DCIT, CIR-11, KOLKATA, KOLKATA vs. M/S MACHINO FINANCE PVT. LTD., KOLKATA

Facts in brief are that assessee in the present case is a Private Limited Company and engaged in the share trading business. During the year under consideration, assessee has made various transactions for purchase and sale of shares with various companies. The assessee on the sale-purchase of share has declared the income under the head “capital gains”. However, Assessing Officer, during the course of assessment proceedings, observed that the income from the sale/ purchase of shares should be treated as business income. The assessee is doing its activities for sale-purchase of share very frequently in a systematic manner and in volume. The object clause of the company also provides the dealing in shares. In the assessment year 2006-07, the AO under section 143(3) has also treated the income from the aforesaid transactions as business income. In view of above the AO regarded the income from the aforesaid activities as “business income” in place of “capital gains”. Accordingly the AO treated the same as “income from business”. A.Y. 2009-10 DCIT Cir-11 Kol. Vs. M/s Machino Finance Pvt. Ltd. Page 3 4. Aggrieved, assessee preferred an appeal before Ld. CIT(A) who treated the income of assessee under the head “capital gains” by reversing the order of AO by observing as under:- “5.2.3 I have carefully considered the submission put forth on behalf of the appellant along with the supporting documents furnished, perused the facts of the, gone through the findings of the AO and other materials brought on record. In so far as the treatment of long term capital gain and short term capital gain as business income is concerned, I find that the issue is covered in favor of the appellant by the order of the ITAT for the assessment year 2005-06 referred to above. Hence the appellant’s appeal on this ground is allowed. The AO is directed to modify the order accordingly.”

At the outset, we find that this issue is squarely covered in favour of assessee in its own case in dated 12.034.2013 for AY and relevant operative portion of the said order is reproduced below:- “4. We have heard the rival contentions and carefully perused the materials available on record. The ld. DR has supported the order of the ld. AO with respect to the Revenue’s appeal and has supported the order of ld. CIT(A) in so far as the assessee’s appeal is concerned. The ld. Counsel for the assessee has relied on the facts as brought on record by the AO vis-à-vis as considered by the ld. CIT(A) for rendering the income as capital gains, was accepted on the undisputed facts that the shares were held by the assessee as investment and were being sold on having held for two years, was not controverted by the Revenue. It was not the case of the AO to rely on the Hon’ble Apex Court together with CBDT Circular which definitely has to be considered irrespective of finding of fact as to when the investment whether converted for the purpose of sale whether could be considered, then as opinion of the AO for business purposes was to be considered on the basis of the cited case laws which the compilation has also been furnished by the ld.counsel for the asessee. The Tribunal being a fact finding body, it was not the case of the AO to form an opinion as to how to conduct the share business when the assessee is dealing in shares and held as investment in shares which holding is not disputed by the AO, in so far as, the shares were held for more than one year was acceptable to it. This was considered in the case of CIT vs Gopal Purohit by ITAT Mumbai reported in 228 CTR 582. Similarly in the case of CIT vs R.K.Dhawan reported in 208 Taxation 393 it was held that having found that the assessee had sold the shares which was held by it as investment cannot be treated as stock-in-trade, unilaterally by the AO to be rendering income from business. Coming closer to the Tribunal decisions at Kolkata the ld.counsel had relied on various decision rendered by ITAT, Kolkata being DCIT vs M/s. Eterna Steel & ITA No.312/Kol/2014 A.Y. 2009-10 DCIT Cir-11 Kol. Vs. M/s Machino Finance Pvt. Ltd. Page 4 Investments Pvt. Ltd. in when the Tribunal was pleased to hold that the shares which being already as investment in the immediately preceding assessment year can be considered as income from capital gains on their sale in so far as the intention of the assessee was to hold shares as investment only. In another decision of ITAT, Kolkata in the case of ITO,Ward- 6(2) vs M/s.Lookad Finance & Leasing Ltd. in ITA No.659/Kol/2008, it was held that even the shares purchased in the same year and sold cannot be considered for taxation as business in so far as the assessee had complied with various govt. regulations to hold the shares as per the guidelines of the SEBI cannot be thrust upon the assessee on the sole opinion of the AO to be rendered as business income. Similarly reliance has been placed on ITAT, Kolkata in the case of Coloma Commercial Co. Ltd vs ACIT in ITA No.585/Kol/2009 and also in the case of JCIT vs Shri Deo Kumar Saraf in ITA No.411/Kol2009. The crux of the finding that the assets which have been held as investments have been sold on account of capital and not for business. We are inclined to hold the issue as covered in favour of the assessee, in so far as, the Revenue has not been able to bring out any controverting material which the ld. Counsel for the assessee has submitted that the case laws cited fairly cover the facts which the ld. CIT(A) accepted and allowed the assessee’s appeal who confirmed the returned income on sale of shares as for capital gains. The appeal of the revenue stands dismissed.” Since the issue is already covered in favour of assessee we do not find any reasons to interfere in the order of Ld. CIT(A). Accordingly we uphold. This ground of Revenue is dismissed.

Next issue raised by Revenue is that Ld. CIT(A) erred in deleting the addition made by AO for Rs.50,36,668/- u/s 14A of the Act r.w.s. Rule 8D of the IT Rules, 1962.

Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO in part by observing as under:- “5.3.3 I have carefully considered the submission put forth o behalf of the appellant along with the supporting documents furnished, perused the facts of the gone through the findings of the AO and other materials brought on record. As regard to the disallowance of the expenses by applying section 14A read with rule 8D on the ground, it is submitted that no satisfaction was recorded by the AO. It is apparent from the assessment order that the AO has specifically mentioned that quantum of disallowance has to be made under section 14A read with rule 8D and that, in my opinion, is sufficient to show that the AO was satisfied with regard to the disallowance to be computed under section 14A ad with Rule 8D ignoring the calculation and disallowance under rule 8D2(ii) computed by the appellant. Therefore, this argument of the Ld A/R is not accepted. However, in so far as the calculation of disallowance from interest was concerned, I am in agreement with the contention of the Ld. A/R of the appellant that disallowance on account of interest is to be calculated with reference to the net amount of interest by giving credit to the interest of Rs.90,34,07/- credited in the profit & loss account and accordingly modify the disallowance made u/s. 14A of the Act. thus, this ground of appeal is partly allowed.”

Before us the ld. DR vehemently supported the order of the AO whereas the ld. AR submitted that AO has invoked the provisions of section 14A of the Act without recording the satisfaction. The ld. AR also drew our attention on page 5 of the paper book and demonstrated that the investment was made out of the owned funds of the assessee. The loan fund was obtained during the year and no part of it was invested in shares. The opening balance of the investment was Rs. 18.31 crores and the loan amount of the opening balance was nil.

We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we find that the assessee was having no loan in the previous year and the investment made was of Rs. 18.31 crores. So it is A.Y. 2009-10 DCIT Cir-11 Kol. Vs. M/s Machino Finance Pvt. Ltd. Page 6 clear that the investment was made out of the owned fund in the previous year. The investment and loan in the year under consideration has increased by Rs. 2.98 crores and 12.25 crores respectively. So at the most the interest pertaining to the increased investment of Rs. 2.98 crores can proportionately be disallowed. Besides the above we also find that the AO has failed to establish whether the borrowed fund was utilized for the investment in the shares. It is also important to note that the assessee is having both interest income and interest expenses. In this connection various courts have decided to take the net of interest amount while making the disallowance under section 14A read with rule 8D of Income Tax rules 1962. Therefore we are relying in the order of Jurisdictional Tribunal in the case of DCIT Vs. Trade Apartment Limited ITA no. 1277/kol/2011. The relevant extract is extracted below :