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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM]
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : KOLKATA
[Before Hon’ble Sri N.V.Vasudevan, JM & Shri Waseem Ahmed, AM] I.T.A No. 1882/Kol/2012 Assessment Year : 2008-09
D.C.I.T., Circle-6, -vs.- M/s. K.B.Capital Markets Ltd. Kolkata Kolkata [PAN : AABCK1174F) (Appellant) (Respondent)
I.T.A No. 1726/Kol/2012 Assessment Year : 2008-09 M/s. K.B.Capital Markets(P)Ltd. -vs- D.C.I.T., Circle-6, Kolkata Kolkata [PAN : AABCK1174F) (Appellant) (Respondent)
For the Department : Shri Rajat Subhra. Biswas, CIT(DR) & Shri Rajat Kumar Kureel, JCIT, Sr.DR For the Assessee : Shri D.S.Damle, FCA
Date of Hearing : 09.05.2016. Date of Pronouncement : 13.05.2016.
ORDER Per N.V.Vasudevan, JM ITA No.1882/Kol/2012 is an appeal by the Revenue while ITA No.1726/Kol/2012 is an appeal by the Assessee. Both the appeals are directed against the order dated 10.09.2012 of CIT(A)-VI, Kolkata, relating to AY 2008-09.
The Assessee is a company. The assessee during the previous year carried on the business of share broking, share trading, derivative trading and portfolio management
2 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 services. Besides the above the assessee also made investments of its surplus funds in shares and securities for the purpose of earning dividend as well as for deriving capital gain. The assesee was both a dealer as well as investor in shares. There is no dispute that in respect of income from purchase and sale of shares held in stock in trade, was declared under the head from business and that the gain on sale of shares held as investments was declared under the head ‘capital gains’.
The assessee filed return of income for A.Y.2008-09 declaring total income as follows :-
BUSINESS INCOME NET PROFIT AS PER PROFIT & LOSS A/C 1352,22,624.00 INCOME TO BE CONSIDERED SEPARATELY LESS DIVIDEND (EXEMPT) 42,38,860.00 Interest recd. in this year for Last year considered in last Year return 2,36,917.00 CAPITAL GAINS 1089,05,015.00 DEPRECIATION (AS PER IT) 6,98,815.00 1140,79,607.00 211,43,027.00 ADD DEPRECIATION(AS PER ACCO 11,47,217.00 Expenses disallowed u/s 14A 825,00,965.00 Dividend Stripping u/s 94(7) 37,924.00 15,14,479.00 BUSINESS INCOME 226,57,496.00 CAPITAL GAINS TOTAL CAPITAL GAINS 1089,05,015.00 LONG TERM CAPITAL GAINS (EXEMPT U/s 10) 825,00,965.00 SHORT TERM CAPITAL GAINS 264,04,050.00 TAXABLE AT SPECIAL RATE @ 10% U/S 111A 264,04,050.00 TAXABLE INCOME 490,61,546.00” 2
3 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09
The AO analyzed the transaction which gave rise to long term capital gain and short term capital gain declared by the assessee in the return of income. He analysed the duration of holding, frequency of transactions and conduct of the assessee and came to the following conclusions. :- “The above transactions are summarized in table-1 and table-2. In table-1, all the transactions which have been claimed by the assessee as Short Term Capital Gains have been summarized. In table-2, all the transactions which were claimed as Long Term Capital Gains by the assessee have been summarized. Table -1 Name of the scrip No.of shares Purchase Sale Profit consideration consideration Bank Rajas 15000 5,72,290/- 12,98,620/- 7,26.330/- BHEL 4100 12,80,400/- 66,39,900/- 53,59,500/- Eveready 15459 8,53,252/- 6,62,387/- (1)1,90,865/- GAIL 28000 73,81,145/- 83,72,433/- 9,91,288/- Gold tech. 41000 24,11,980/- 42,65,284/- 18,53,303/- IDBI 71000 56,78,204/- 70,42,400/- 13,64,195/- INDOASIFU 20000 26,65,000/- 20,90,000/- (-)5,75,000/- IPCL 9900 26,37,573/- 32,05,352/- 5,67,779/- JMFINANCIAL 3007 22,92,743/- 72,17,480/- 49,24,736/- MCLEODRUS 30000 17,61,000/- 19,53,038/- 1,92,038/- MSKPROJ 11000 7,34,248/- 19,38,225/- 6,63,976/- MTNL 6000 8,40,560/- 9,60,000/- 1,19,440/- PUNJLLYOD 43360 62,84,968/- 1,29,60,376/- 66,75,407/- SB & TINL 342838 1,47,28,996/- 66,01,854/- (-)81,27,142/- SKUMARYNF 100000 77,84,105/- 92,74,162/- 14,90,056/- SUBEX 1195 5,70,859/- 7,74,240/- 2,03,380/- TRIVENI 115600 59,06,817/- 1,60,72,443/- 1,01,65,625/- Grand Total 857549 6,43,84,147/- 9,07,88,198/- 2,64,04,050/- Table-2 Name of the Total No.of Total Purchase Total sale value Profit scrip shares value L&T 1750 14,83,000/- 42,77,554/- 27,94,553/- MTNL 4000 3,96,200/- 6,40,000/- 2,43,800/- Mukund Ltd. 2399 23,990/- 3,06,975/- 2,82,985/- Pentaloon R. 32370 94,844/- 1,66,93,403/- 1,65,98,559/- Punji Lloyd 6000 8,98,800/- 28,51,897/- 11,83,957/- Skumarsynf 26000 20,05,249/- 34,16,761/- 14,11,511/- Tata Steel 1650 6,48,202/- 14,17,325/- 7,69,123/- 3
4 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 Tata Tea 500 96,225/- 3,83,911/- 2,87,686/- TCI 46515 3,96,951/- 61,48,659/- 57,51,707/- UTUSOF 15459 23,59,558/- 62,71,679/- 39,12,120/- AVAYAGCL 14971 35,27,353/- 36,02,095/- 74,741/- BHEL 2900 15,71,290/- 46,92,600/- 31,21,309/- BIRLA JUTE 4209 1,36,261/- 11,51,351/- 10,15,090/- BLUE DART 154 13,259/- 1,23,508/- 1,10,248/- EI HOTEL 31488 16,44,230/- 58,22,280/- 41,78,050/- FEDERAL 22646 39,99,592/- 80,58,550/- 40,58,958/- BANK HINDSANIT 10000 0 9,84,719/- 9,84,719/- ITC 15750 18,34,212/- 32,68,089/- 14,33,876/- JM 15508 1,22,01,266/- 3,57,16,080/- 2,35,14,813/- FINANCIAL KTK BANK 68000 65,32,538/- 1,44,33,259/- 79,00,721/- ZEE TELE 2500 3,01,007/- 8,92,500/- 5,91,492/- TAURUS MF 8313 1,00,000/- 3,04,488/- 2,04,488/- DISH TV 1438 29,796/- 1,53,147/- 1,23,350/- Grand Total 335415 4,09,99,926/- 12,35,00,890/- 8,25,00,963/-
In addition to the above, the trading result as disclosed by the assessee is summarized as under :- Table -3 Sale of Shares Rs.14,29,53,662/- Add: Increase in stocks Rs. 2,72,01,653/- Rs.17,01,54,227/- Less : Purchase of shares Rs.16,76,21,660/- Rs. 25,33,615/-
The total expenses debited in the account is about 2.19 crores. If the table-I, table-2 and table-3 are compared, it is observed that the assessee company has misclassified the profit out of purchase and sale of shares to reduce its tax liability. In table-I, the assessee has misclassified the profit of Rs.2,64,04,050/- as Short Term Capital Gain to get the benefit u/s.111 A relating to Special Rate of Taxes. In table-2, the assessee has misclassified the profit as Long Term Capital Gain to get the benefit of tax exemption. The Table-S reveals that the sales and purchases of shares without any substantial profits have been classified as trading activities. The assessee has also manipulated its accounts so that Explanation below Section 73 is not attracted in its case. “
Based on the above analysis of the transactions giving raise to long term capital gain and short term capital gain, the AO was of the view that short term capital gain of Rs. 4
5 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 2,64,04,050/- and Long Term Capital Gain of Rs 8,25,00,965/- should be treated as business profit. The assessee submitted before the AO that it had maintained distinct portfolio of shares held as investments and that held as stock-in-trade and therefore the head of income under which it had declared gain on sale of shares viz., short term and long term capital gain should be accepted. The AO however held that the contention of the assessee cannot be accepted in view of the discussion made by the AO on the pattern of purchase of sale of shares held by the Assessee as investments. The AO also observed that the main business of the assessee was purchase and sale of shares and the classification of the shares as investments and stock-in-trade was merely a device to reduce tax liability. The AO further observed that examination of Table-I given above would reveal that (i) the assessee has purchased 857549 shares, (ii) the total purchase consideration is Rs.6,43,84,147/-, (iii) the total sale consideration is sRs.9,07,88,198/-, (iv) the average holding period is less than six months, (v) the profit is Rs.2,64,04,0501- The assessee has made a series of transactions regularly and these transactions are its organized and regular business activities. The assessee company does not maintain any separate demat accounts for these transactions. The assessee is a SEBI registered Stock Broker. It carries out activities of sale & purchase of shares as a member of NSE. The series of transactions in table-I constitutes adventures in the nature of trades. Considering the magnitude and volume of transactions, the period of holding, frequency of transactions and the nature of activities and also common demat accounts, the profit shown in table 1 was held by the AO as the business income of the assessee. Similarly for transactions evidenced by Table-2 above, the AO observed that (i) the assessee has purchased 335415 shares, (ii) the total purchase consideration is Rs.4,09,99,926/-, (iii) the total sale consideration is Rs.12,35,00,890/-, (iv) the profit is Rs.8,25,00,963/-. He also observed that the Assessee did not maintain any separate demat accounts for these transactions. For the same reasons given for concluding that gains on sale of shares described in Table-I as giving raise to income from business, the AO held that income from purchase and sale of shares described in Table-2 is also income from business. 5
6 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 The AO thus held that the profit of Rs.2,64,04,050/- as shown in Table-I and the profit of Rs.8,25,00,963/- as shown in Table-2 were to be treated as the business income of the Assessee. 6. Aggrieved by the order of the AO, the assessee preferred appeal before CIT(A). The contention of the assessee before CIT(A) was that (a) that the assessee over a number of years was carrying on business of dealing in shares and securities and was also making investments of its surplus capital in shares and securities for the purpose of earning dividend and deriving capital gain. (b) the assesse had in its books of accounts given a distinct accounting treatment in respect of shares held as investments and the shares held as stock in trade of business (c) that in the past the assessments completed on similar set of facts, the revenue has accepted that the income on sale of shares held as investments gave rise to capital gain. (d) the assessee relied on the ruling of the AAR in the case of Fidelity North Star Fund and others 288 ITR 641 wherein it was held that the entries made in the books of accounts whereby the shares are shown as investment or stock in trade would be more material in coming to the occlusion whether the gain sale of shares would give rise to business income or income under the head capital gain. (e) the assessee pointed out that gains arising from sale on long term capital asset cannot by any stretch of imagination be treated as income from business and disregard to the contention of the CIT(A) that long term capital asset and short term capital asset as defined in section 2(29A) and 2(42A) of the Income Tax Act, 1961 (Act). (f) the assessee relied on several judicial pronouncements in support of its claim that income from sale of shares held as investment can give rise only to income under the head ‘capital gain’ and that the assessee can be both a dealer in shares holding shares as stock in trade and also holding shares as investments and that the entries in the books of account in this regard will decide the head of income under which the gains on sale of shares will be assessed.
7 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 7. The CIT(A) on consideration of the above submissions and the judicial pronouncements came to the following conclusion : “20. On the analysis of the various decisions relied upon by the appellant and the Assessing Officer it is observed that there is no specific terms and conditions, which can be applied mechanically to come to a conclusion. The issue regarding taxation of gains from shares depends upon the facts and circumstances of each case. The Hon'ble appellate Courts have determined the issue on the facts of each case giving the various points/issues considered' for coming to a conclusion regarding the head of income under which the share profit is to be taxed.
The frequency of buying and 'selling of shares by the appellants were high; only one demat account; the period of holding was less in the case of short term capital gain; interest being paid by appellant on borrowed money in common kitty for trading and investments; the high turnover was on account of frequency of transactions; the assessees had dealt in delivery trading purely with the intention of making quick profits on a huge turnover; the period of holding of a majority of the stock was few days; in most of the transactions, the asses sees did not even hold on to at least some part of the huge purchases and had engaged in the same scrips frequently; the intention of the assessees in buying shares was not to derive income by way of dividend on such shares, but to earn profits on the sale of the shares; the asses sees had indulged in multiple transactions of different quantities with very high periodicity. These periodic transactions, selecting the time of entry and exit in each scrip, called for regular direction and management which would indicate that it was in the nature of trade; repeated transactions, coupled with the subsequent conduct of the assessees to re-enter the same scrip or some other scrip, in order to take advantage of market fluctuations lent the flavour of trade to such transactions; the assessee was purchasing and selling the same scrips repeatedly, and was switching from one scrip to another; the dominant impression left on the mind was that the ssessee had not invested in shares; mere classification of these share transactions as investment in the assessee's books of accounts is not conclusive; the intention of the assessee at the time of purchase was only to sell the shares immediately after purchase; frequency of purchase and sale of shares showed that the assessees never intended to keep these shares as investment; and it is only for the purpose of claiming benefit of lower rate of tax, under Section 111 A of the Act, that they had claimed certain shares to be investment, though these transactions were only in the nature of trade. The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case.
The investments has been accepted by the Assessing Officer in his assessment order passed u/s 143(3) dated 31.12.2009 for the Assessment Year 2007-08 amounting to Rs.222,733,497/- as closing balance as on 31st March 2007. The Assessing Officer has also accepted the amount of Rs.4,55,57,618/- as closing balance which has been subsequently calculated to be investments for short term capital gain by the Assessing officer. There are peculiar facts and circumstances where in the earlier assessment year 2007-08 the investments shown by the appellant have been upheld as investments by the 7
8 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 Assessing Officer but in the subsequent year the same figure has been treated as stock in trade for denying the benefit of capital gain on sale of shares. As per the various facts & circumstances mentioned in Para 9 and after considering the observations of the Assessing Officer in the assessment order and submissions of the appellant and aforesaid discussion on this issue in detail, the short term capital gains on sale of shares is being held to be business income. It is held that the sale and purchase of shares shown in the investments portfolio except long term capital gains is treated as business income under the head of 'profits & gains of business' for the current assessment year. The gain on sale of shares having short term capital gains is held to be assessed as business income. The long term capital gain shown by the assessee is accepted as long term capital gains. The appellant will not get the benefit of closing stock of investments shown in the final accounts as on 31 st March 2008 to be considered as capital gains in the Assessment Year 2009-10 merely because it has been accepted so in this appellate order. The appellant has given the details of shares in the investment folio in which there is short term capital gain. As per appellant the short term capital gain amounts to RS.2,64,04,051/-. The Assessing Officer will treat the same i.e. amounting to Rs.2,64,04,051/-. as business income after due verification and Rs.8,25,00,964/- as long term capital gain. These grounds of appeal are accordingly decided. The appeal on issue of short term capital gain to be treated as short term capital gain instead of business income is dismissed. 23. The Hon'ble appellate Courts have determined the issue on the facts of each case giving the various points/issues considered for coming to a conclusion regarding the head of income under which the share profit is to be taxed. The long term capital gain amounting to Rs. 8,25,00,964/- is held to be long term capital gain exempted u/s 10(38) of the Income-tax Act, 1961. The amount of Rs.2,64,04,051/- is held to business income instead of short term capital gain. These 5 (five) grounds of appeal are accordingly decided and the order of the Assessing Officer is upheld on this issue.”
Aggrieved by the order of CIT(A) holding that gains on sale of shares declared by the assessee as short term capital gain gives rise to income from business and the consequent finding of the CIT(A) in this regard has raised ground no.1 to 6 before this Tribunal which read as follows :- “1) For that on the facts and in the circumstances of the case, the CIT CA) erred on facts and in law in directing the AO to assess the gains realized on sale of investment shares; held for period less than 12 months; under the head "profits & gains of business" as opposed to "short term capital gains" claimed by the appellant. 2) For that on the facts and in the circumstances of the case, the lower authorities failed to appreciate that the appellant in it's books had maintained clear distinction between the trading stock of shares & Investments and followed different and distinct methods of accounting in relation thereto and therefore the ClT (A) was unjustified in upholding the assessment of only short term capital gains under the head "profits & gains of business". 8
9 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09
3) For that on the facts and in the circumstances of the case, the lower authorities not having disputed the genuineness of the audited accounts nor having proved any infirmity in the accounts nor having invoked provisions of Sec. 145 of the Act, the CIT CA) was grossly unjustified in holding Para-25 of the Appellate Order that the Investment in shares disclosed in the Balance-sheet as on 31 st March 2008; should not be accepted to be Investments in relation to appellant's assessment for the A. Y. 2009-10 & onwards. 4) For that on the facts and in the circumstances of the case, the findings of the Ld. CIT CA) with regard to assessment of short term capital gains under the head 'profits & gains of business' and his direction to the AO not to accept depiction of Investments in shares as on 31 st March 2008 as & by way of Investment; in the subsequent assessment year; be held to be perverse as the same is not based on any cogent material and reasoning and the same be held to be arbitrary. 5) For that on the facts and in the circumstances of the case, the AO be directed to assess the short term capital gains of Rs.2,64,04,051 /- under the head 'capital gains' and be further directed to charge the tax at the rate prescribed in Sec. 111A of the Act. 6) For that on the facts and in the circumstances of the case, the A'O be directed to accept Rs.27,97,93,524/- being Investment in shares as on 31 st March 2008 as Investment for A.Y. 2008-09 and the subsequent years since such Investments were accounted in the books "at cost" and not on the principle of "lower of the cost or market value".
Aggrieved by the order of CIT(A) in coming to the conclusion that the gain on sale of shares held for more than 12 months by the assessee give rise to long term capital gain the revenue has raised ground no.1 before this Tribunal which read as follows :- “1. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in holding the business income from sale of shares to be treated as long term capital gain and get exemption u/s 10(38) of the I.T.Act,1961.”
We have heard the submissions of the learned counsel for the assessee, who reiterated the submissions as were made before CIT(A). The learned counsel also drew our attention to the Circular of CBDT dated 29.02.2016 i.e. No. 6/16 whereby CBDT dated 29.02.2016 has clearly laid down that the shares and securities held for a period of 12 months, the gain on sale of those shares if claimed by the assessee, as long term capital gain should not be disputed by the AO. According to him therefore based on the aforesaid circular, the grounds raised by the revenue have to be rejected. As far as ground no.1 & 2 raised by the Assessee is concerned, the ld. Counsel for the assessee 9
10 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 the assessee besides reiterating submissions as were made before CIT(A) also submitted that in the assessments completed for A.Yrs. 2006-07 and 2007-08, similar type of transactions were carried out by the assessee and gain on sale of shares held as investment were declared as short term capital gain and the same were accepted by the revenue in the assessments completed u/s 143(3) of the Act. He placed reliance on the decision of Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit 336 ITR 287 wherein the Hon’ble Bombay High Court held that though the principle of res judicata is not applicable to the assessment proceedings there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. It was also a case of a person who declared gain on sale of shares held as investments as capital gain and the revenue had treated the said gain as giving raise to income from business. He also brought to our notice that SLP preferred against the aforesaid decision of the Hon’ble Bombay High Court has been dismissed by the Hon’ble Supreme Court. Besides the above our attention was also drawn to the fact that in assessment completed for A.Yrs. 2010-11 to 2012-13 u/s 143(3) of the Act the revenue has accepted the claim of the assessee that gain on sale of shares held as investments give rise to capital gain. The relevant assessment orders were placed in the paper book filed before us.
The ld. DR while placing reliance on the order of AO submitted that the facts and circumstances of each will not be looked into before coming to the conclusion whether gain on sale of shares held as investment should be treated as capital gain or income from business. He placed reliance on the CBDT Circular No. CBDT Circular No.4/2007 dated 15/6/2007, wherein the department has laid down certain guidelines for deciding the question as to whether income from sale of shares will give raise to capital gain or income from business.
We have given a careful consideration to the rival submissions. As far as the appeal of the Revenue is concerned, the question is whether the Long term Capital Gain 10
11 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 declared by the Assessee can be said to be income from business, the reasoning given by the AO in this regard was making a reference to the fact that the activity of making investment had been carried out by the Assessee in a systematic and organized manner and over a number of years and therefore would constitute business. In this regard, we find that this controversy as to whether income on sale of shares ought to be regarded as income under the head “capital gain” or “Business Income” created lots of dispute and with a view to clarify the position the CBDT had come out with a Circular No.6/2016. The relevant portion of the circular as far as the present appeal of the revenue is concerned, is as follows: “In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;”
We are of the view that the above Circular should settle the controversy in favour of the Assessee, in the facts and circumstances of the case of the Assessee. We have already observed that the Assessee has been consistently maintaining two portfolio of shares one held as investments and the other held as stock-in-trade of business of dealing in shares. As far as the income on sale of shares held as investments is concerned, the Assessee has always been declaring such income under the head “Capital Gain” and the same has been accepted by the revenue in the past assessments. We therefore uphold the order of the CIT(A) in this regard and dismiss Ground No.1 raised by the Revenue.
As far as the appeal of the Assessee is concerned, the first issue to be decided is as to whether the STCG on transaction of purchase and sale of shares undertaken by the assessee during the previous year is to be assessed under the head ‘income from business’ as claimed by the revenue or income under the head ‘capital gain’ as contended by the assessee. If it is held that STCG declared by the Assessee has to be 11
12 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 accepted under that head of income, then the other grounds of appeal regarding valuation of closing stock of shares etc., become academic and need no adjudication.
Before we deal with the facts of the case of the assessee, we will briefly narrate the principles applicable in deciding the above issue as laid down in several judicial pronouncements :-
(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. Holck Larsen, 60 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 hold by him as investments and those hold as stock in trade. (CIT Vs. Associated Industrial Development co. Ltd., 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., 113 ITR 173 (Guj); Raja Bahadur Viswshwara Singh Vs. CIT, 41 ITR 685 (SC). (d) Purchase without an intention to resell where they are sold under changed circumstances would be capital gains. CIT Vs. PKN, 60 ITR 65 (SC). Purchase with an intention to resell would render the gain profit on sale business 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, 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, 57 ITR 21 (SC).
The above tests have again been reiterated by the CBDT in its Circular referred to by the learned DR before us. Keeping in mind, the above broad principles, we shall now examine the case of the assessee. The factors which go in favour of the Assessee that the income in question is short term capital gain (STCG) are as follows:
The fact that in the earlier AYs i.e., AY 06-07 & 07-08 in assessment completed u/s.143(3) of the Act, on identical volume of transaction, has accepted the case of the Assessee that income from purchase and sale of shares is STCG and not business 12
13 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 income. The same position continued in assessment for AY 2010-11 & 2011-12 also. A chart is annexed to this order as annexure-1 which gives the comparative component of capital gain (Short term/Long term and income from share trading. A reading of the said chart would show that the volume of gain under the head STCG has been consistent and no adverse inference can be drawn against the Assessee in this regard. 2. A chart showing the average holding period of investments sold during the previous year by the Assessee indicating the average holding period is given as annexure-2 to this order. A perusal of the same would show that the holding period has been substantially high in respect of shares which gave raise to STCG. 3. The shares which were sold and which gave raise to STCG were held by the Assessee as investments in its books of accounts. The treatment in the books of accounts is thus as investments and this will be one of the important criteria which will support the plea of the Assessee that the income in question is STCG. 4. No borrowed funds had been utilized for making investments. 5. There is no bar in law that a person who does share trading as business cannot hold shares as investments and that he can have two portfolios one of shares one held as investment and the other as stock-in-trade of business.
In CIT Vs. Gopal Purohit 228 CTR 582 (bom), the question of law raised was regarding whether STCG declared by the Assessee was to be assessed as business income or not. Question (b) considered by the Hon’ble Bombay High Court was as follows: “(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 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 resjudicata to preclude the authorities from holding such transactions as business activities in current year?”
The Hon’ble Bombay High Court held as follows: “3. 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
14 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 Assessment Year in question. Question (b), therefore, does not also raise any substantial question.”
The above decision of the Hon’ble Bombay High Court is clearly applicable in this case. As we have already seen that the AO in AYs 2006-07 & 2007-08 the AO accepted the plea of the Assessee and assessed income declared on purchase and sale of shares as giving raise to STCG in assessment completed u/s.143(3) of the Act. We have also seen that the facts and circumstances in the present AY and the AYs referred to above were identical. Though the rule of res judicata is not applicable but the principle of consistency will definitely apply and on that basis the claim of the Assessee should be held to be proper.
The Hon’ble ITAT Mumbai Bench decision in the case of Janak S.Rangwala Vs. ACIT 11 SOT 627 (Mum) has been held that magnitude of the transaction does not alter the nature of the transaction. Therefore magnitude of transactions carried out by the Assessee, in our view, should not be very material in coming to the conclusion that income in question is income from business.
On a consideration of the facts and circumstances of the present case and in the light of the principles laid in judicial pronouncement referred to above, we are of the view that the income in question has to be assessed under the head “Short Term Capital Gain” as declared by the Assessee. Gr.No.1 & 2 raised by the Assessee are accordingly allowed. In view of the decision on ground No.1 & 2, we are of the view that the other connected grounds of appeal No.3 to 6 are either consequential or do not call for any adjudication.
Ground No.7 raised by the assessee and ground no.2 by the revenue can be decided together. These grounds read as follows :- Ground No.7 raised by the Assessee: 14
15 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 “7) For that on the facts and in the circumstances of the case, the CIT CA) erred in law and on facts in upholding the disallowance of expenses u/s 14A in conformity with Rule 8D of the Income Tax Rules without pointing out any specific infirmity in the assessee's working of the amount disallowable u/s 14A.” Ground No.2 raised by the Revenue: “2. Whether on the facts and circumstances of the case, Ld. CIT(A) erred in law in holding that the opening value of investments will be reduced by the amount of short term investments sold during the year to calculate the disallowance u/s 14A of the I.T.Act.”
It is not in dispute that the assessee earned dividend income does not form part of the total income. In view of the provisions of section 14A of the Act which provides that the expenditure incurred in earning income which does not form part of the total income under the Act, should not be allowed as deduction while computing the total income, AO wanted to disallow expenses claimed by the assessee in arriving at its income from business. The assessee on his own had computed the disallowance u/s 14A of the Act added a sum of Rs.3,29,313/- and had also given the basis of such disallowance in its submission dated 7.10.2010 filed before the AO. The said disallowance comprised of direct expenditure in nature of demat charges, transaction charges and salary of one employee and 10% of Director's salary involved in the investment & broking division. The AO however was of the view that the aforesaid disallowances was not proper and he computed the disallowance u/s 14A of the Act by applying Rule 8-D of the Income Tax Rules, 1962 (Rules), which was as follows :- “The assessee has computed the disallowance of Rs.3,29,338/- u/s 14A vide its submission dated 7-10-2010. Since it is not computed as per Rule 8D, it is not accepted. The assessee company had earned exempt income i.e. dividend of Rs.4238860/- during this financial year relevant to the assessment year 2008-09. The disallowance u/s 14A read with rule 8D is calculated as under :- 1)Depository charges Rs.351494/- Opening Value of investments Rs.222733496/- Closing Value of investments Rs.279793524/- Total Rs.502527020/- Average value Rs.251263510/-…..[B] Opening Value of total assets Rs.268186865/- Closing Value of total assets Rs.423659800/- Total Rs.691846665/- 15
16 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 Average Value Rs.345923332/-…..[C] Interest Rs. 2429451/-……[A] 2)A x B = 2429451 x 251263510 = Rs.1764646/- C 345923332 3) ½% of average value of investment Rs.251263510/- comes to Rs.12,56,318/- Therefore total amount [1+2+3] [351494/- + 1764646/- + 12,56,318/-] inadmissible u/s 14A read with Rule 8D comes to Rs.33,72,458/-.”
On appeal by the assessee the CIT(A) confirmed the order of AO. “26. I have considered the submissions of the Authorised Representative and have perused the audited accounts of the appellant for the AY 2008-09. It is the plea of the appellant that it carries on business activities through multiple divisions though underlying transactions conducted' by these divisions involves purchase and sale of shares and securities. It is the assessee's plea that it maintains separate accounts for each of the division which inter alia include investment division from which the assessee derives income by way of capital gains and dividend. The income derived from this division substantially qualifies for exemption under Section 10(34) or 10(38) of the I.T. Act, 1961. The Authorised Representative primarily argued that the expenses incurred in relation to investment division were identifiable and therefore the disallowance under Section 14A should be made in relation to expenses of the investment division only and not in accordance to Rule 8D of the I.T. Rules,1962. It is also the assessee's plea that since net owned funds by way of capital and reserves were sufficiently large to cover the cost of investments no part of the interest paid was liable to be disallowed under Rule 8D(2)(ii) of the Act.
I am however unable to accept the submissions of the Authorised Representative because the divisional accounts of the assessee are prepared by the assessee according to its own convenience and as per assessee's subjective assessment as to what expenditure was relatable to each division. I do not find any scientific basis adopted by the assessee in allocating the expenses to each division. The assessee has maintained one single and composite business establishment for carrying on different business activities in different segments of capital markets. The expenses and overheads relate to such common business establishment relate to incomes derived from all business sources and segments. It is practically impossible to segregate common business overheads and correlate the same with any particular source of income at present proceedings. Section 14A was introduced in the I.T. Act, 1961 which clarified the legislative intent that where exemption is to be allowed then the exemption should be 16
17 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 allowed in respect of net income and not in respect of gross receipts after deducting expenses pertaining to exempted income. The expenses which are debited in the taxable income reduce it thereby showing a lesser income and thereby less amount of taxes. The expenditure incurred for earning exempted income is debited to reduce the taxable income. Rule 8D has a legislative sanction and it is to be applied in all cases where it is not possible to determine exactly the expenses incurred in relation to earning of tax free income and the appellant has also not able to, show the exact expenditure incurred for earning exempted .income. In a given case, like the assessee's where assessee maintains one single business establishment which caters to needs of all segments, there cannot be any certainty about the correlation between any particular head of expenditure and earning of income from different sources. It is for the simple reason that there cannot be direct and proportional relation between earning of income and incurring of administrative expenses. Similarly when all business transactions; and business funds are routed through a common bank account individual identity of the funds is lost and therefore it is impossible to ascertain to what extent borrowed and owned funds get used in acquiring investments which produce dividend income ..
In the present case the assessee has not been able to establish with sufficient material that the manner of calculating the amount disallowable for earning the exempted income (i.e. income not forming part of total income), as per his working was the correct method and that no other expenses were incurred in relation to earning of tax free income. I am satisfied that the claim of expenditure incurred and shown by the appellant with regard to the accounts is not correct. Once the assessee has failed to establish his explanation then the only course permissible for working out the amount disallowable is application of Rule 8D. I am satisfied that the expenses shown by the appellant are not correct having regard to the entries in the books of accounts. For the reasons set out above, I therefore held that in the appellant's case the disallowance under Sec 14A was required to be made in conformity with Rule 8D by the Assessing Officer. This ground of appeal is therefore dismissed.
The appellant has suo moto disallowed an amount of Rs.3,29,338/- as expenses on the earning of exempted income in the return of income. The appellant has received dividend amounting to Rs.42,38,860/- and capital gain of Rs.8,25,00,963/- as per the figures shown in the return of income. The disallowance involves basically direct expenditure in nature of demat charges, transaction charges and salary of one employee and 10% of Director's salary involved in the investment & broking division. The disallowance made by the appellant is inadequate looking into the scale of operations, efforts involved, 17
18 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 administrative expenditure incurred by the appellant, amount involved in investments much higher i.e. almost 4 times of the stock-in-trade and involving 80% of capital & free reserves. The appellant has establishment and other expenses amounting to Rs.1,86,55,302/- and depreciation of Rs.11,47,217/-. The income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The appellant has not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. I am satisfied that the expenditure disallowed by the appellant of Rs.3,29,338/- is far less than the actual expenditure incurred for earning income which does not form part of business Income. …….. 35. The expenditure as per Section 14A read with Rule 8D is to be determined on the basis of the "investment" calculated in this order. The opening value of investments will be reduced by thy' amount of short term investments sold during the year which is included in the' opening investments. The calculation of the opening value of investments is as follows: Opening Investments as per Balance Sheet 22,27,33,496 Less: Short Term Investments 4,55,57,618 Net Opening Investments 17,71,75,878
The calculation for the disallowance on the basis of the above working as ' submitted by the appellant is as follows: Particulars Amount (Rs.) (i) Expenditure directly attributable to earning 3,51,494 exempt income . (ii)Interest not directly attributable-to any particular income = Interest expenditure X Average value of investments Average of total assets 22,84,84,701 = 24,29,451 X 34,59,23,333 16,04,669 (iii)Amount equal to 0.50% of the average value of investments
19 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 = 0.50% X 22,84,84,701 11,42,424 Expenditure in relation to income not includible in total 30,98,586 income Less: Expenditure already disallowed by appellant (3,29,338) Expenditure to be disallowed 27,69,248
Therefore the disallowance under Section 14A read with Rule 8D is calculated at Rs:30,98,586/-. The appellant itself has disallowed an amount of Rs.3,29,338/- and thereby the net disallowance is determined at Rs.27,69,248/-. The figure of closing stock of investment taken for calculation does not give rise to any right to the appellant to consider the whole of closing amount of investments necessarily to be considered as investment in the next year since the figure has been taken only for the purposes of calculation of working of disallowance under Section 14A read with Rule 8D for this assessment year. The disallowance is very reasonable looking into the scale of transactions involving exempted income of dividends and long term capital gain. The Assessing Officer will verify the figures from the assessment record and disallow the amount accordingly. In case of any variation, from the figures as mentioned above, he will pass a speaking order. This ground of appeal is partly allowed ..
Aggrieved by the relief granted by CIT(A) the revenue has raised ground No.2 before the Tribunal. Aggrieved by the order of CIT(A) sustaining the disallowance as made by AO in part the assessee has raised ground no.7 before the Tribunal.
We have heard the rival submissions. It was brought to our notice at the time of hearing that the disallowance under Rule 8D (2)(ii) namely disallowance of interest expenditure of Rs.16,04,669/- cannot be sustained. In this regard our attention was drawn to the order of CIT(A) for A.Y.2007-08 in appeal No.1018/CIT(A)-VI/2009-10 dated 31.10.2011 wherein a specific finding has been given that investments in that year were made out of assessee’s own funds. It was further brought to our notice that the aforesaid finding of the CIT(A) has attained finality and the order of ITAT in ITA NO.582/Kol/2011 and 607/Kol/2011 dated 05.11.2015 of ITAT, Kolkata was filed before us. The ld. Counsel submitted that during the previous year there were 19
20 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 investments made to the tune of Rs.5.50 crores and that was funded out of the profits derived by the assessee during the previous year. In this regard our attention was also drawn to the fact that the income from sale of shares, brokerage, portfolio management & advisory fees etc derived by the assessee during the previous year was more than Rs.18 crores. It was also submitted that the funds available with the assessee as per the balance sheet as on 31.03.2008 was much more than the investments made during the previous year. The ld. Counsel for the assessee placed reliance on the decision of the Hon’ble Bombay High Court in the case of HDFC Bank Limited (2014) 49 Taxman.com 335 (Mum) wherein the context of disallowance u/s 14A of the Act the Hon’ble Bombay High Court took a view that where the assessee’s own funds and other non interest bearing funds were more than the investments in tax free securities no disallowance of interest u/s 14A of the Act can be made. The Hon’ble Bombay High Court in this regard placed reliance on the decision in the case of CIT vs Reliance and Power Ltd. 313 ITR 340 (B). The ld. Counsel for the assesse further submitted that the disallowance u/s 14A of the Act cannot be made on a notional basis and in this regard referred to certain judicial pronouncements. The ld. DR relied on the order of AO.
We have given a very careful consideration to the rival submissions. As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore no disallowance of interest expenses ought to have been made. A perusal of Balance sheet of the Assessee as on 31.3.2008 will show that the Assessee had own funds of 34.84 Crores and investment were acquired at cost of Rs.27.97 Crores. Therefore the disallowance of interest expenses of Rs. 16,04,669/- is directed to be deleted.
As far as disallowance of other expenses under Rule 8D(2)(iii) of the Rules i.e., disallowance of other expenses is concerned, we find that the Assessee had suo moto 20
21 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 disallowed an amount of Rs.3,29,338/- as expenses on the earning of exempted income in the return of income. The Assessee has received dividend amounting to Rs.42,38,860/- and capital gain of Rs.8,25,00,963/-. The basis of disallowance made by the Assesssee was direct expenditure in nature of demat charges, transaction charges and salary of one employee and 10% of Director's salary involved in the investment & broking division. The finding of the CIT(A) is that the disallowance made by the Assessee cannot be said to be adequate looking into the scale of operations, efforts involved, administrative expenditure incurred by the Assessee, amount involved in investments was much higher i.e. almost 4 times of the stock-in-trade and involving 80% of capital & free reserves. The Assessee’s has claimed establishment and other expenses amounting to Rs.1,86,55,302/- and depreciation of Rs.11,47,217/-. The income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The Assessee had not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. It cannot therefore be said that the revenue authorities were not justified in disregarding the disallowance made by the Assessee on its own by pointing out specific infirmity in the Assessee’s working of the amount disallowable under Section 14A of the Act. Keeping in mind the above findings of the CIT(A), we are of the view that the disallowance of other expenses as sustained by the CIT(A) of Rs.11,42,424 under rule 8D(2)(iii) of the Rules is proper and calls for no interference. We however clarify that the amount already disallowed by the Assessee in the computation of total income should again not be added. In other words, the disallowance u/s.14A of the Act shall be only Rs.11,42,424/-. We hold accordingly and partly allow the ground of appeal No.7 raised by the Assessee.
22 ITA No.1882&1726/Kol/2012 M/s.K.B.Capital Markets Ltd. A.Yr.2008-09 28. The other grounds of appeal viz., Grounds No.8 to 10 were not pressed by the Assessee as they have become infructuous. Ground No.11 raised by the Assessee is general in nature and calls for no specific adjudication.
In the result, the appeal by the Assessee is partly allowed, while the appeal by the revenue is dismissed.
Order pronounced in the Court on 13.05.2016.
Sd/- Sd/- [Waseem Ahmed] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 13.05.2016.
[RG PS]
Copy of the order forwarded to:
1.M/s. K.B.Capital Markets (P)Ltd., 25, Swallow Lane, Kolkata-700001. 2. D.C.I.T., Circle-6, Kolkata. 3. CIT(A)-VI Kolkata 4. CIT-II, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.