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Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM]
ORDER
Per Shri Mahavir Singh, JM:
This appeal by revenue and Cross Objection by assessee are arising out of order of CIT(A)-XII, Kolkata vide Appeal No. 356/XII/Cir-10/08-09 dated 30.04.2010. Assessment was framed by DCIT, Circle-10, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2006-07 vide his order dated 20.11.2008.
The first issue in this appeal of revenue is against the order of CIT(A) accepting the assessee’s contention that the transactions in shares and consequently the profit is to be assessed as capital gains instead of business income. For this, revenue has raised following ground no.1:
1. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in accepting the assessee’s contention that the income from transactions in shares were to be assessed as capital gain without appreciating the fact that the purchase and sale of shares was the principal business of the assessee.”
Briefly stated facts are that the assessee has declared short term capital gain and long term capital gain for the transaction in respect of purchase and sale of shares and mutual funds. The assessee in its return of income has claimed the following capital gains: i) Short Term Capital Gain on MF (STT paid) 8,61,039 ii) Short Term Capital Gain on sale of MF without STT 33,267 iii) Long Term Capital Gain without STT 3,035 iv) Long Term Capital Gain on sale of MF with STT 7,39,200 v) Long Term Capital Gain on shares with STT 84,56,025 vi) Short Term Gain on shares u/s. IIIA 7,31,522 Total: 1,08,24,088 The AO during the course of assessment proceedings stated that the profit on sale of investment i.e. on the transactions of sale and purchase of shares and mutual funds is business income. Aggrieved, assessee preferred appeal before CIT(A), who allowed the claim of the assessee by observing as under:
“The A.O treated the 'income from capital gains' as income from business. The A.O applied the parameters like frequent transactions, large volume of transactions planned, systematic and organized transactions, motive to earn profits etc to the appellant's case to treat the transactions in shares as business transactions. The A.O also relied on certain case laws to drive a point that the appellant's transactions in shares are in the nature of 'trading' and not 'investments'. On the other hand, the appellant mainly submitted that its intention is to hold shares as investments since beginning with a motive to earn dividend and appreciation in value. I have duly considered the submissions of the appellant. I have also considered the reasons stated and case laws relied on by the A.O in his assessment order. In this regard reliance is placed primarily on jurisdictional ITAT, 'B'-Bench, Kolkata in the case of DCIT Vs. Reliance Trading Enterprises Ltd (ITAT No. 944/Kol/2008 dt. 3.1.2008) and host of other important case laws mentioned as under for deciding this issue: CIT V. H. Holck Larsen (1986) 160 ITR 67 (SC) CIT V. Rewashankar A Kothari (2006) 201 CTR 510 (Guj) CIT V. Ramamrithans (2008) 217 CTR 206 (Mad) CIT V. Associated Industrial Development Co. Ltd. (SC) 82 ITR 586 Janak S. Rangwalla V. ACIT (2007) 11 SOT 627 (Mum. Trib.) CIT V. N.S.S. Investments P. Ltd. (2005) 277 ITR 149 (Mad) Bombay Gymkhana Ltd. V. ITO (220) 115 TTJ 639 (Mum. Trib.) Gopal Purohit V. JCIT, 25(3), Mumbai (2009) 29 SOT 117 (Mum.Trib.) Sarnath Infrastructure P. Ltd. V. ACIT (2009) 313 ITR (AT) 13 (Lucknow) DCIT V. Reena Sarogi & 332/Cal/2001) DCIT V. Kavita Parasramka (ITA No. 1033/KoI/2008, dt. 20.3.09) The ratio laid down by the judicial forums in the above cases is that one has to see the basic 'intention' of the assessee in the books to distinguish whether the activity is in the nature of 'trading' or 'investment'. Once this is established the other features like frequency, magnitude, volume etc do not alter the character of transaction. In the present case the appellant shown the transactions in snares under the head 'investments' and treated accordingly. Respectfully following the Kolkata Tribunal decisions in Reliance Trading Enterprises Ltd (supra), Reena Sarogi (supra) and Kavita Parsramka (supra) and the ratio laid down by the courts including Supreme Court in the above cited cases, I hold that the gains on account of transfer/redemption of shares/MFs shall be treated as capital gains as against business income assessed by the AO, since the basic intention of the appellant was to invest and all the transactions in equity shares were delivery based. However on going through the break-up of 'investment in shares', it is noticed that the appellant converted 'stock' of shares valued Rs. 43,43,883/- into 'investment' as on 1.4.2004 (AY. 2005-06) and out of this shares costing Rs. 20,90,895/- were sold during F.Y. 2004-05 (AY.2005-06) and shares costing of Rs.8,52,671/- were sold during F.Y. 2005-06 (AY.2006-07). As a result of sale of shares during F.Y. 2005-06 (AY.2006-07), the appellant earned profit of Rs.24,79,571/- and the same was disclosed as LTCG. Since this profit is included in the total amount of capital gains of Rs. 1,08,24,088/-, I direct the A.O to treat Rs.83,44,517/- (Rs.1,08,24,088/- --- Rs. 24,79,571/-) only as capital gains. I also direct the AO to treat Rs.24,79,571 /- corresponding to shares sold from out of stock of shares 3 & CO No. 41/K/2012 H.K. financiers Pvt. Ltd. AY 2006-07 converted into investment as income from business since the intention at the time of acquisition was to acquire the same as 'stock-in-trade'.” Aggrieved, now revenue is in appeal before us.
We have heard rival submissions and gone through facts and circumstances of the case. The assessee, a registered NBFC by RBI, engaged in the business of finance and investment. The assessee has invested the majority of its funds in shares of joint stock companies and mutual funds. The assessee has disclosed the investments and the profit arising out of the same is treated as short term capital gains or long term capital gains. In most of the cases average holding period of shares and units is more than years i.e. more than 12 months and 84% of the total capital gains of the assessee is from long term assets i.e. sale of shares and mutual funds which clearly shows that the period of holding of shares is more than 12 months and kept in investment portfolio. In AY 2007-08 i.e. the immediate next assessment year, the Tribunal exactly on identical facts has allowed the claim of the assessee and Hon’ble High court in assessee’s own case reported in (2015) 375 ITR 577 (Cal) confirmed the view of the tribunal. From the order of the CIT(A) it is clear that the assessee in this year also has shown income from shares either as long term or short term capital gains in the investment portfolio and the shares were being valued at cost and the shares of the assessee which were not stock in trade had been valued either at market price or cost price and according to us there is no justification in the order of AO to treat the capital gain arising out of the shares as business. 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.
Hence, taking a consistent view and respectfully following the order of the Hon’ble High court in assessee’s own case, cited supra, we confirm the order of CIT(A) and appeal of revenue on this issue is dismissed.
4 & CO No. 41/K/2012 H.K. financiers Pvt. Ltd. AY 2006-07 5. The next issue in this appeal of revenue is against the order of CIT(A) deleting the disallowance of interest. For this, revenue has raised following ground no.2:
2. On the facts and in the circumstances of the case, Ld. CIT(A) has erred in allowing interest of Rs.19,524/- (Rs.86,934 – Rs.67,410/-), being the interest on loan at lower rate than the rate at which interest was payable.”
We have heard rival submissions and gone through facts and circumstances of the case. The AO during the course of assessment proceedings noticed that the assessee has earned interest @ 5% whereas the interest paid is at a higher rate. Accordingly, he worked out the interest payable and disallowed the interest of Rs.86,934/- money borrowed for business but not utilized for it. Aggrieved, assessee preferred appeal before CIT(A), who restricted the disallowance at Rs.67,410/- by observing as under: “These grounds are considered together as the same are interrelated. On going through the records it is observed that the appellant claimed interest expenditure of Rs.86,934/- which the AO disallowed as not related to business. The AO further disallowed another sum of Rs.67,410/- as interest disallowable u/s. 14A resulting into double disallowance of the same expenditure. Since the appellant could not provide the nexus of utilization of borrowed funds, the funds are presumed to have been used for common purposes for earning income under different heads. In such a case the disallowance of Rs.67,410/- out of Rs.86,934/- is fully justified u/s. 14A. However, since the AO has disallowed this interest expenditure twice, I direct the AO to delete the disallowance of Rs.86,934/- out of the aforesaid double disallowance.”
We find that the CIT(A) has given a finding of fact that this disallowance of interest has been made twice, one u/s. 14A of the Act and the other in normal provisions tantamount to double disallowance and he restricted the disallowance at Rs.67,410/- and allowed interest of Rs.19,524/-. We find no infirmity in the order of CIT(A) and hence, the same is confirmed. This issue of revenue’s appeal is also dismissed. 8. CO of assessee is dismissed since not pressed. 9. In the result, appeal of revenue is dismissed and the CO of the assessee is dismissed as not pressed. 10. Order is pronounced in the open court on 03.02.2016 Sd/- Sd/- (Waseem Ahmed) (Mahavir Singh) Accountant Member Judicial Member Dated :3rd February, 2016 Jd.(Sr.P.S.)
APPELLANT – DCIT, Cir-10, Kolkata. 1. Respondent –M/s. H K. Financiers Pvt. Ltd., Radhe-Radhe, D-103, 2 Yoshodha Path, Shyamnagar, Jaipur-302019, Rajasthan The CIT(A), Kolkata 3.