No single fact has any decisive significance and the question must depend upon the collective effect of all the relevant materials brought on record. Janki Ram Bahadur Ram vs CIT reported in (1065) 57 ITR 21 (SC).

5.8.1. The above tests have again been reiterated by the CBDT in its Circular issued on this subject. Keeping in mind, the above broad principles, we shall now examine the case of the assessee. The assessee during the previous year had entered into transactions of purchase of shares giving rise to short term capital gain. As far as short term capital gain is concerned,

12 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 there were in all about 185 companies shares which were purchased and sold which gave raise to short term capital gain / loss earned/ incurred by the assessee. The assessee had derived long term capital gains in respect of 2 companies shares. These details are available in page 19 of the Paper Book of the assessee. All these transactions were effected by actual delivery of shares at the time of purchase and sale. We find that the investment in equity shares have been held for a duration of weighted average of 132 days for the Asst Year 2006-07 and for 87 days for Asst Year 2007-08. It is not in dispute that the assessee had taken delivery of all its shares and never traded on the same . It is not in dispute that no day trading activities, future and options transactions etc were carried out by the assessee.

5.8.2. We find that the assessee has been consistently showing the purchase of shares under the head ‘investments’ in its books of accounts and the gains derived thereon apart from dividends were reported as short term / long term capital gain depending upon the period of holding. The intention of the assessee had to be derived from the treatment given by it in its books of accounts. This treatment of the investments and its resultant gains has been consistently accepted by the revenue in the earlier years. The last of the scrutiny assessment was framed on the assessee u/s 143(3) of the Act was for Asst Year 2004-05, wherein the stand of the assessee was accepted by the department. Though the principle of res judicata does not apply to income tax proceedings, the principle of consistency cannot be given a go by. Reliance in this regard is placed on the decision of the Hon’ble Apex Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC), wherein it was held that : As we are aware of the fact that, strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

5.8.3. The factors which go in favour of the assessee that the income in question is to be assessed under the head capital gains are as follows:-

(a). The volume and frequency of the transactions are not very high. (b) The assessee held the shares as investment in its books of accounts and not as stock in trade.

13 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 (c ) The assessee has received dividend on shares of Rs. 5,22,731/- from 32 companies which shows that investment activity and getting returns was the motive of the assessee. (d) The assessee has passed a specific board resolution by which it resolved to make investment in shares and that such investments were to be regarded not as stock in trade but as investments. (e) No borrowed funds were used to purchase shares held as investments. (f) The volume of investment in comparison to the share capital of the assessee is not very high. (g) The revenue had accepted the treatment of the shares held as investments in its books and the resultant gains thereon as short term and long term capital gains in the past as well as in future. Scrutiny assessments were framed for Asst Year 2004-05 and Asst Year 2010- 11. All other years except the years under appeal (i.e Asst Years 2006-07 & 2007-08) were completed u/s 143(1) of the Act upto Asst Year 2013-14 accepting the treatment of the assessee.

5.8.4. We find that CBDT Circular No. 4/2007 dated 15.6.2007 on the impugned subject had in para 8 stated as below:- 8. The Authority for Advance Rulings (AAR) in Fidelity Northstar Fund& Ors ., IN RE reported in (2007) 288 ITR 641 , referring to the decisions of the Supreme Court in several cases, has culled out the following principles : (i)”Where as company purchases and sells shares, it must be shown that they were held as stock –in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction ; (ii) The substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions ; (iii) Ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/ adventure in the nature of trade ; but where the object of the investment in shares of a company is to derive income by way of dividend , etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt.”

5.8.5. We find that the impugned issue has been elaborately dealt by this tribunal recently in the case of ITO vs Lyons & Roses (P) Ltd in ITA Nos. 1148 & 1437 (Kol) of 2009 dated 20.1.2016 for Asst Years 2005-06 and 2006-07 reported in (2016) 67 taxmann.com 253 (Kolkata trib) , wherein it was held :-

14 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 5.3 We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee containing the scrutiny assessment orders of the assessee for the Asst years 2002-03, 2004-05, 2008-09 & 2010-11 ; statement of total income for the Asst Year 2010-11 ; audited financial statements for the years ended 31.3.2004 & 31.3.2005 ; details of profit on sale of investments ; details of investments and stock in trade for five years and compilation of various case laws on the impugned issue. We find that the assessee is engaged in investment activity and business activity for years together. We also find that the co-ordinate bench decision of this tribunal for the Asst Year 1992-93 in assessee's own case in ITA No. 2943/Cal/1996 dated 28.9.2001 had accepted the plea of the assessee that the gains arising out of investment activities of the assessee had to be assessed only as capital gains and not business income. It is also not in dispute that the revenue has been accepting the dual portfolio maintained by the assessee for years together which is quite evident from the scrutiny assessment orders passed by the Learned AO for the Asst Years 2002-03, 2004-05, 2008-09 and 2010-11, wherein the stand of the assessee reporting both capital gains and business income arising out of purchase and sale of shares have been accepted. Hence we find lot of force in the decision of the Hon'ble Apex Court relied on by the Learned AR in the case of Radhasoami Satsang (supra) on the principle of consistency. We are also in agreement with the arguments of the Learned AR that just because the assessee had made profits out of its investment activities, the same cannot be concluded that the assessee had carried on with an intention to do business. For that matter, every assessee would only try to make profits out of their activities be it investment or business. What is to be seen is whether the assessee intended to make only profits from dealing in shares or whether the shares were purchased with a view to earn dividend income which is also profit. The gains arising in the former case would be in the nature of trade and hence business income and the latter would be for the purpose of investment and hence resultant gain would be capital gains. In the instant case, the assessee had reported both dividend income and offered short term and long term capital gains on the investment activities and business income for trading activities. 5.3.1 Whether introduction of concessional rate of tax on short term capital gains and exemption of long term capital gains pursuant to introduction of securities transaction tax (STT) would change the character of the transaction We find that the entire gamut of transactions are to be viewed in the context of dominant intention of the assessee whether to hold a particular scrip in investment portfolio or in trading portfolio. We find that the levy of securities transaction tax has been introduced in the statute with effect from 1st October 2004 relevant to Asst Year 2005-06, wherein if a sale of shares transaction is routed through a recognized stock exchange and securities transaction tax is suffered by the assessee, then the long term capital gains arising on such sale would be exempt u/s 10(38) of the Act. Similarly with effect from 1.4.2005, the short term capital gains, if subjected to levy of securities transaction tax, would be liable for concessional rate of tax as against the normal rate of tax @ 30%. We also find that the Learned AO had not brought any evidence on record that the assessee was trying to shift any of its trading assets from the trading portfolio of shares & units to the investment portfolio to take advantage of lower tax rates under the head capital gains and vice versa wherever losses were incurred on sale of investments. It is not in dispute that the assessee had not converted any of the shares under investment category into stock in trade. 5.3.1.1 As stated supra we find that certain shares under investment portfolio were held by the assessee from the year 1995 onwards. Just because if during the mid of the relevant financial year, certain tax benefits have been given in respect of capital gains, that cannot,

15 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 in any way, lead to an assumption or presumption that the intention of the assessee at the time of purchase of shares was that of a trader and not of an investor. The treatment of the investment in the books of accounts of the assessee is also a relevant guiding factor. The issue of treatment of income from share transaction as short term capital gains or business income has in fact arisen after the amendment brought with Finance Act 2004 with effect from 1.10.2004. It is an admitted fact on record that prior to amendment when the tax on short term capital gains was at par with business income, the department has been consistently accepting the treatment of income by the assessee as capital gains. Merely because the rate of tax has been reduced in respect of short term capital gains and long term capital gains have been made exempt during the year by way of an amendment to the provisions, that itself, cannot be a ground for the Learned AO to depart from its consistent stand of treating the assessee as an investor and thereby to charge the income earned by the assessee from share transactions as business income. From the records, it is found that at the time of purchase and sales even during the period prior to 1.10.2004, the assessee was not guided or influenced by lower tax rate in case of short term capital gains as the rate for business income and short term capital gains was at par. The assessee, however, was treating himself as an investor and keeping the delivery based shares as investments in his account irrespective of the probable tax implication as there were no such tax implications as discussed above. Thus, the intention of the assessee, while purchasing the share, is the important and guiding factor as to whether the same was purchased with an intention of investment or trading. 5.3.2 Dual portfolio - whether permitted We also find that nothing prohibits an assessee from holding dual portfolios i.e. (1) shares/units held for investment and (2) shares/units held for trading purposes. It is not in dispute that in the instant case, the assessee had maintained dual portfolios in its books of accounts and had reported capital gains and business income separately as per the consistent practice followed by the assessee over the years and accepted by the revenue in the earlier years. It is well settled that it is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment or stock in trade, then onus would shift to revenue to prove that apparent is not real. In the instant case, we find from the details in the paper book that the assessee had duly discharged its primary onus of demarcating the scripts held for investment and for trading and the resultant gains derived therefrom. Even the CBDT Circular No. 4 of 2007 dated 15.6.2007 envisages the practice of assessee's maintaining dual portfolios. We also find that the decision was rendered by the Hon'ble Bombay High Court in the case of CIT v. Gopal Purohit reported in (2011) 336 ITR 287 (Bom) wherein the assessee had maintained dual portfolios and ultimately the court held that the resultant gains from investment activity would be assessable as capital gains and not business income. We also find that the valuation of investments has been done by the assessee at cost as could be evident from the accounting policies forming part of the audited financial statements. 5.3.2.1 We also find that the CBDT in its Instruction No. 1827 dated 31.8.1989 has laid down certain criteria to determine whether an activity of purchase and sale of shares is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given in the books is indicative of assessee's intention whether to hold the shares with a view to earn dividend and long term appreciation or with a view to carrying on as business.

16 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08

5.3.3 Intention of the assessee We find the intention of the assessee to maintain two independent portfolios i.e. one for investment purposes and one for trading purposes from the very beginning is quite evident from the books of accounts wherein assessee had separate entries in its ledger accounts at the time of each transaction i.e. at the time of purchase itself. This practice has not been found fault by the revenue in the earlier assessment years even in scrutiny proceedings. The Hon'ble Madras High Court in the case of CIT v. S. Rammaamirtham reported in (2008) 217 CTR 206 (Mad) while distinguishing trading and investment, observed that the intention of the assessee is relevant to determine whether an assessee is carrying on the business in shares or investments. The initial intention of the assessee in the instant case is proved beyond doubt from the manner of maintaining two separate portfolios i.e. (1) for investment purposes and (2) for trading purposes. The Learned AR argued that in respect of shares retained under 'investment category' the assessee had taken due delivery of shares on its purchase and given due delivery of shares on its sale. The Learned AR further informed that the assessee had also kept separate records to record the transactions of each category i.e delivery based and non- delivery based. It is settled law that a particular income is from business or from investment must be decided according to the general common sense view of those who deal with those matters in the particular circumstances. The most excruciating factor to be looked into at this juncture is the conduct of the assessee. 5.3.4 Frequency of transactions The next point to be addressed in this issue is whether the frequency of transactions would alone indicate the trading activity. In this regard, we find the co-ordinate bench of Mumbai Tribunal had an occasion to consider the same in the case of Janak S. Rangwalla v. Asstt. CIT reported in (2007) 11 SOT 627 (Mum), wherein it was held that: "It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years have been held to be income from capital gains both on long term and short term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as short term capital gains. There is no basis for treating the assessee as a trader in shares, when his intention to hold the shaes in Indian companies as an investment and not as stock in trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years. The Assessing officer is directed to set off the Long Term Capital Loss against the Short Term Capital Gain of the year under consideration. The grounds of appeal raised by the assessee are allowed." 5.3.4.1 We also find that the Hon'ble Calcutta High Court in the case of CIT v. Merlin Holding (P.) Ltd reported in (2015) 375 ITR 118 (Cal) for the Asst Years 2005- 06 and 2006-07 had held as below:— "The frequency of transactions in shares alone cannot show that the intention of the investor was not to make an investment. The Legislature has not made any distinction on the basis-of frequency of transactions. The benefit of short -term capital gains can be availed of for any period of retention of shares up to 12 months.

17 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 Although a ceiling has been provided, there is no indication as regards the floor, which can be as little as one day. The question essentially is a question of fact. The assessee was a certified non-banking financial concern. Its main activities were giving loans and taking loans and-investing in shares and securities. The Assessing Officer, for the assessment years 2005-06 and 2006-07, opined that the activity which, according to the assessee, was on investment account amounted to business activity and, therefore, he treated the short-term capital gains of Rs. 1,01,00,000 as business income. The Commissioner (Appeals) held that the refusal on the part of the Assessing Officer to accept the short-term capital gains was incorrect. This was confirmed by the Tribunal. On appeal : Held, dismissing the appeal, that the assessee had adduced proof to show that some transactions were intended to be business transactions, some transactions were intended to be by way of investment and some transactions were by way of speculation. The Revenue had not been able to find fault from the evidence adduced. The mere fact that there were 1,000 transactions in a year or the mere fact that the majority of the income was from the share dealing or that the managing director of the assessee was also a managing director of a firm of share brokers could not have any decisive value. The Commissioner (Appeals) and the Tribunal had concurrently held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter." 5.3.4.2 We also find that the Hon'ble Calcutta High Court in the case of CIT v. H K Financiers (P.) Ltd reported in (2015) 61 taxmann.com 175(Cal) for the Asst Year 2007-08 had held as below:- '3. The Assessing Officer has laid stress on motive. To begin with motive is something, which is locked in the mind of the person. No direct evidence as regards motive is possible. Motive can be inferred from the conduct of the person concerned but that is bound to remain an inference, which may or may not be correct. We have today dictated a judgment in the case of CIT v. Merlin Holding (P.) Ltd. [IT Appeal No. 101 of 2011, dated 12-5- 2015] wherein the following views have been expressed by us: "From the tenor of the submissions made by Mr. Saraf noted above, it appears that the case of the revenue is that in the facts of the case the finding that the income was earned from investment could not have been recorded. If that is the proposition then it is for the revenue to show that such a finding is not possible in law. That was not even suggested. What remains then is a question of appreciation of evidence, which has already been done. No fruitful purpose is likely to be served by remanding the matter. We do not find any issue, which has remained unattended. For the aforesaid reasons, we hold that the judgment under challenge is not perverse." 4. The judgment in the case of Dalhousie Investment Trust Co. Ltd. v. CIT reported in (1968) 68 ITR 486 (SC) referred by the Assessing Officer does not assist the revenue because in that on appreciation of facts it was found as follows:— "On the facts, that the appellant dealt with the shares of McLeod and Co. and the allied companies as stock-in-trade, that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade. The profit derived by the appellant

18 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 from the sale of shares was therefore a revenue receipt and as such liable to income- tax." 5. The facts of the case are not shown to be similar with those in the case of Dalhousie Investment. 6. For the aforesaid reasons, we are of the opinion that the views expressed both by the CIT and the Tribunal for reasons expressed therein are a possible view. It is, therefore, not open to the revenue to contend that the view taken by the Tribunal is perverse. Question form ulated at the time of admission of the appeal does not appear to have been correctly formulated. The question could only be, whether the views expressed upon appreciating the facts and circumstances of the case were perverse. The question is now formulated and is answered in the negative. The appeal is thus dismissed.'

5.3.5 Existence of borrowed funds The next point to be addressed in this issue is the existence of borrowed funds and payment of interest thereon by the assessee. The Learned CIT(A) had given a factual finding that no nexus has been brought on record between the borrowed funds and the investments made. The Learned CIT(A) found that for the Asst Year 2005-06, the assessee had made short term borrowings from its director for a period of seven months only in order to meet its working capital requirements and the said loan was also squared up during the year. Similarly in Asst Year 2006-07, the assessee had made borrowings of Rs. 3 crores and utilized the same for investment as well as for trading activity. The Learned CIT(A) also found that the assessee has got a share capital of Rs. 10,00,000/- and reserves and surplus as on 31.3.2005 at Rs. 1,73,98,009/- in addition to generation of own funds in the form of sale of shares held as investments. This goes to prove that the own funds along with borrowed funds have been utilised for both investment and trading activities of the assessee. He accordingly held that the finding of the Learned AO that borrowed funds were utilized for investments to be factually incorrect. This finding given by the Learned CIT(A) is not refuted by the Learned DR before us for both the asst years under appeal. We find that the Hon'ble Calcutta High Court in the case of Jt. CIT v. Bajranglal Chowdhury reported in (2015) 58 taxmann.com 204 (Cal) had held as below:— 'l. The appeal is directed against a judgment and order dated March 13, 2014, by which the learned Income-tax Appellate Tribunal dismissed an appeal preferred by the Revenue. 2. The Assessing Officer held that the transaction in shares undertaken by the assessee was in the nature of a business transaction and not investment. Aggrieved by the order of the Assessing Officer, an appeal was preferred by the assessee which was allowed by the Commissioner of Income-tax (Appeals) holding that the transaction was really in the nature of an investment. The appellate authority discussed reasons as to why was the transaction in the nature of an investment. The Revenue preferred an appeal. The learned Tribunal agreeing with the appellate authority dismissed the appeal. The Revenue has once again come up in appeal before us. 3. Mr. Saraf, learned advocate appearing for the Revenue, strenuously submitted that the finding of the learned Tribunal is perverse. The Tribunal ignored the fact that the shares allegedly purchased in July were not taken delivery of till December nor was

19 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 any payment made when the purchase was allegedly made in the month of July. This submission of Mr. Saraf evidently is based on misreading of the evidence. It would appear from the assessment order that payment was made for the shares in the month of July itself through bill accommodation facility. 4. Mr. Saraf relied upon a judgment in the case of CIT v. Sutlej Cotton Mills Supply Agency Ltd reported in (1975) 100 ITR 706 (SC). He drew our attention to the following finding recorded by the apex court (page 713) : "The finding of the High Court that the clauses of the memorandum of association, viz., clauses 10, 12, l3, 28 and 29 do not authorise the company to acquire and sell shares as business has no relevance in view of the aforesaid resolution of the assessee and of the fact that it had been dealing in shares in a commercial spirit as is evident from its claim for loss in dealings in the shares of M/s. Titaghur Paper Mills Ltd. and devaluation of shares of M/s. Pilani Investment Corporation on the basis that they had fallen in value. Secondly, the Tribunal said that from 1947 to 1956, no dividend had been declared by the Rayon company and that the money which went into the purchase of these shares was borrowed by the assessee. In other words, the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with the borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend was correct. We cannot say that this was not a relevant circumstances for the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business."

5.3.6 Period of Holding of shares We find that one of the main arguments of the revenue seems to be the shorter duration for which the shares were held by the assessee. In this regard, we had gone through the entire details of profit on sale of investment scrip wise containing the date of purchase, number of

20 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 shares purchased, purchase price, date of sale, sale price and resultant book profit or loss which forms part of the paper book filed by the assessee. We find from the said workings of profit on sale of investments, none of the scripts had been sold by the assessee within a period of 30 days as stated by the Learned DR, except Kotak Mahindra Mutual Fund Short Term Plan which was purchased in March 2004 and redeemed in April 2004. Other than this, all other scripts and mutual funds were held for a minimum period of two months from the date of purchase before its transfer. We also find that certain shares were held by the assessee from March 1995, October 1996, December 1998, May 2003, June 2003, July 2003, August 2003, September 2003, October 2003 etc onwards which were ultimately sold by the assessee in Asst Year 2005-06. Similarly in Asst Year 2006-07, from the workings of short term capital gains filed in the paper book, we find that only the part of the shares of DSP Merrill Lynch Ltd and Graphite India Ltd were sold within a month. Other than these two shares, the average period of 4 months has been maintained by the assessee from the date of purchase. We also find from the workings of long term capital gains for Asst year 2006-07, the shares were held for a period of 13 months. This shows that the assessee always intended these shares to be retained only under the investment category and it will be highly improper to state that these shares/units were held as stock in trade by the assessee. We find that this aspect has been considered by the co-ordinate bench of this tribunal in the case of Dy. CIT v. Reliance Trading Enterprises Ltd. in ITA No. 944/Kol/2008 dated 3.1.2008 wherein it was held that : "We have heard both the parties and perused the records as well as the documents contained in the paper book filed before us. There is no denying the fact that as per the account maintained the assessee had acted both as a trader as well as investor in shares as per the Memorandum and Articles of Association. Accounts were maintained for trading/business shares which are held as stock in trade and separately for investment shares which are held and shown in balance sheet under the head investment representing capital assets. The decisions used to be taken by the assessee at the time of purchase itself based on different factors whether any share and security was to be held as investment or trading. When the shares are accounted for in the books as investment shares, the volume of transaction of such shares cannot alter its status from investment to trading. Profit on sale of such investment shares held, as capital assets are assessable under the head capital gain. Period of holding of such assets cannot determine its status or change it from investment (capital) to trading (stock in trade). The audited accounts for the Assessment Year 04-05 and the earlier years placed in the paper book made it clear that every year the assessee had acquired shares for trading purpose and separately also for investment purpose with an intention to earn dividend income in addition to the prospect of making profit on sale of such investment shares at an appropriate opportune moment without making any hurry for self ignoring dividend. The investment shares and securities purchased and held till their sale had dual purpose i.e. for earning dividend as an incidental income as well as to make profit on shares at appropriate time. The conclusions drawn by the Assessing Officer by treating the investment shares as trading shares was based purely on assumptions and presumptions without bringing any record any material or evidence in support thereof. The Assessing Officer did not reject the books of accounts vis a vis the audited accounts u/s 145 of the IT Act before arriving at such a conclusion. The Assessing Officer's finding cannot therefore be accepted."

21 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 5.3.7 We find that the assessee had earned dividend income also which is quite reflective of the intention of investment and not for profit motive though an investor is not precluded from realizing its investment which may result into profit in favourable circumstances. 5.3.8 We also find that the practice followed by the assessee by offering capital gains for investment activities and business income for trading activities in the earlier years have been consistently accepted by the revenue in section 143(3) proceedings for the Asst Years 2002-03 ; 2004-05 ; 2008-09 and 2010-11, copy of which orders are placed on record before us. The assessment years under appeal before us are Asst Years 2005-06 and 2006- 07. We do not find any logical reason for the revenue to deviate from its consistent stand taken in the earlier years. It is also evident from the scrutiny assessment orders for Asst Years 2008-09 and 2010-11, the revenue had accepted the stand of the assessee having dual portfolio and offering income under capital gains and business income in subsequent years. 5.3.9 We find that the Hon'ble Bombay High Court in the case of Gopal Purohit (supra) had considered the issue under consideration and held as under:— '4.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR before us. We find that the assessee has been engaging himself in the share transactions both as an investor and as well as trader. It is seen that the assessee had clearly bifurcated the investment and trading transactions including speculative share transactions in his books of accounts and it is also seen that the average period of holding of shares range from one month to more than one year and accordingly short term or long term capital gains are duly offered to tax by the assessee depending upon the period of holding the shares. It is also seen that the Learned AO had also accepted the stand of the assessee in the immediately succeeding assessment year as investment transactions under scrutiny proceedings vide 143(3) order dated 12.10.2009. We find that the frequency of transactions does not really matter and what is to be seen is the intention of the assessee whether he wants to penetrate into the capital market for the purpose of investment or for making speculative gains by doing day trading and dealing in futures and options. It is also seen that the Learned AO had clearly stated in his assessment order that the interest on borrowings were paid by the assessee only for trading in shares and this itself goes to prove that the assessee had clearly bifurcated his activities into two parts - one towards investment in shares out of own funds of the assessee and other towards trading in shares out of own and borrowed funds of the assessee. It is also seen that the assessee has been doing this activity consistently. It is also seen from the balance sheet filed by the assessee that the assessee had clearly classified the share transactions under the head Investments. This itself clearly proves the intention of the assessee that he is only interested in share market only as an investor and not otherwise. We find that this issue has been elaborately dealt with by the Hon'ble Bombay High Court in the case of CIT v. Gopal Purohit reported in 228 CTR 582 (Bom), wherein the questions raised before the Bombay High Court and decision rendered thereon are as below:— (a) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in treating the income from sale of 7,59,003 shares for Rs.5,00,12,879/- as an income from short term capital gain and sale of 3,88,797 shares for Rs.6,65,02,340/- as long term capital gain as against the "Income from business" assessed by the A. O. ? (b) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in holding that principle of consistency must be applied here as

22 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res judicata to preclude the authorities from holding such transactions as business activities in current year? (c) Whether, on the facts and circumstances of the case and in law., the Hon'ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income?

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 (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, 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 there from should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law.

In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1. of 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 revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. 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. Question (b), therefore, does not also raise any substantial question.

In so far as Question (c) is concerned, again 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 Section 260A. No substantial question of law is raised. The appeal is accordingly dismissed.'

23 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 It is pertinent to note that the decision of Bombay High Court was subjected to further appeal by the revenue before the Hon'ble Apex Court and the Special Leave Petition (SLP) was dismissed by the Supreme Court. 5.3.10 We also find that there is no material brought in by the revenue to show that separate accounts of two portfolios are only a smokescreen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present as culled out above, we hold that the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. Accordingly, the ground no. 2 in ITA No. 1148/Kol/2009 for Asst Year 2005-06 and ground no. 1 in ITA No. 1437/Kol/2009 for Asst Year 2006-07 raised by the revenue are dismissed.

5.8.6. In view of the aforesaid facts and findings given thereon and respectfully following the judicial precedents relied upon hereinabove including the CBDT Circular issued on this subject, we hold that the surplus derived by the assessee out of shares held as investments in its books need to be treated only as short term and capital gains depending upon the period of holding. Accordingly, we hold that the ld CITA had rightly treated the gains as income from capital gains. Accordingly the ground raised by the revenue in this regard for the Asst Years 2006-07 and 2007-08 is dismissed.

GROUND NO. 2 IN ITA NO. 1064/Kol/2010 FOR AY 2006-07

The brief facts of this issue is that the assessee made purchases from the following parties :-

Mayur Synthetics Proprietor Name – Virendra Agarwal HUF 161 /1, M.G.Road, 3rd Floor, Kolkata – 700007 PAN – AACHV4380E 22,92,482/-

Prachi Saree Proprietor Name – Virendra Agarwal 161 /1, M.G.Road, 3rd Floor, Room 82, Kolkata – 700007 PAN – AEBPA0638M 16,29,653/-

24 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 Piyush Trading Co. Proprietor Name – Asha Agarwal 138, M.G.Road, 1st Floor, Kolkata – 700007 PAN – ADWPA0151P 16,29,416/- ------------------- 55,51,551/-

The ld AO in order to verify the veracity of the said purchases sought to issue notices u/s 133(6) of the Act on the aforesaid parties which could not be served. The assessee produced books of accounts together with stock register, ledgers and purchase bills of Piyush Trading, Mayur Synthetics and Prachi Sarees which were examined by the ld AO. The ld AO found that these bills do not contain the signature acknowledging the receipt of goods. No vehicle number or any mode of transportation was mentioned. Accordingly the ld AO asked the assessee by show causing as to why the said purchases made from aforesaid three parties should not be considered as bogus as they remain unverifiable. The assessee filed a written submission stating that purchases from these parties were genuine and payments have been made during subsequent and current year as well and suggested the ld AO to make enquiry by issuing summons to the parties and also contended that without purchases from those parties, export of textiles was impossible. The summons were served by affixture by the Inspector of Income Tax as the parties were not traceable by the Inspector at the said addresses. In addition to this, Inspector reported that the premises of 138, M.G.Road Kolkata -7 was occupied by a partnership firm namely M/s Shib Kumar Ashok Kumar Enterprises. A summon was also issued in the name of Mr Ashok Kumar Bubna, partner of the said firm who informed that no space has been assigned to M/s Piyush Trading Co. for carrying business in the said premises. In respect of 161, M.G.Road, Kolkata -7 , the Inspector reported that the said premises is a big building owned by Laxmi Salt Co. Ltd as stated by Mr Ravi Shankar Singh, Caretaker of the said premises. He also reported that tenant register was also verified by him but name of M/s Mayur Synthetics or Prachi Saree do not exist. He also collected that Mr Sushil Kr Jain was the Director of Laxmi Salt Co Ltd and accordingly summon was issued on him who reported that there was no such tenancy in the name of M/s Mayur Synthetics and Prachi Saree.

6.1. It was submitted by the assessee that the denial of the landlord of not assigning any space to Piyush Trading Co is not disputed since the premises were rented in the

25 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 proprietor’s name Asha Agarwal who operates her business from her residence. The assessee filed a written submission requesting to issue fresh summons to the aforesaid parties and was directed to produce the respective proprietors of respective concerns for necessary verification as they were not found at the address furnished by the assessee company. Mr Virendra Agarwal, Proprietor of Mayur Synthetics and Prachi Saree filed the PAN Card, Voting Card and copy of demand notice of Kolkata Municipal Corporation in the name of Virendra Agarwal Mayur Synthetics and Prachi Saree in tapal and did not appear in person before the ld AO. The assessee filed reply containing PAN card, trade licence and IT Return acknowledgements of all the three concerns and offered explanation with respect to the delivery of goods by the aforesaid parties and the reason why carriage inwards were not incurred by the assessee thereon. The assessee submitted detailed date wise purchase summary of cotton fabrics, silk fabrics and made up scarves / stole containing date wise, detail of goods purchased, sold , exported and closing stock (day wise). It was explained that the goods purchased were either exported or lying in closing stock which are quite evident from the details furnished therein. However, the ld AO going by the aforesaid circumstances treated the purchases from three parties as unverifiable and accordingly treated them as bogus and added a sum of Rs. 55,50,937/- to the total income of the assessee.

6.2. It was argued that if the purchases were bogus, how they could be included in the closing stock as on 31.3.2006 and when these items were sold in financial year 2006-07, the assessee had credited the sales thereon to the profit and loss account and had offered the profit to tax. If it is added in Asst Year 2006-07, then it would amount to double taxation. It was pleaded that the assessee was a pure trader/exporter. In the case of trading, quantitative analysis play a major role to determine the stock , corresponding sales, etc ,since without effecting purchases, no corresponding sales could be made. It was submitted that from the stock registers submitted by the assessee no discrepancies were found by the ld AO. Moreover the quantitative details were duly subjected to audit by the statutory auditors and tax auditors of the assessee company and had been reported in the annual report and tax audit report filed along with the return of income. It was reiterated that since the tenancy of the aforesaid three parties were in the personal name of the respective

26 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 proprietors, the notices u/s 133(6) and summons thereon which were issued in the name of the respective proprietary concerns could not be served on them in the said address. All the payments for the said parties were made by account payee cheques. It was also submitted that the ld AO could have verified from the bankers that the cheques issued by the assessee to those parties were ultimately cleared in their favour only , which could have proved the identity of those parties beyond doubt. It was argued that there is no material brought on record to even allege that the money have been routed back to the assessee for the payments made to the aforesaid three parties. It was argued that the ld AO mentioned in assessment order at page 10 last para, that the trade licence did not contain the signature of the party, when there was no specific proviso / purpose of such signature. Had the ld AO had any doubt about the genuineness of such trade licence, PAN, Voter ID etc he was at his own liberty to verify the same by using his official powers rather than disbelieving the same on arbitrary grounds. It was also submitted that Mr Virendra Agarwal vide his letter dated 18.12.2008 filed before the ld AO had confirmed the sales to Veda Commercial P Ltd (assessee herein) by his concerns Mayur Synthetics and Prachi Saree, after filing the necessary identification documents such as PAN, Voter ID and Trade licence together with their audited accounts and income tax returns. It was also pleaded that during the course of assessment proceedings as per the directions of the ld AO , the assessee duly furnished comparative chart of purchase, sale, GP % and NP% for the last five years. It was explained that GP% of 33.26% in Asst Year 2006-07 was far better than earlier years and GP % of 13.23 % reported by the assessee was duly accepted by the ld AO in Asst Year 2004-05 u/s 143(3) of the Act. It was argued that if the purchases from the aforesaid three parties were to be disbelieved, then the GP% would arrive at 60% which was unachievable in their line of export business. Finally it was argued without prejudice to the above, that if the purchases have not been effected through the aforesaid three parties , then the purchases might have been effected from anybody else. The receipt of goods by the assessee can be proved beyond doubt because the same goods have been partly sold and partly remained in the closing stock. The sales as well as the closing stock has been accepted by the revenue.

6.3. The ld CITA deleted the addition by observing as under:-

27 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 “The Assessing Officer treated the purchases made from Piyush Trading,Mayur Synthetics and Prachi Sarees amounting to Rs. 5550937 as bogus purchases. The AO noticed discrepancies like:

a) non-mention of vehicle No. in the purchase bills b) no carriage inward debited by appellant c) payment against purchases made in subsequent year; d) parties not found in the addresses furnished; e) unsigned trade licence documents f) non-appearance of the party against summons issued g) mismatch/different spelling in Voter ID as compared to PAN card of the party.

I have duly considered the submissions of the appellant along with the documents annexed to the Paper Book. I have also considered the reasons stated the A.O in the assessment order.

From the copies of purchase bills of the aforesaid three parties it is ap[parent that, the bills were supported by delivery challans, the items purchased being Fancy Fabrics, sarees and Stoles on different dates. The appellant's claim that the goods were supplied by the parties at their own cost cannot be dismissed. Hence the question of incurring carriage inwards in hands of the appellant doesn't arise. Further purchased were not necessarily required to be transported through Tempo/vans but could be easily delivered through local transport such as Taxi/Bus, hence non mentioning of vehicle no. in the bills is also not a material factor.

I have considered the AO's contention with reference to non-existence of the purchase parties/genuineness of the purchases. The A.O firmly believed on the statement of the owners of the premises, who confirmed of not assigning any space in the name of the proprietorship concerns. The appellant however claimed that the tenancy was in their individual capacity, hence the reason of proprietorship concern’s names, not appearing in the tenant register. This appears to be logical in the sense that the Trade License have been issued by License Department of the Kolkata Municipal Corporation. Thus genuineness of the parties are undoubted. Moreso, it has been clearly mentioned in the Trade License itself that "This is a Computer generated Notice, hence no signature is required". In fact Sri Virendra Agarwal proprietor of “Prachi Sarees" and representing as Kcrto-Proprietor of Mayur Synthetics had duly confirmed the transaction with the appellant, Voter ID, PAN submitted before AO for identification purpose. Had the AO any doubt he could have cross verified the said documents filed before AO on 18.12.2008. I thus agree with the contention of the appellant that the identity of the parties is established. Some mis-match in the spelling in Voter ID Card as compared to PAN Card does not give the impression that they belong to two separate persons.

1 have also considered the item-wise summary of purchase & sales in entire F.Y 2005 - 06. I find that the appellant is an export trader; whatever purchases were made from the three parties were either exported or lying in closing stock as on 31/03/2006. The corresponding export sale/stock-in-hand have been duly accepted by the A.O. The payments for all the purchases were made through the a/c. payee cheques. The A.O had no material to prove that the payments of purchases came back to the assessee in any mode. Even the G.P% for the Export Trading business for A.Y-2006-07 (33.26%) is far better than preceding two years (23.62% & 13.22%).

The Ld. AR of the appellant has also brought to my notice ITAT, Jaipur Bench decision in ITO Vs Kanchwala Gems (2009) 122 TTJ 854 which according to him is similar to facts of the appellant's case. The Hon'ble ITAT in this case after reviewing number of case laws on the issue of bogus purchases he1h as under:

28 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 “By furnishing necessary information supported with documents like bills issued against the purchases by the four parties bearing details of the goods supplied including rates. RST/CST numbers, their PAN, making of payment through account payee cheques and entire purchases having been exported in the same shape, size and weight duly verified by customs authorities, assessee had established genuineness of purchases and in the absence of any positive material showing the purchases to be bogus, accounts could not be rejected and no addition could have been made on that account." I find the facts of the above said case are similar to the appellant's case. The appellant furnished necessary information. supported with documents like bills issued against the purchases, , PAN of the parties, confirmation letters etc. and details of making payments through account payee cheques. The A.O has not made any remark against the corresponding export sales made by the appellant. Under these circumstances I am of the view that the A.O is not justified in doubting the genuineness of the purchases effected through Piyush Trading Co. Mayur Synthetics and Parchi Sarees amounting to Rs. 55,50,937/-. As such I direct the A.O to delete the addition.”

6.4. Aggrieved, the revenue is in appeal before us on the following ground:- “2. That under the facts and in the circumstances of the case, Ld. CIT(a) has erred in deleting the addition of rs.55,50,937/- without appreciating the fact that the purchase could not be verified because the owner of the premises denied to have assigned any part of the premises to any of these parties to whom the transactions were made.”

6.5. The ld DR vehemently relied on the order of the ld AO. He argued that no explanation has been offered on the aspect of non-appearance of the proprietors of three concerns before the ld AO. Hence the genuinity of the purchases were not proved by the assessee. In response to this, the ld AR vehemently relied on the order of the ld CITA and drew our attention to the relevant pages of the paper book containing filing of various documents and evidences in support of his contentions. He also placed reliance on the following decisions :- CIT vs M.K.Brothers reported in (1987) 163 ITR 249 (Guj) Sagar Bose vs ITO reported in 56 ITD 561 (Kol Trib) CIT vs Nangalia Fabrics P Ltd reported in (2013) 40 taxmann.com 206 (Guj HC) ITO vs Kanchwala Gems reported in (2009) 33 SOT 27 (Jaipur Trib)

6.6. We have heard the rival submissions. We find that the ld CITA had elaborately discussed the entire gamut of the facts and given an elaborate finding. We do not find any infirmity in the said order of the ld CITA in this regard. We also find that the reliance placed by the ld AR on the following decisions is very well founded and directly on the impugned issue in favour of the assessee :-

29 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08

CIT vs M.K.Brothers reported in (1987) 163 ITR 249 (Guj) 8. On a perusal of the order of the Tribunal it clearly appears that whether the said transactions were bogus or not was a question of fact. The Tribunal has also pointed out that nothing is shown to indicate that any part of the fund given by the assessee to these parties came back to the assessee in any form. It is further observed by the Tribunal that there is no evidence anywhere that these concerns implicate vouchers to the assessee. Even the two statements do not implicate the transactions with the assessee in any way. With these observations the Tribunal ultimately has observed that there are certain doubtful features, but the evidence is not adequate to conclude that the purchases made by the assessee from these parties were bogus. It may be stated that the assessee was given credit facilities for a short duration and the payments were given by cheques. When that is so, it cannot be said that the entries for the purchases of the goods made, in the books of account were bogus entries. We, therefore, do not find that the conclusion arrived at by the Tribunal is against the weight of evidence. In that view of the matter we answer the question in the affirmative, that is, in favour of the assessee and against the revenue. Accordingly, the reference stands disposed of with no order as to costs.

Sagar Bose vs ITO reported in 56 ITD 561 (Kol Trib)

30 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 of profit has been ignored by the ITO and has not been considered and decided properly and correctly by the CIT(A). In our opinion, therefore, the assessment made under section 143(3) raising the gross profit rate abnormally high @ 82% is pure guess work and is based on suspicion. Our view gets support from the Supreme Court decision in the case of Dhakeswari Cotton Mills Ltd. v. CIT [1954] 26 ITR 775 . In this case the Supreme Court has observed at page 782 as under: ". . . it is equally clear that in making the assessment under sub- section 3 of section 143 of the, Act, the Income-tax Officer is not entitled to make a pure guess and make an assessment without reference to any evidence or any material at all. There must be something more than mere suspicion to support the assessment under section 143(3)." 26. We find that the assessee has given names and addresses of the suppliers and has furnished all particulars and details of purchases. The assessee has also produced books of account and pass books and has furnished copies of bills, account payee cheque Nos. and sales-tax Nos. etc. Although it was in the knowledge of IT department that suppliers are assessed to sales tax no follow-up action was taken. It was also in the knowledge of the department that payments are made by account payee cheques and bank names, pass book Nos. and cheque Nos. were given but in spite of that the Revenue did not conduct thorough enquiry and investigation and did not pursue the matter further. There is no effort to find out the present addresses of suppliers. On the facts and in the circumstances of the case, the assessee could not do anything further except requesting the Revenue to issue summons to suppliers. We therefore come to the conclusion that the assessee has discharged the burden and it is the Revenue being alleging party which failed to discharge the heavy burden of establishing mala fides by producing evidence and proof of high order. We accordingly arrive at the conclusion that on the facts and in the circumstances of the case the addition made by the Assessing Officer and confirmed by the CIT(A) is not in accordance with law and our conclusion is based on relevant material, cogent and positive evidence produced and furnished by the assessee. Our view is squarely covered and supported by the Supreme Court decision in the case of CIT v. Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 wherein it was held as under:— "In this case the respondent had given the names and addresses of the alleged creditors. It was in the knowledge of the Revenue that the said creditors were income-tax assessees. Their index numbers were in the file of the Revenue. The Revenue, apart from issuing notices under section 131 at the instance of the respondent, did not pursue the matter further. The Revenue did not examine the source of income of the said alleged creditors to find out whether they were creditworthy. There was no effort made to pursue the so-called alleged creditors. In those circumstances, the respondent could not do anything further. In the premises, if the Tribunal came to the conclusion that the respondent had discharged the burden that lay on it, then it could not be said that such a conclusion was unreasonable or perverse or based on no evidence." 27. In this view of the matter as well as for the reasons mentioned in the foregoing paragraphs we hold that on the facts and in the circumstances of the case, the CIT (Appeal) was not justified in confirming the addition of Rs. 6,54,767 on account of bogus purchases made by the Income-tax Officer. Accordingly we quash the orders of the ITO and the CIT (Appeal) and delete the addition. This ground of appeal, therefore, succeeds.

In view of the aforesaid facts and findings and respectfully following the judicial precedents relied upon herein above, we do not find any justifiable reason to interfere with the order of

31 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 the ld CITA in this regard and accordingly, the Ground No. 2 raised by the revenue is dismissed for Asst Year 2006-07.

The brief facts of this issue is that the assessee filed details of debtors and creditors before the ld AO , among other details, during the course of assessment proceedings. The ld AO observed that the assessee had transactions with Upline Travels P Ltd showing payment of Rs. 5,55,060/- against service of Rs. 8,39,396/- leaving creditors of Rs. 2,84,336/- as on 31.3.2006. Letter u/s 133(6) was issued and served on the said party and reply was received from him by the ld AO which showed that the said party was a travel agent and was providing services to the assessee. Since no tax has been deducted at source on the expenses incurred towards Upline Travels P Ltd, the ld AO invoked the provisions of section 40(a)(ia) of the Act and disallowed a sum of Rs. 8,39,396/- in the assessment. The assessee before the ld CITA submitted that the assessee had purchased air tickets through the said travel agent and making payment for visa charges etc apart from ticket charges. The assessee filed the complete details of payments and expenditure incurred through the said travel agent which was also filed before the ld AO vide letter dated 28.11.2008. It was argued that no TDS was applicable for purchase of air tickets and reliance was placed in this regard on the Circular No. 715 dated 8.8.95. The ld CITA went through the invoices of Upline Travels P Ltd and found that they are only for purchase of tickets amounting to Rs. 7,74,727/- and balance towards visa charges and miscellaneous expenses. Placing reliance on CBDT Circular No.715 dated 8.8.95 , wherein it was categorically stated that no Tax need to be deducted on payment towards purchase of air tickets, he deleted the disallowance of Rs. 8,39,396/-. Aggrieved, the revenue is in appeal before us on the following ground:- “3. That under the facts and in the circumstances of the case, Ld. CIT(A) has erred in deleting the addition of Rs. 8,39,396/- u/s. 40(a)(ia) on the basis of evidence without asking any remand report from the AO which violation of Rule 46A of the I. T. Rules.”

32 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 7.1. The ld DR argued that additional evidences were filed by the assessee before the ld CITA which were not subjected to any remand proceedings and hence prayed for set aside of this issue to the file of the ld AO for verification by the ld AO. In response to this, the ld AR agreed for setting aside of this issue to the file of the ld AO for verification of the details filed by the assessee.

7.2. We have heard the rival submissions and perused the materials available on record. We find that the assessee had placed a detailed analysis of expenses incurred through Upline Travels P ltd date wise , but as fairly stated by both the parties , it is not known clearly as to whether the same was filed before the ld AO for his verification. Hence in the interest of justice and fairplay, we deem it fit and appropriate to set aside this issue to the file of the ld AO for verification on his part. The ld AO is also directed to take into account the CBDT Circular No. 715 dated 8.8.95 while deciding the said issue. Accordingly, the Ground No. 3 raised by the revenue for Asst Year 2006-07 is allowed for statistical purposes.

Order is pronounced in the open court on 16.11.2016 Sd/- Sd/- (S.S. Viswanethra Ravi) (M. Balaganesh) Judicial Member Accountant Member

Dated : 16th November, 2016

Jd.(Sr.P.S.)

33 ITA No.1064/Kol/201& & 1527/Kol/2010 & CO Nos. 153 & 154/Kol/2010 Veda Commercial Pvt. Ltd., AY 2006-07 & 2007-08 Copy of the order forwarded to:

APPELLANT – DCIT, Circle-10, Kolkata. 1. Respondent –Veda Commercial Pvt. Ltd., 5/1, Anil Maitra Road, 2 Kolkata-700 019. The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt. Registrar.