ITO, WARD - 12(4), KOLKATA vs. M/S. MANIMAYA HOLDINGS PVT. LTD., KOLKATA

Ground No.1 raised by the revenue reads as follows :- “1. For that on the facts and in the circumstances of the case the Ld. CIT(A) was not justified in giving the direction that the profit on sale of shares and securities held by way of investment is to be assessed as “Capital assets” instead of “Business Income” as determined by the A.O.”

The Assessee is a company. It is engaged in the business of buying and investing in shares. In the course of assessment proceedings, the AO noticed that the assessee had declared short term capital gain on sale of shares of Rs.29,07,728/-. AO was of the view that the assessee had two portfolios of shares. One set of shares were shown in the books of account as stock-in-trade and the profit on purchase and sale of these shares were declared as income from business. The other set of shares were held as investment and the gain on sale of these shares had been declared as short term

In response to the query by the AO in this regard the assessee submitted as follows :- “1. That the assessee company has shown the said shares as investment and not stock- in-trade. 2. That the assessee company has resolved in its Board Meeting that the company would buy such shares for investment purposes only. Hence, the motive of the assessee company was to invest in shares. 3. That the assessee company is not buying and selling shares every day. 4. That some of the shares purchased by the assessee company were held by it for more than 3 to 4 months. 5. That in comparison to paid up capital of the company, the investment in shares was not excess. 6. That the negative results of the transactions were not heavy. Hence, the profit from purchase and sales of shares held investment in shares should be treated as income from capital gain and not the business profit.”

The AO however was of the view that short term capital gain declared by the assessee was to be considered as income from business for the following reasons :- a) The assessee was already engaged in the business of buying and selling of shares or units. b) It was carrying on the aforesaid activity in a systematic and organised manner and therefore income from buying and sale of units had to be recorded as arising from business. c) Considering the volume and frequency of the transactions carried out by the assessee it cannot be said that the assessee merely realising the gain of appreciation of a capital asset.

Aggrieved by the order of AO assessee preferred appeal before CIT(A). Before CIT(A), the Assessee pointed out that even investment could be carried out by the assessee in a systematic and organised manner and doing so need not necessarily lead to the conclusion that the assessee was engaged in carrying on business of buying and selling shares. With regard to the volume of transactions the assessee submitted that volume of purchase and sale of shares which resulted in short term capital gain is negligible compared to the capital of the assessee. With regard to the frequency of the transactions the assessee pointed out that sometimes the broker purchase or sell shares depending upon the market conditions. Therefore the frequency of transaction could be more but that cannot be decisive to come to a conclusion that the assessee was carrying on business of purchase and sale of shares. The assessee pointed out that the Board of Directors of the Assessee passed a resolution whereby the assessee consciously decide to have a separate portfolio of investment in shares and therefore the motive of the assessee was to hold those shares as investment and not as stock in trade of business of the assessee. More importantly the assessee pointed out that the shares in question were treated as investment in books of accounts of the assessee and that would be a very decisive factor in coming to the conclusion that gain on sale of those shares had to be recorded as capital gain. The assessee also pointed out that there is no prohibition in law to having two portfolios one as investment and the other as stock in trade.

The assessee placed reliance on several judicial pronouncements in support of the contentions as set forth above. The CIT(A) on consideration of the aforesaid submissions was of the view that in the books of account the shares in question were ITA No.439/Kol/2009-M/s. Manimaya Holdings Pvt. Ltd. A.Y.2005-06

Aggrieved by the order of CIT(A) revenue has raised ground no.1 before the Tribunal.

We have heard the submissions of the learned DR and the learned counsel for the assessee. The learned DR placed reliance on the order of AO. The learned Counsel for the assessee placed reliance on the order of CIT(A). He also placed reliance on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Merlin Holding (P)Ltd (2016) 65 Taxmann.com 37 (Calcutta) wherein the Hon’ble Calcutta High Court observed as follows :- “6. These are the facts and circumstances, which according to him, go to show that the assessee primarily in the business of dealing in shares rather than in the business of investment. The frequency of transaction highlighted by Mr. Saraf is not decisive on either side. Frequency alone cannot show that the intention was not to make an investment. The legislature has not made any distinction on the basis of frequency of transaction. The benefit of short-term capital gain can be availed for any period of ITA No.439/Kol/2009-M/s. Manimaya Holdings Pvt. Ltd. A.Y.2005-06

We have given a careful consideration to the rival submissions. The 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. 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). ITA No.439/Kol/2009-M/s. Manimaya Holdings Pvt. Ltd. A.Y.2005-06

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 declared by the assessee as capital gain has to be accepted as correct and calls for no interference.

For the reasons given above, we uphold the order of the CIT(A) and dismiss gr.no.1 raised by the Revenue.

Ground No.2 raised by the Revenue reads as follows :- “2. For that on the facts and in the circumstances of the case the Ld. CIT(A) is not justified in deleting the additions of Rs.87,50,000/- made by the A.O. on account of unexplained cash credit. “

During the previous year the share capital of the assessee increased to a sum of Rs.80,05,000/-. 39 companies had subscribed to the share capital of the assessee. Share premium received by the assessee on these shares was Rs.3,20,20,000/-. Out of 39 companies AO issued notice u/s 131 of the Act to the following parties.

On appeal by the assessee CIT(A) held as follows :- “I have perused the assessment order and assessee’s submissions. From perusal of assessment records it is observed that the A.O. issued notices u/s 133(6) of the Act, to the above mentioned three parties. In compliance thereof these parties submitted confirmations confirming the subscription to the share capital of the assessee. They also submitted copies of their balance sheets, profit and loss a/cs, evidences of having filed returns of income for relevant period, copies of shares application forms, and copies of relevant extracts of their bank statements evidencing the sources of payments for such subscription. They also submitted their PA No. in their confirmation. It will also be pertinent to mention have that all these persons are corporate entities. In the light of these facts, in my opinion, the subscription to the capital of the assessee by the above mentioned three persons was adequately explained. Hon'ble Delhi High Court in the case of CIT Vs. Lovely Exports Pvt. Ltd. (299 ITR 268) has held that the assessee has to, prima facie, prove:- (I) the identity of the creditor/subscriber, (2) the genuineness of the transaction, namely, whether it has been transmitted through banking or other indisputable channels; and (3) the creditworthiness or financial strength of the creditor/subscriber. It was also held that: (i) if relevant details of the address of PAN identity of the creditor/subscriber are furnished to the Department along with copies of the shareholders Register, Share Application Forms, Share transfer Register etc. it would constitute acceptable proof or acceptable explanation by the assessee; (ii) the Department could not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices. In the instant case, (I) the subscriber did not repudiate the transactions, rather they confirmed the transactions (2) the transactions were through banking channels, (3) they submitted their Permanent Account No. to the A.O. (4) their identities were established by the fact that notices is u/s.133(6) of the Act. issued by the A.O. were served upon them and they filed their confirmations in response there of, (5) they also submitted copies of evidence of having filed their returns of income (6) they submitted the relevant portions of their bank statements evidencing the source of payments for the shares subscribed (7) they submitted copies of their balance sheets and profit and loss account of the relevant period. ITA No.439/Kol/2009-M/s. Manimaya Holdings Pvt. Ltd. A.Y.2005-06

The learned DR placed reliance on the order of AO. It was submitted by him that mere filing of confirmation in response to notice u/s.133(6) of the Act will not be sufficient to explain credit in the books of an Assessee. That process will only discharge the primary onus that lay on the Assessee. If the AO wants to examine the creditor, the AO has to resort to provisions of Sec.131 of the Act and summon the concerned creditor and if the AO has sufficient material to doubt the creditworthiness or genuineness of the transaction, the burden would shift to the Assessee to show that the above two aspects are also fully and satisfactorily explained. Since the summons u/s.131 of the Act could not be served, the onus would shift to the Assessee to produce the creditor for examination by the AO or furnish the correct address of the creditor. In the event of the Assessee not in the knowledge of the present whereabouts of the Assessee, he should say so. The Assessee having failed to do so, the addition ought to have been sustained by the CIT(A). The learned counsel for the assessee relied on the order of CIT(A). Reference is also made to the decision of Hon’ble Delhi High Court in the case of CIT vs Vrindavan farms (P)Ltd in ITA.71/2015 dated 12.08.2015 wherein the Hon’ble Delhi High Court took a view that when complete particulars of the share applicants were furnished to the AO by the assessee and if the AO fails to conduct an inquiry no addition can be made in the hands of the assessee u/s 68 of the Act. He further submitted that the additional share capital raised by the assessee during the previous year from the aforesaid parties was Rs.46.50 lakhs. The opening balance as on 01.04.2005 in the case of these three parties have also been added as unexplained credit u/s 68 of the Act. The chart annexed to the order will show the opening balance and the share capital received from three parties during the

We have considered the rival submissions. As rightly pointed out by the learned counsel for the Assessee, the additional share capital by the assessee during the previous year from the aforesaid parties was Rs.46.50 lakhs. The opening balance as on 01.04.2005 in the case of these three parties have also been added as unexplained credit u/s 68 of the Act. The chart annexed to the order will show the opening balance and the share capital received from three parties during the previous year. As rightly contended by the learned counsel for the assessee the opening balance in share capital account cannot be a subject matter of scrutiny u/s 68 of the Act as they cannot said to be credit entry in the books of account of the assessee for the previous year. As rightly contended by the learned counsel for the assessee in any event the opening balance in the capital account could not have been added u/s 68 of the Act. Therefore addition u/s.68 of the Act to the extent of Rs.41 lacs deserves to be deleted as to this extent the credit entry in the books of the Assessee is not an credit of the previous year relevant to AY 2005-06.

As far as the credit entry in the books of the Assessee in respect of the aforesaid three parties during the previous year totalling Rs.46.50 lacs is concerned, we find that the revenue has not denied the fact that in the course of assessment proceedings three of the share applicants namely Ellenbarrie Commercial Ltd., NPEC Capital Markets Ltd and Reliance Oil Co.Pvt. Ltd had filed confirmation before the AO. In response to notice u/s 133(6) of the Act these confirmations are being filed before us and copy of the same is at pages 18, 29 and 46 of the assessee’s paper book. All the supporting particulars like the share applications, assessment particulars and balance sheet etc ITA No.439/Kol/2009-M/s. Manimaya Holdings Pvt. Ltd. A.Y.2005-06

In the result the appeal of the revenue is partly allowed for statistical purpose.