D.C.I.T CIR - 1,KOLKATA, KOLKATA vs. M/S A.K.G FINVEST LTD, KOLKATA

Per Shri Mahavir Singh, JM: This appeal by revenue is arising out of order of CIT(A)-I, Kolkata vide Appeal No. 748/CIT(A)-I/C-1/11-12 dated 20.02.2013. Assessment was framed by DCIT, Circle-1, Kolkata u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2009-10 vide his order dated 23.11.2011.

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proceedings, the AO required the assessee to produce the contract notes for verification of long term capital loss and short term capital loss. The AO on verification of these contract notes noted that the purchase and sale of shares were made on frequent dates and also utilization of interest bearing borrowed funds in purchase of shares and accordingly, he treated the long term capital loss and short term capital loss as business loss by treating the share transaction business as regular business by observing as under:

“Frequency and transactions towards purchases and sales of shares/securities is a strong case of trading in shares. Hon'ble Supreme Court in the case of Raja Bhandhur Vishaswara Singh CIT (411 ITR 685) has also expressed the same view. The activities of the assessee in the instant case are purely of purchase and sales of shares and that too at frequent intervals. On perusal of statement of Short Term Capital Gain & Long Term Capital Gain, it is observed that purchase of shares of OBC in large volumes have taken place almost continuously from 12.10.2007 to 31.03.2008 on 65 different dates and sale took place almost continuously in the month of October, 2008 on 13 different dates. In case of transactions shown to have been resulting into LTCG also, it is found that shares of OBC were acquired in bigger volumes on 22 different dates and sold on 5 different dates. (ii) Utilization of interest bearing borrowed fund in purchase of shares is a strong circumstances of trading in shares. The Hon'ble Madhaya Pradesh High Court in the case of CIT Vs Godabari Corp. Ltd. (156 ITR 835) has supported this view. On perusal of P&L A/c., it is found that the assessee has paid interest of Rs.20.6 6lakhs. (iii) The purchase and sale of share is not an isolated incident in assessee's case. The assessee is engaged in purchase and sale of shares in regular course and that too in a bulk. In fact, the main and sole activity of the assessee is in the field of purchase and sale of shares shown as investment. Hon'ble Supreme Court in the case of Saroj Kumar Majumder (37 ITR 242) held that purchase and sale of shares not in an isolated manner is a strong case of trading activities. In view of the above facts and circumstances of the case, the loss disclosed under the heads 'L T C Loss' for Rs. (-) 3,34,30,136/- and 'STC Loss' for Rs. (-)36,39,94,084/ is treated as business loss. Therefore, the Share Transaction Business is treated as Regular Business and the total loss from the business is arrived at - Rs. [(-)3,34,30,136.00 + (-) 36,39,94,084.00] i.e. Rs. (-) 39,74,24,220/-. Now to examine applicability of explanation to Section 73, head-wise analysis of income and deployment of fund is required to be done. On examination of the Balance Sheet for the year it is found that Total Investment into shares/securities is Rs. 89.33 Crores for the current year and in the earlier year is was Rs.128.53 crores. Whereas total investments into Loans & Advances is Rs. 5.91 Crores for the current year earlier year it was NIL. So the main business of the assessee is definitely in dealing shares not giving loans & advance. In addition to the profit on sale of shares, the assessee has income from on securities Rs.l,33,91,344.64 & dividend income of Rs.2.87 crore and dividend has been claimed exemption. Interest income has been offered under the head “Income from Business & Profession" there is no other income from 'House Property', ‘Other Source' or 'Capital Gains'. Therefore, the assessee has the main Income/Loss from Business as discussed above. As such Explanation below section 73 of the Income Tax Act applicable in assessee's case which states that Where any part of the business of a company consists in the purchase and sale of shares

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of other companies, such company, shall for the purpose of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. In view of the above discussion the business loss of Rs.(-)39,74,24,220/- is treated as speculative loss as per explanation of Sec. 73 of the Act.” 4. Aggrieved, assessee preferred appeal before CIT(A), who deleted the addition by observing as under:

“After careful consideration of the assessment order and written submission it is noticed that the AO treated the long term capital loss of Rs.3,34,30,136/- and short term capital loss of Rs.36,39,94,084/- in shares claimed by assessee as business loss and applied explanation to section 73 of the Income tax Act and treated the whole loss of Rs.39,74,24,220/- as speculative loss which was allowed to be carried forward. The assessee was a NBFC u/s 45 of RBI Act having income from interest, dividend and capital gains and was maintaining portfolio in investment of shares categorised as investment in this financial year. In earlier years assessee was maintaining two separate portfolios in form of Stock-in-trade and investments. The investment was made out of substantial interest free funds available as reserve and surpluses and equity. In the financial year under consideration assessee has credited interest of Rs.1,33,91,334/- from loan and advances given and debited interest of Rs.20,66,968/- in the P&L a/c and assessee had also received a dividend of Rs.2,87,49,680/- on these investments. In the computation of income assessee had disallowed expenses of Rs.33,57,610/- on account of tax-free income, while the short term capital loss was carried forward. In the financial under consideration assessee had sold of Rs.44,08,300/- shares of Oriental bank of Commerce (OBC) which was purchased in last year's and shown as investments and holding period was more than 12 months resulting long term capital loss of Rs.3,34,30,136/- which was not claimed in the computation of income and the short term capital loss on the sale of shares of OBC was Rs.36,39,94,084/- and assessee had earned a dividend of Rs.2,07,19,010/- on the shares of OBC. The average holding period of the said shares OBC was between 7 months and 18 months. These transactions of sale of OBC shares were done through recognised stock exchange and were subjected to STT. The appellant in the written submission relied upon the judgment of Bombay High Court in the case of Gopal Purohit 228 ITR 582 (Bombay) and the case of CIT Vs. Consolidated Invest Holding Ltd. 337 ITR 264 Delhi High Court to support his contention the purchase of shares of OBC was in nature of investment rather than in nature of business and explained that the shares were sold as the prices started declining and the appellant wanted to stop its loss. There were no intraday transactions. The appellant had claimed short term capital gains on the investments in shares AY 2007-08 and the same was accepted by the AO for AY 2007-08. Keeping in view of these facts and circumstances the loss arising from sale of shares was in the nature of long term capital loss and short term capital loss rather than business loss and accordingly section 73 cannot be invoked. Therefore the ground no.2 and 3 are allowed.” Aggrieved against the order of CIT(A) revenue is now in appeal before Tribunal.

4 ITA No.1341/Kol/2013 AKG Finvest ltd. , AY 2009-10 in shares. The assessee explained that its source of income comprises of interest, capital gains and dividend. The assessee claimed that investments made in shares by the assessee are categorized as investment in share not current asset of the assessee. According to him, the investments, as and when disposed off from time to time, resulting in short term and long term capital gains/loss depending upon the holding period. Accordingly, the gains or loss was offered to tax and the same was accepted in earlier years and future years. According to AO, the assessee’s main business is dealing in shares. Thus he invoked explanation to section 73 of the Act and treated the gains/loss arising out of sale of shares, numbering 44, 08, 300, of Oriental Bank of Commerce for the consideration amounting to Rs.65,56,30,091/- and loss arising out of the same was treated as business loss instead of capital gains declared by the assessee. The AO held that the assessee is engaged in the business of shares for the reason that there is frequency of transactions and also the investment in shares out of borrowed funds on which interest was paid. Before us, the assessee contended that it had invested only in five scrip being investor in shares with the motive of earning dividend income. According to assessee, it has earned dividend income of Rs.2,87,49,680/- during the year, which was claimed as exempt u/s. 10(34) of the Act. Ld. Counsel for the assessee before us stated that the shares of Oriental Bank of Commerce have been shown in the Balance Sheet under the head investments and not as stock in trade under the current assets. According to him, as per the schedule to the Balance Sheet of a Non Banking financial Company Prudential Norms, no shares are to be held by assessee as current investment and all the investments are in the nature of long term investments. The assessee explained the fact that the price of scrip fell from Rs.180.87 per share, as on the last date of purchase of shares on 28.03.2008 to Rs.162.39 per share, as on the first date of sale on 25.09.2008 and further declined to Rs.112.24 per share as on 27.10.2008 to the last sale was made. According to assessee, in the 6th month the price of share fell by 38% and hence, it has to sell the shares to liquidate its holding in the scrip of Oriental Bank of Commerce and invest in some other shares owing to steep decline in the price of these shares. Ld. Counsel for the assessee also argued and drew our attention to pages 71 to 76 wherein it can be seen that the period of holding or Oriental Bank of Commerce’s shares by assessee ranging between 556 days to 213 days i.e. between 18 months to 7 months. In view of these facts, ld. Counsel for the assessee stated that the evidence and submissions

5 ITA No.1341/Kol/2013 AKG Finvest ltd. , AY 2009-10 clearly prove that the assessee was not a dealer in shares but only in investor and during the relevant assessment year it has liquidated the shares of Oriental Bank of Commerce held by it, purchased in AY 2007-08 and 2008-09, and due to steep decline in price of shares resulting in huge long term and short term capital loss. In term of the above arguments, ld. Counsel for the assessee stated that the loss arising out of sale of shares of Oriental Bank of Commerce is long term and short term and not business loss as held by AO depending upon period of holding. According to him, there is no frequency in transaction as is evident from pages 71 to 76 of assessee’s paper book wherein complete details of holding of shares of Oriental Bank of Commerce as well as gains or loss is disclosed. On the other hand, Ld. Sr. DR relied on the order of AO. 6. We find from the facts of the case that the assessee is NBFC as per section 45-IA of the RBI Act, 1934. The assessee has always taken the value of investment at cost and categorized the investment in shares under the head investment and not as current assets. The assessee has earned dividend income of Rs.2,87,49,687/- during the year and the same was claimed as exempt u/s. 10(34) of the Act. The assessee during the course of assessment proceedings produced contract notes for sale as well as for purchase of shares of Oriental Bank of Commerce from where the assessee has earned substantial loss on account of short term and long term. The assessee’s details in respect of holding period, purchase price, sale price, date of sale, date of purchase is enclosed in assessee’s paper book at pages 71 to 76 wherein it can be seen that the period of holding by the assessee of shares of OBC ranged between 556 days to 213 days i.e. between 18 months to 7 months. We also find from the orders of the lower authorities that none of the authorities below has doubted the genuineness of sales or purchases or genuineness of transaction and source of payment, whether received or paid. From these facts we can analyze that the assessee by virtue of being an NBFC is authorised to invest in shares and such a terminology does not indicate that the loss or gains from investments made by assessee is to be treated as business income. Following are the features of the transaction: “The investments made by the respondent assessee are categorized as investment and they are not the current assets of the company. Short term and long term is judged on the basis of the period of holding of investment for the purpose of Income Tax Return. The investments made by the respondent assessee have always been valued at cost, therefore, the investments made by the assessee can be said to be long term investments.

6 ITA No.1341/Kol/2013 AKG Finvest ltd. , AY 2009-10 The respondent assessee is dealing only as an investor and has never dealt as a trader in share transactions. All the investments have been made under delivery based segment.” 7. In view of the above facts, we are of the view that the assessee has established that the shares held by it as investment are capital asset and sale of capital asset being shares held as investment for a considerable period i.e. either little less than one year or more than one year are assessable as short term capital gain/loss or long term capital gain/loss and not business income. Similar view is taken by Hon’ble Bombay High Court in the case of CIT Vs. Gopal Purohit (2011) 336 ITR 287 (Bom.), wherein it has been held as under:

“Held, dismissing the appeal, (i) that it was open to the assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, and this warranted no interference. (ii) That there should be uniformity in treatment and consistency when facts and circumstances for different years were identical particularly in the case of the same assessee. (iii) That entries in the books of account alone are not conclusive in determining the nature of income.” 8. We also find from the decision of Hon’ble Delhi High Court in the case of CIT Vs. Consolidated Finvest & Holding Ltd. (2011) 337 ITR 264 (Del.), wherein the issue was as regards to purchase of shares not held for long period of time, Hon’ble Delhi High Court held as under:

“3. We have heard the learned counsel for the Revenue and also the assessee and perused the records. There is no dispute that the shares which were acquired were sold within a short span of 7 to 10 months by the assessee. There is also no dispute that the assessee had also asserted to be non-banking financial company having business of investments and dealing in shares. However, the facts which were noted by the CIT(A) and also the Tribunal are worth considering. The assessee was, in fact, engaged in manufacture of photographic goods having manufacturing units at different places prior to the de- merger of the photographic goods business into separate company w.e.f. 1st April, 2004 on the scheme of de-merger of the company approved by the High Court of Uttaranchal. Though the de-merger took place w.e.f. 1st April, 2004, the assessee continued to carry on the photographic goods manufacturing until the date of the order of the High Court of Uttaranchal approving scheme of the de-merger on 1st November, 2004. The assessee also held long-term investments in various other shares. The aforesaid shares of ONGC were purchased by the assessee when it was a manufacturing company and the aforesaid shares were not purchased as part of any business activity of dealing in shares at the time of purchase. The assessee was neither in the business of investments nor dealing in shares, though it held shares of different companies at the beginning of the relevant previous year. The assessee had acquired those shares in a public issue and had, in fact, shown them in the books of accounts as investment and were booked under the head "non-trade" and not "trading" investment. The intention to acquire those shares as investment can be reflected from the fact that it was holding most of the shares of other companies since long period of time and was not entering into frequent business of sale and purchase of shares.

7 ITA No.1341/Kol/2013 AKG Finvest ltd. , AY 2009-10 From the facts, the CIT(A) and the Tribunal arrived at a finding of fact that the acquisition of such shares in public issue with the intent of holding them for a long period of time to achieve long-term appreciation and the mere fact that the shares were sold in a short span of time of its acquisition due to steep and unanticipated rise in stock market does not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal in them. This was a pure question of fact arrived at by CIT(A) and the Tribunal, and rightly so that the profit arisen from sale of shares of ONGC during the relevant previous year was to be treated under the head „capital gain‟ and not „profit or gain of business and profession‟. 9. Another aspect discussed by AO as regards to frequency of transaction, the investor aims at wealth maximization and has to divest the shares at the opportune time to prevent depreciation in investment. And Investor has to take appropriate decision after weighing the risk of carrying the investment with the return thereon. In the process, the assessee may required to sell off part of his investments at appropriate intervals which may lead to high turnover in the investment account. However, it does not mean that the investments are actually held as stock in trade. An investor may frequently buying or selling shares, but shares purchased during a particular year may not be sold in the same year and shares sold during the year which have been purchased more than a year ago. This will be treated as investment and not trading. 10. In view of these facts, we are of the considered view that the CIT(A) has rightly deleted the disallowance of loss by holding the assessee as investor and we confirm the same. This issue of revenue’s appeal is dismissed. 11. The next issue in this appeal of assessee is against the order of CIT(A) deleting the disallowance of expenses qua exempted income by invoking the provisions of section 14A of the Act. For this, revenue has raised following ground no.2: “2. That on the facts and in the circumstances of the case the Ld. CIT(A) was not justified in restricting the disallowance u/s. 14A to Rs.34,63,114/- instead of Rs.71,20,710/-” 12. Briefly stated facts are that the assessee has earned exempted income i.e. dividend of Rs.2,87,49,680/- and claimed the same as exempt u/s. 10(34) of the Act. The assessee itself computed disallowance u/s. 14A of the Act at Rs.33,57,610/-. But the AO computed the disallowance by invoking Rule 8D of the I. T. Rules, 1962 at Rs.71,20,710/- by computing as under: “(i) Direct expenses Nil (ii) Proportionate Interest paid Rs.16,73,997/- (iii) One half percent of Average value of Investments Rs.54,46,713/- Rs.71,20,710/-”

8 ITA No.1341/Kol/2013 AKG Finvest ltd. , AY 2009-10 13. Aggrieved, assessee preferred appeal before CIT(A), who deleted the disallowance by observing as under: “Next ground of appeal no. 3 relates to disallowance of rs.37,63,100/- u/s. 14A read with Rule 8D. Assessee had earned tax free dividend income for rs.2,87,49,680/- the assessee had already disallowed a sum of rs.33,57,610/- in relation to earning of above dividend income as per the computation of income filed along with of return. The nature of expenses debited in P&L A/c was on account of interest paid for Rs.20,66,969/- and Rs.13,96,145/- on account of administrative and other expenses. While the AO computed the proportionate interest paid for rs.16,73,997/- and ½% of the average investment for Rs.54,46,713/- u/s. 14A read with Rule 8D and net amount of Rs.37,63,100/- over and above the proportionate disallowance made by assessee was further disallowed. The total expenditure debited in P&L A/c for the whole financial year as per P&L A/c was Rs.34,63,114/- only. Therefore, the disallowance made u/s. 14A read with Rule 8D be restricted to a total of rs.34,63,144/- as against Rs.71,20,710/- determined by the AO i.e. the disallowance should be restricted to actual expenditure debited in P&L a/c in relation to earning of tax free dividend income credited in P&L a/c. Therefore this ground is partly allowed.” Aggrieved, revenue preferred second appeal before Tribunal on this issue.

9 ITA No.1341/Kol/2013 AKG Finvest ltd. , AY 2009-10 two asset theory is not applicable in this case as there is no expenditure incurred in terms of Section 14A. 15. Further Hon’ble P&H High Court in the case of CIT Vs. Hero Cycles 323 ITR 518 held that – “In view of finding reproduced above, it is clear that the expenditure on interest was set off against the income from interest and the investment in the share and funds were out of the dividend proceeds. In view of this finding of fact, disallowance under Section 14A was not sustainable. Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under Section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of Section 14A, cannot be accepted. Disallowance under Section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible….” 16. In view of the above facts and circumstances, we find no infirmity in the order of CIT(A) in deleting the disallowance and hence, the same is confirmed. This issue of revenue’s appeal is dismissed. 17. In the result, appeal of revenue is dismissed. Order pronounced in the open court on 16.03.2016. Sd/- Sd/- (M. Balaganesh) (Mahavir Singh) Accountant Member Judicial Member

Dated : 16th March , 2016

Jd. Sr. P.S

Copy of the order forwarded to:

Asstt. Registrar.