DCIT, CIRCLE - 12, KOLKATA, KOLKATA vs. M/S. HOBB INTERNATIONAL PVT. LTD., KOLKATA

The AO was of the view that the frequency and volume of the transactions which have resulted in the long term capital gain and short term capital gain declared by the assessee was of such a nature that it has to be construed that the assessee indulged in the business of purchase and sale of shares/unit and therefore long term capital gain and short term capital gain had to be construed as income from business. In response to query in this regard by the AO, the assessee submitted that the shares and units in question were reflected as investments in the balance sheet and were not stock in trade of any business carried on by the assessee. The assessee also pointed out that in the past such income was declared under the head capital gain and accepted by the revenue. It may be mentioned here that in A.Y.2003-04 assessment u/s 143(3) was completed in the case of the assessee wherein identical nature of income was accepted by the AO as income under the head capital gain. AO however made a reference to the CBDT Instruction No.1827 dated 31.08.1989 wherein principles and guidelines to be applied to decide whether the assessee is a trader in shares or not were laid down. AO was of the view that if guidelines laid down in the aforesaid circular in the light of the transactions carried out by the assessee are considered then it would be a case where income from purchase and sale of shares/units had to be regarded as income from business. The AO drew the following conclusions in this regard : (a) the assessee is dealing in shares and units throughout the year. (b) the volume of transactions is quite substantial (c) the scale of activity is vast covering a wide range of units and scripts. (d) the typical holding period for the majority of the shares and units varies from as little as a few months to just over a year. 2 “Consequently, the profit on sale of investments in shares and units is being computed under the head “Income from business” as under : From the audited accounts of the assessee, it is seen that the assessee has shown investments of Rs.3,99,76,903/- and Rs.3,69,34,515/- (stated at cost ) as on 31.03.2004 and 31.03.2003 respectively as detailed under : 2004 2003 UTI Us-64 13,72,725 13,50,000 Mutual Fund 3,71,41,758 3,42,40,196 Equity Shares 14,62,420 13,44,319 3,99,76,903 3,69,34,515 The corresponding market value are shown as under : 2004 2003 UTI Us-64 13,72,725 13,50,000 Mutual Fund 3,71,41,758 3,42,40,196 Equity Shares 15,44,405 13,46,084 4,00,58,888 3,69,36,280 The valuation of these “stock-in-trade” at cost or market price, whichever is lower is then as under “ Closing Stock Rs.3,99,76,903/- Opening stock Rs.3,69,34,515/- The income from business of trading in shares and units is then calculated as under : Closing stock Rs.3,99,76,903/- Less: Opening stock Rs.3,69,34,515/- Increase in stock Rs. 30,42,388/- Add : Profit on sale of share/mutual Funds Rs. 40,20,499/- Income from business Rs. 70,62,887/-“

Aggrieved by the order of AO assessee preferred appeal before CIT(A). Before CIT(A) the assessee contended that investments in shares and mutual funds were made with a view to enjoy the dividend income and not with a view to carry on in the business of purchase and sale of shares/unit. The assessee pointed out that as per the main objects of the Memorandum of Association of the assessee was that its business was to act as export house carrying on the manufacturing activity, Import and export of engineering products etc. The assessee pointed out that as per the CBDT’s Instruction No.1827 3 &C.O.92/Kol/2010 M/s. HobbInternational Pvt. Ltd. A.Yr.2004-05 dated 31.08.1989 distinction has to be made between shares held as stock in trade and shares held as investments. The assessee specifically pointed out that the guidelines laid down in the circular clearly specify that no single criterion listed in the said instruction was decisive and the total effect of all the criteria should be considered. The assessee specifically pointed out that units of mutual funds are generally redeemed and they are listed and sold in the market. Such redemption cannot be treated as any systematic activity in the nature of business. The assessee again reiterated its stand that identical income had been accepted in the past by the revenue as income under the head capital gain. CIT(A) on consideration of the aforesaid grounds held that the income in question has to be assessed under the head capital gain. The following were the relevant observations of the CIT(A) :- “Before me the appellant filed copies of its audited final accounts for the relevant year and for earlier years, i.e., 2001-02, 2002-03, 2003-04 & 2004-05 and other documents. From the perusal of these evidences it is observed that the shares/units of mutual funds purchased by the assessee have been classified as 'Investment' in its books of accounts and the assessee has carried its investments in such shares/units, in its books of accounts, at 'cost price' and not at 'Cost or which is generally the case of goods are held as stock-in- trade. The investments, in this case, have been clearly disclosed in the Balance Sheet. When the units/shares are accounted for in the books as investment, the volume of transactions/ frequency of transaction alone of such shares/units cannot alter its status from investment to that of trading. After careful consideration of the observations/ findings recorded in the assessment order as well as the contentions of the appellant, I am of considered opinion that the Assessing Officer was not justified in consider the transactions relating to redemption of units and sale of shares as a business activity. Profit on sale of such shares held as investment is assessable as income under "Capital Gains". The AO's finding cannot therefore be accepted. Considering the above facts, it is held that the profit on sale of shares and units of mutual funds by the assessee is to be assessed under the head 'capital gain'. ' I agree with view of the appellant that there is no scope to treat redemption in units of Mutual Funds as a trading activity since units are not available for sale in open market. I also endorse the view of the appellant that similar transactions having been accepted by the Department as assessable under the head Capital Gain in earlier years, it is required that judicial consistency should be maintained. I find that assessing officer has considered the purchase and sale of and shares as a trading activity in the present year by referring to CBDT's Instruction No. 1827 dt. 31.08.1989. I have gone through the said instruction. This refers to as many as fifteen tests and guidelines in respect of shares held as Stock-in- 4 &C.O.92/Kol/2010 M/s. HobbInternational Pvt. Ltd. A.Yr.2004-05 trade and shares held as investment. It is made clear at the end that no single criterion is decisive and the total effect of all the criteria should be considered, Moreover, these tests and guidelines, in my opinion, cannot be applied for units in Mutual Fund which are not available for sale in the open market. In view of the totality of facts I have no hesitation to hold that the action of Assessing Officer to treat the transactions relating to purchase and sale of units shares as a trading activity is ne t proper. A.O. is accordingly directed to consider the profit resulting from such Transactions under the head capital gains and quantify the income' as per law. These grounds are, therefore, allowed for statistical purposes.”

Aggrieved by the order CIT(A) revenue has preferred the present appeal before the Tribunal.

The learned DR relied on the order of the AO. The learned counsel for the Assessee relied on the order of the CIT(A) and the decision of the Hon’ble Bombay High Court in the case of CIT Vs. Gopal Purohit 228 CTR 582 (Bom).

We have considered the rival submissions. The issue to be decided is as to whether the STCG on transaction of purchase and sale of units of mutual funds and 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. 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 5 &C.O.92/Kol/2010 M/s. HobbInternational Pvt. Ltd. A.Yr.2004-05 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 Instruction No.1827 dated 31.8.1989 referred to by the AO in the order of assessment and Circular No.4 of 2007 dated 15 June 2007. CBDT has recently issued Circular No.6/2016 dated 29.2.2016 clarifying on taxability on income earned from sale of shares and other securities and whether to treat it as capital gains or business income. The circular gives a choice to the assessee to define the income earned from share or securities sale as capital gains or business income. The treatment in the books of accounts by the Assessee of the shares/units sold in its books of accounts as investments would be very important factor to be considered and should be sufficient to hold that shares/units held as investments cannot be treated as giving raise to income from business.

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 and sale of units of mutual funds of 42 different mutual fund schemes. There were 8 transactions of purchase and 7 transactions of sale of shares. The shares purchased and sold were that of listed companies. It cannot also be said that the volume and frequency of transactions was high so as to draw an inference that the Assessee was engaged in business. The Hon’ble ITAT Mumbai Bench in the case of Janak S.Rangwala Vs. ACIT 11 SOT 627 (mum) has held that magnitude of the transaction does not alter the nature of the transaction. The total income declared by the Assessee 6 &C.O.92/Kol/2010 M/s. HobbInternational Pvt. Ltd. A.Yr.2004-05 in the return of income for the present AY is a sum of Rs. 41,03,490 comprising of income under the head “Income from Business” of Rs.15,31,885/-. As we have already seen the Assessee’s main business is export of iron and steel items and income from the said activity has been declared under the head income from business.

It is not in dispute that the Assessee had treated the shares and units as investments in its books of accounts. Similar transactions have been accepted by the revenue in assessments for AY 2001-02 to 2003-04 as giving raise to capital gains and not as business income. In fact the assessment in AY 2003-04 was completed u/s.143(3) of the Act after scrutiny. In the light of the above circumstances prevailing in the case of the assessee, we are of the view that the conclusion of the CIT(A) that the income from sale of shares and units declared by the assessee as capital gain has to be accepted is correct and calls for no interference.

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 inholding that principle of consistency must be appliedhere 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 above decision of the Hon’ble Bombay High Court is clearly applicable in this case. As we have already seen that the AO in AY 03-04 accepted similar income as capital gain. It is not disputed by the revenue that the facts and circumstances in the AY 03-04 & 04-05 are 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.

For the reasons given above, we confirm the order of the CIT(A) and dismiss the appeal by the revenue.

In the result, appeal by the revenue is dismissed.

As far as ground no.1 in the cross objection is concerned the same relates to the denial of the claim of the assessee for deduction u/s 80HHC of the Act on the ground that there was no profit from the export activity. The prayer of the learned counsel for the assessee before us is that the decision on this issue was rendered by the Hon’ble Supreme Court in the case of Topman Exports 342 ITR 49 (SC) which was after passing 8 &C.O.92/Kol/2010 M/s. HobbInternational Pvt. Ltd. A.Yr.2004-05 the of the impugned order of the CIT(A) and therefore the issue should be directed to examined by the AO in the light of the decision rendered by the Hon’ble Supreme Court referred to above. We are of the view that the request made by the learned counsel is acceptable. Accordingly the issue is remanded to the AO for fresh consideration in the light of the decision cited above.

As far as ground no.2 in the cross objection raised by the assessee is concerned the same relates to disallowance u/s 14A of the Act. AO made disallowance of Rs.1,20,981/- which is approximately 2.5% of the dividend income. The disallowance was only towards administrative expenses. The prayer of the learned counsel for the assessee was that in the light of the consistent view taken by the ITAT, Kolkata Bench in respect of A.Yrs. prior to A.Y.2008-09 when Rule 8D was not applicable, that disallowance of other expenses should be only at 1% of the dividend income, should be followed. The prayer of the learned counsel for the assessee was to restrict the disallowance to 1% of the exempt income.

We have considered his submissions and find that in the following orders ITAT Kolkata Bench has taken the view that 1% of the dividend income can be disallowed as other expenses disallowable u/s.14-A of the Act:

In the result the cross objection is partly allowed.

In the result the appeal by the revenue is dismissed while the cross objection of the assessee is partly allowed.