ITO, WARD - 12(1), KOLKATA, KOLKATA vs. M/S. LYONS & ROSES PVT. LTD., KOLKATA

SHRI M.BALAGANESH, AM

These appeals of the revenue and cross objection of the assessee arise out of the orders of the Learned CIT (A)-XII, Kolkata in Appeal No. 729/XII/Cir-12/07-08 dated 31.3.2009 for Asst Year 2005-06 and Appeal No. 310/XII/Cir-12/08-09 dated 28.5.2009 for the Asst Year 2006-07 against the orders of assessment framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 1 M/s. Lypons & Roses Pvt. Ltd

4.1. The brief facts of this issue is that the assessee is an investment company engaged in the business of dealing, trading and investing in shares and securities including units of mutual funds. The assessee derived a dividend income of Rs. 4,63,906/- for the Asst Year 2005-06. The Learned AO called for information regarding the incurrence of expenditure by the assessee for the purpose of earning this dividend income. In response to this, the assessee replied that no expenses were incurred for the purpose of deriving the dividend income. The Learned AO not satisfied with the reply sought to invoke the provisions of section 14A of the Act and disallowed 5% of Rs. 4,63,906/- amounting to Rs. 23,125/- for the Asst Year 2005-06. On first appeal, the Learned CIT(A) directed the Learned AO to adopt the provisions of Rule 8D(2)(iii) of the Rules to make disallowance u/s 14A of the Act for the Asst Year 2005-06. Aggrieved, the revenue is in appeal and assessee has preferred cross objections before us on the following grounds:- “1. On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the AO to follow the method as provided in Rule 8D(2)(iii) only of I.T Rules for determining the disallowance pertaining to exempt dividend whereas Rule 8D(2)(ii) is also applicable in the instant case since the assessee has incurred interest and other expenses directly or indirectly to earn the said income not forming part of total income.”

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 2 M/s. Lypons & Roses Pvt. Ltd

CO No. 52/2009 [ITA No.1149/Kol/09 A.Y 2005-06] 1 a) For that, the application of Rule 80 of the Income Tax Rules in the case of the Assessee is bad in law and, therefore, cannot be sustained.

b) For that, in the original Assessment Order, disallowance u/s 14A was made on estimate at Rs. 23,125/- and the said disallowance of Rs.23,125/- cannot be increased under any circumstances while giving effect to the Appellate order.

c) For that, the Application of Rule 8D(2)(iii) results in enhancement of disallowance of expenditure, increase in the taxable income, and the Learned CIT(A) is not empowered to enhance the liability without proper hearing and notice to the assessee.

2) For that the Commissioner of Income Tax (Appeals) erred in the holding that Rule 80 of the Income Tax Rules 1962 which was introduced in the statute only on 24 March 2008 was applicable in respect of Assessment Year 2005-06. The Commissioner of Income Tax (Appeals) failed to appreciate the fact that even sub-section (2) of Section 14A of the Act in which the said rule was inserted was introduced in the statute book with effect from 1 April 2007 and was admittedly applicable only from Assessment Year 2007-08 as stated in the memo explaining the Finance Bill 2006.

3) For that no expenses were incurred by the appellant for earning dividend income. Further and in any event the Assessing Officer as well as the Commissioner of Income Tax (Appeals) could not point out any expenditure which was directly relatable to exempt income and as such disallowance on proportionate basis even under Rule 80 of the Rules was erroneous.

4.2. The Learned AR argued that the provisions of Rule 8D of the IT Rules could be made applicable only from Asst Year 2008-09 as has been held by the Hon’ble

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 3 M/s. Lypons & Roses Pvt. Ltd

Bombay High Court in the case of Godrej& Boyce Manufacturing case reported in 328 ITR 81 (Bom) and fairly pleaded that since provisions of section 14A of the Act has got retrospective application in the statute, disallowance thereon could be restricted to 1% of exempt income as has been held by the Jurisdictional High Court in the case of CIT vs R.R.Sen & Brothers P Ltd in G.A.No. 3019 of 2012 in ITAT No. 243 of 2012 dated 4.1.2013. In response to this, the Learned DR fairly conceded to the submission of the Learned AR.

4.3. We have heard the rival submissions. The relevant assessment year under appeal is 2005-06 at which point of time , the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing. However, it is not in dispute that the assessee had derived taxable income as well as tax free income and incurred expenditure for deriving both the incomes and hence disallowance is definitely warranted in terms of section 14A which is brought in the statute book with retrospective effect from 1.4.1962. The disallowance had to be made only on an estimated basis with regard to the expenditure incurred for the purpose of earning tax free income. The Hon’ble Jurisdictional High Court in the case of CIT vs M/s R.R.Sen & Brothers P Ltd in GA No. 3019 of 2012 in ITAT NO. 243 of 2012 dated 4.1.2013 had held as under:- “ The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under income tax. The tribunal has computed expenditure at 1% of such dividend income, which, according to them, is the thumb rule applied consistently. We find no reason to interfere.

The appeal is dismissed.”

Respectfully following the judicial precedent, we direct the Learned AO to disallow 1% of exempt income under this issue and accordingly, the ground no.1 raised by the revenue for Asst Year 2005-06 in ITA No. 1148/Kol/2009 and cross objections of the assessee in CO No. 52 /Kol/2009 are partly allowed.

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 4 M/s. Lypons & Roses Pvt. Ltd

5.1. Since the facts for both the assessment years are similar except change in figures, we decide these appeals based on the facts of Asst Year 2005-06. The brief facts of this issue is that the Learned AO noticed that the assessee has shown income from purchase and sale of shares under two heads viz ‘capital gains’ from investments and ‘business income’ from trading in shares for the Asst Year 2005-06. Under the investment head, the Learned AO observed that the assessee had disclosed long term capital gains of Rs. 50,10,740/- after indexation and claimed exemption for the same ; and disclosed Rs. 71,90,242/- as short term capital gains after setting off carried forward losses of Rs. 10,06,203/-. Under the head ‘business income’, the Learned AO observed that the assessee had disclosed Rs. 3,09,988/- as profit from trading in shares. The assessee was carrying on both trading and investment activity in purchase and sale of shares / units. The Learned AO felt that the profit on sale of investments credited in the profit and loss account amounting to Rs. 1,35,86,013/- should also be considered as business income as against claim of capital gains made by the assessee. In response to this, the assessee replied that all the shares were held for the purpose of long term investments and earned substantial dividends and there was no motive to use the shares for the purpose of trading and that the intention was to invest in shares and that the shares were held as long term investment only in earlier years and gains from sale of investments always assessed under the head capital gains. However, as per the

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 5 M/s. Lypons & Roses Pvt. Ltd

memorandum of Association of the company, the Learned AO observed that the main business of the assessee is to acquire, subscribe to , hold, dispose off and deal in shares/units. The Learned AO also felt that the assessee had carried on in a systematic and an organized manner, numerous transactions of buying and selling of shares / units which in the opinion of the Ld AO constituted its business activities. The Learned AO also observed that some of the transactions are completed in a very short period which indicates the motive of the assessee of earning profits out of buying and selling these shares. Hence the Ld. AO concluded that the frequent transactions carried out by the assessee are in the nature of business activities and not capital investment as claimed. On first appeal, the Learned CIT(A) appreciated the contentions of the assessee and treated the said gains as capital gains and not business income. Aggrieved, the revenue is in appeal before us.

5.2. The Learned DR argued the holding period of most of the shares were less than 30 days and hence the intention of the assessee was only to earn profits out of buying and selling of shares and not to hold the same as investment for long term purposes. In response to this, the Learned AR argued that the assessee has got two separate portfolios i.e one for investment and other for business. The profit derived from investment activities are offered to tax as short term and long term capital gains depending upon the period of holding the shares and the profit derived from the business activity of trading in shares were offered as income from business. The Ld.Senior Advocate further argued that this practice has been followed by the assessee consistently and the revenue had accepted the same in the scrutiny assessment proceedings for the earlier years and in subsequent assessment years in the scrutiny assessment proceedings, wherever applicable. In response to the argument of the Learned DR that principle of resjudicata does not apply to income tax proceedings, the Learned AR argued that the principle of consistency cannot be given a go bye and for which he placed reliance on the decision of the Hon’ble Apex Court in the case of Radhasaomi Satsang reported in 193 ITR 321(SC). The Learned AR further argued

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 6 M/s. Lypons & Roses Pvt. Ltd

that even the investment activities were carried out by the assessee only with an intention to make profits out of such investments which are duly offered to tax as capital gains by the assessee. Hence the reasoning of the Learned AO that the assessee had made profits would not vitiate the intention of carrying on the investment activities of the assessee. The Learned AR explained the entire transactions from the details filed in the paper book stating that most of the shares were held for more than one year also for which long term capital gains were reported by the assessee and it is for the assessee to decide when to exit from the relevant investment depending upon the favourable market conditions. He further placed on record the copy of the tribunal order in assessee’s own case , among other decisions, for the Asst Year 1992-93, wherein this tribunal had accepted the plea of the assessee that the gains derived from investment activities of assessee were accepted as capital gains.

5.3. We have heard the rival submissions and perused the materials available on record including the detailed paper book filed by the assessee containing the scrutiny assessment orders of the assessee for the Asst years 2002-03 , 2004-05 , 2008-09 & 2010-11 ; statement of total income for the Asst Year 2010-11 ; audited financial statements for the years ended 31.3.2004 & 31.3.2005 ; details of profit on sale of investments ; details of investments and stock in trade for five years and compilation of various case laws on the impugned issue. We find that the assessee is engaged in investment activity and business activity for years together. We also find that the co- ordinate bench decision of this tribunal for the Asst Year 1992-93 in assessee’s own case in ITA No. 2943/Cal/1996 dated 28.9.2001 had accepted the plea of the assessee that the gains arising out of investment activities of the assessee had to be assessed only as capital gains and not business income. It is also not in dispute that the revenue has been accepting the dual portfolio maintained by the assesseee for years to gether which is quite evident from the scrutiny assessment orders passed by the Learned AO for the Asst Years 2002-03, 2004-05 , 2008-09 and 2010-11, wherein the stand of the assessee reporting both capital gains and business income arising out of purchase and

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 7 M/s. Lypons & Roses Pvt. Ltd

sale of shares have been accepted. Hence we find lot of force in the decision of the Hon’ble Apex Court relied on by the Learned AR in the case of Radhasaomi Satsang reported in 193 ITR 321 (SC) on the principle of consistency. We are also in agreement with the arguments of the Learned AR that just because the assessee had made profits out of its investment activities, the same cannot be concluded that the assesseee had carried on with an intention to do business. For that matter, every assessee would only try to make profits out of their activities be it investment or business . What is to be seen is whether the assessee intended to make only profits from dealing in shares or whether the shares were purchased with a view to earn dividend income which is also profit. The gains arising in the former case would be in the nature of trade and hence business income and the latter would be for the purpose of investment and hence resultant gain would be capital gains. In the instant case, the assessee had reported both dividend income and offered short term and long term capital gains on the investment activities and business income for trading activities.

5.3.1. Whether introduction of concessional rate of tax on short term capital gains and exemption of long term capital gains pursuant to introduction of securities transaction tax (STT) would change the character of the transaction

We find that the entire gamut of transactions are to be viewed in the context of dominant intention of the assessee whether to hold a particular scrip in investment portfolio or in trading portfolio. We find that the levy of securities transaction tax has been introduced in the statute with effect from 1st October 2004 relevant to Asst Year 2005-06, wherein if a sale of shares transaction is routed through a recognized stock exchange and securities transaction tax is suffered by the assessee, then the long term capital gains arising on such sale would be exempt u/s 10(38) of the Act. Similarly with effect from 1.4.2005, the short term capital gains , if subjected to levy of securities transaction tax, would be liable for concessional rate of tax as against the normal rate of tax @ 30%. We also find that the Learned AO had not brought any

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 8 M/s. Lypons & Roses Pvt. Ltd

evidence on record that the assessee was trying to shift any of its trading assets from the trading portfolio of shares & units to the investment portfolio to take advantage of lower tax rates under the head capital gains and vice versa wherever losses were incurred on sale of investments. It is not in dispute that the assessee had not converted any of the shares under investment category into stock in trade.

5.3.1.1. As stated supra we find that certain shares under investment portfolio were held by the assessee from the year 1995 onwards. Just because if during the mid of the relevant financial year, certain tax benefits have been given in respect of capital gains, that cannot, in any way, lead to an assumption or presumption that the intention of the assessee at the time of purchase of shares was that of a trader and not of an investor. The treatment of the investment in the books of accounts of the assessee is also a relevant guiding factor. The issue of treatment of income from share transaction as short term capital gains or business income has in fact arisen after the amendment brought with Finance Act 2004 with effect from 1.10.2004. It is an admitted fact on record that prior to amendment when the tax on short term capital gains was at par with business income, the department has been consistently accepting the treatment of income by the assessee as capital gains. Merely because the rate of tax has been reduced in respect of short term capital gains and long term capital gains have been made exempt during the year by way of an amendment to the provisions , that itself, cannot be a ground for the Learned AO to depart from its consistent stand of treating the assessee as an investor and thereby to charge the income earned by the assessee from share transactions as business income. From the records, it is found that at the time of purchase and sales even during the period prior to 1.10.2004, the assessee was not guided or influenced by lower tax rate in case of short term capital gains as the rate for business income and short term capital gains was at par. The assessee, however, was treating himself as an investor and keeping the delivery based shares as investments in his account irrespective of the probable tax implication as there were no such tax implications as discussed above. Thus, the intention of the

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 9 M/s. Lypons & Roses Pvt. Ltd

assessee, while purchasing the share, is the important and guiding factor as to whether the same was purchased with an intention of investment or trading.

5.3.2. Dual portfolio – whether permitted

We also find that nothing prohibits an assessee from holding dual portfolios i.e (1) shares / units held for investment and (2) shares / units held for trading purposes. It is not in dispute that in the instant case, the assessee had maintained dual portfolios in its books of accounts and had reported capital gains and business income separately as per the consistent practice followed by the assessee over the years and accepted by the revenue in the earlier years. It is well settled that it is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment or stock in trade, then onus would shift to revenue to prove that apparent is not real. In the instant case, we find from the details in the paper book that the assessee had duly discharged its primary onus of demarcating the scripts held for investment and for trading and the resultant gains derived therefrom. Even the CBDT Circular No. 4 of 2007 dated 15.6.2007 envisages the practice of assessee’s maintaining dual portfolios. We also find that the decision was rendered by the Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit reported in 228 CTR 582 (Bom) wherein the assessee had maintained dual portfolios and ultimately the court held that the resultant gains from investment activity would be assessable as capital gains and not business income. We also find that the valuation of investments has been done by the assessee at cost as could be evident from the accounting policies forming part of the audited financial statements.

5.3.2.1. We also find that the CBDT in its Instruction No. 1827 dated 31.8.1989 has laid down certain criteria to determine whether an activity of purchase and sale of

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 10 M/s. Lypons & Roses Pvt. Ltd

shares is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given in the books is indicative of assessee’s intention whether to hold the shares with a view to earn dividend and long term appreciation or with a view to carrying on as business.

5.3.3. Intention of the assessee

We find the intention of the assessee to maintain two independent portfolios i.e one for investment purposes and one for trading purposes from the very beginning is quite evident from the books of accounts wherein assessee had separate entries in its ledger accounts at the time of each transaction i.e at the time of purchase itself. This practice has not been found fault by the revenue in the earlier assessment years even in scrutiny proceedings. The Hon’ble Madras High Court in the case of CIT vs S.Ramamrithan reported in (2008) 217 CTR 206 (Mad) while distinguishing trading and investment, observed that the intention of the assessee is relevant to determine whether an assessee is carrying on the business in shares or investments. The initial intention of the assessee in the instant case is proved beyond doubt from the manner of maintaining two separate portfolios i.e (1) for investment purposes and (2) for trading purposes. The Learned AR argued that in respect of shares retained under ‘investment category’ the assessee had taken due delivery of shares on its purchase and given due delivery of shares on its sale. The Learned AR further informed that the assessee had also kept separate records to record the transactions of each category i.e delivery based and non- delivery based. It is settled law that a particular income is from business or from investment must be decided according to the general common sense view of those who deal with those matters in the particular circumstances. The most excruciating factor to be looked into at this juncture is the conduct of the assessee.

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 11 M/s. Lypons & Roses Pvt. Ltd

5.3.4. Frequency of transactions

The next point to be addressed in this issue is whether the frequency of transactions would alone indicate the trading activity. In this regard, we find the co-ordinate bench of Mumbai Tribunal had an occasion to consider the same in the case of Janak S. Rangawalla vs ACIT reported in (2007) 11 SOT 627 (Mum), wherein it was held that : “It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years have been held to be income from capital gains both on long term and short term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as short term capital gains. There is no basis for treating the assessee as a trader in shares, when his intention to hold the shaes in Indian companies as an investment and not as stock in trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as income from capital gains in the past several years. The Assessing officer is directed to set off the Long Term Capital Loss against the Short Term Capital Gain of the year under consideration. The grounds of appeal raised by the assessee are allowed.”

5.3.4.1. We also find that the Hon’ble Calcutta High Court in the case of CIT vs Merlin Holding P Ltd reported in (2015) 375 ITR 118 (Cal) for the Asst Years 2005- 06 and 2006-07 had held as below:- “The frequency of transactions in shares alone cannot show that the inten- tion of the investor was not to make an investment. The Legislature has not made any distinction on the basis-of frequency of transactions. The benefit of short -term capital gains can be availed of for any period of retention of shares up to 12 months. Although a ceiling has been provided, there is no indication as regards the floor, which can be as little as one day. The question essentially is a question of fact.

The assessee was a certified non-banking financial concern. Its main activ- ities were giving loans and taking loans and-investing in shares and securi-

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 12 M/s. Lypons & Roses Pvt. Ltd

ties. The Assessing Officer, for the assessment years 2005-06 and 2006-07, opined that the activity which, according to the assessee, was on investment account amounted to business activity and, therefore, he treated the short- term capital gains of Rs. 1,01,00,000 as business income. The Commissioner (Appeals) held that the refusal on the part of the Assessing Officer to accept the short-term capital gains was incorrect. This was confirmed by the Tribunal. On appeal :

Held, dismissing the appeal, that the assessee had adduced proof to show that some transactions were intended to be business transactions, some transactions were intended to be by way of investment and some transactions were by way of speculation. The Revenue had not been able to find fault from the evidence adduced. The mere fact that there were 1,000 transactions in a year or the mere fact that the majority of the income was from the share dealing or that the managing director of the assessee was also a managing director of a firm of share brokers could not have any decisive value. The Commissioner (Appeals) and the Tribunal had concurrently held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter .”

5.3.4.2. We also find that the Hon’ble Calcutta High Court in the case of CIT vs H K Financiers (P) Ltd reported in (2015) 61 taxmann.com 175 (Cal) for the Asst Year 2007-08 had held as below:- 3. The Assessing Officer has laid stress on motive. To begin with motive is something, which is locked in the mind of the person. No direct evidence as regards motive is possible. Motive can be inferred from the conduct of the person concerned but that is bound to remain an inference, which may or may not be correct. We have today dictated a judgment in the case of CIT v. Merlin Holding (P.) Ltd [IT Appeal No. 101 of 2011, dated 12-5- 2015] wherein the following views have been expressed by us:

"From the tenor of the submissions made by Mr. Saraf noted above, it appears that the case of the revenue is that in the facts of the case the finding that the income was earned from investment could not have been recorded. If that is the proposition then it is for the revenue to show that such a finding is not possible in law. That was not even suggested. What remains then is a question of

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 13 M/s. Lypons & Roses Pvt. Ltd

appreciation of evidence, which has already been done. No fruitful purpose is likely to be served by remanding the matter. We do not find any issue, which has remained unattended. For the aforesaid reasons, we hold that the judgment under challenge is not perverse."

"On the facts, that the appellant dealt with the shares of McLeod and Co. and the allied companies as stock-in-trade, that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade. The profit derived by the appellant from the sale of shares was therefore a revenue receipt and as such liable to income-tax."

5.3.5. Existence of borrowed funds

The next point to be addressed in this issue is the existence of borrowed funds and payment of interest thereon by the assessee. The Learned CIT(A) had given a factual finding that no nexus has been brought on record between the borrowed funds and the investments made. The Learned CIT(A) found that for the Asst Year 2005-06, the assessee had made short term borrowings from its director for a period of seven months only in order to meet its working capital requirements and the said loan was

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 14 M/s. Lypons & Roses Pvt. Ltd

also squared up during the year. Similarly in Asst Year 2006-07, the assessee had made borrowings of Rs. 3 crores and utilized the same for investment as well as for trading activity. The Learned CIT(A) also found that the assessee has got a share capital of Rs. 10,00,000/- and reserves and surplus as on 31.3.2005 at Rs. 1,73,98,009/- in addition to generation of own funds in the form of sale of shares held as investments. This goes to prove that the own funds along with borrowed funds have been utilised for both investment and trading activities of the assessee. He accordingly held that the finding of the Learned AO that borrowed funds were utilized for investments to be factually incorrect. This finding given by the Learned CIT(A) is not refuted by the Learned DR before us for both the asst years under appeal.

We find that the Hon’ble Calcutta High Court in the case of JCIT vs Bajranglal Chowdhury reported in (2015) 58 taxmann.com 204 (Cal) had held as below:- l. The appeal is directed against a judgment and order dated March 13, 2014, by which the learned Income-tax Appellate Tribunal dismissed an appeal preferred by the Revenue.

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 15 M/s. Lypons & Roses Pvt. Ltd

"The finding of the High Court that the clauses of the memorandum of association, viz., clauses 10, 12, l3, 28 and 29 do not authorise the company to acquire and sell shares as business has no relevance in view of the aforesaid resolution of the assessee and of the fact that it had been dealing in shares in a commercial spirit as is evident from its claim for loss in dealings in the shares of M/s. Titaghur Paper Mills Ltd. and devaluation of shares of M/s. Pilani Investment Corporation on the basis that they had fallen in value.

Secondly, the Tribunal said that from 1947 to 1956, no dividend had been declared by the Rayon company and that the money which went into the purchase of these shares was borrowed by the assessee. In other words, the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with the borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend was correct. We cannot say that this was not a relevant circumstances for the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business."

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 16 M/s. Lypons & Roses Pvt. Ltd

5.3.6. Period of Holding of shares

We find that one of the main arguments of the revenue seems to be the shorter duration for which the shares were held by the assessee. In this regard, we had gone through the entire details of profit on sale of investment scrip wise containing the date of purchase, number of shares purchased, purchase price, date of sale, sale price and resultant book profit or loss which forms part of the paper book filed by the assessee. We find from the said workings of profit on sale of investments , none of the scripts had been sold by the assessee within a period of 30 days as stated by the Learned DR, except Kotak Mahindra Mutual Fund Short Term Plan which was purchased in March 2004 and redeemed in April 2004. Other than this, all other scripts and mutual funds were held for a minimum period of two months from the date of purchase before its transfer. We also find that certain shares were held by the assessee from March 1995 , October 1996, December 1998, May 2003, June 2003, July 2003, August 2003, September 2003, October 2003 etc onwards which were ultimately sold by the assessee in Asst Year 2005-06. Similarly in Asst Year 2006-07, from the workings of short term capital gains filed in the paper book, we find that only the part of the shares of DSP Merrill Lynch Ltd and Graphite India Ltd were sold within a month. Other than these two shares, the average period of 4 months has been maintained by the assessee from the date of purchase. We also find from the workings of long term capital gains for Asst year 2006-07, the shares were held for a period of 13 months. This shows that the assessee always intended these shares to be retained only under the investment category and it will be highly improper to state that these shares / units were held as stock in trade by the assessee.

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 17 M/s. Lypons & Roses Pvt. Ltd

We find that this aspect has been considered by the co-ordinate bench of this tribunal in the case of DCIT vs Reliance Trading Enterprises Ltd in ITA No. 944/Kol/2008 dated 3.1.2008 wherein it was held that :

“We have heard both the parties and perused the records as well as the documents contained in the paper book filed before us. There is no denying the fact that as per the account maintained the asssessee had acted both as a trader as well as investor in shares as per the Memorandum and Articles of Association. Accounts were maintained for trading / business shares which are held as stock in trade and separately for investment shares which are held and shown in balance sheet under the head investment representing capital assets. The decisions used to be taken by the assessee at the time of purchase itself based on different factors whether any share and security was to be held as investment or trading. When the shares are accounted for in the books as investment shares, the volume of transaction of such shares cannot alter its status from investment to trading. Profit on sale of such investment shares held, as capital assets are assessable under the head capital gain. Period of holding of such assets cannot determine its status or change it from investment (capital) to trading (stock in trade). The audited accounts for the Assessment Year 04-05 and the earlier years placed in the paper book made it clear that every year the assessee had acquired shares for trading purpose and separately also for investment purpose with an intention to earn dividend income in addition to the prospect of making profit on sale of such investment shares at an appropriate opportune moment without making any hurry for self ignoring dividend. The investment shares and securities purchased and held till their sale had dual purpose i.e. for earning dividend as an incidental income as well as to make profit on shares at appropriate time. The conclusions drawn by the Assessing Officer by treating the investment shares as trading shares was based purely on assumptions and presumptions without bringing any record any material or evidence in support thereof. The Assessing Officer did not reject the books of accounts vis a vis the audited accounts u/s 145 of the IT Act before arriving at such a conclusion. The Assessing Officer’s finding cannot therefore be accepted.”

5.3.7. We find that the assessee had earned dividend income also which is quite reflective of the intention of investment and not for profit motive though an investor is not precluded from realizing its investment which may result into profit in favourable circumstances.

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 18 M/s. Lypons & Roses Pvt. Ltd

5.3.8. We also find that the practice followed by the assessee by offering capital gains for investment activities and business income for trading activities in the earlier years have been consistently accepted by the revenue in section 143(3) proceedings for the Asst Years 2002-03 ; 2004-05 ; 2008-09 and 2010-11 , copy of which orders are placed on record before us. The assessment years under appeal before us are Asst Years 2005-06 and 2006-07. We do not find any logical reason for the revenue to deviate from its consistent stand taken in the earlier years. It is also evident from the scrutiny assessment orders for Asst Years 2008-09 and 2010-11 , the revenue had accepted the stand of the assessee having dual portfolio and offering income under capital gains and business income in subsequent years.

5.3.9. We find that the Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit reported in (2011) 336 ITR 287 (Bom) and 228 CTR 582 (Bom) had considered the issue under consideration and held as under:- 4.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR before us. We find that the assessee has been engaging himself in the share transactions both as an investor and as well as trader. It is seen that the assessee had clearly bifurcated the investment and trading transactions including speculative share transactions in his books of accounts and it is also seen that the average period of holding of shares range from one month to more than one year and accordingly short term or long term capital gains are duly offered to tax by the assessee depending upon the period of holding the shares. It is also seen that the Learned AO had also accepted the stand of the assessee in the immediately succeeding assessment year as investment transactions under scrutiny proceedings vide 143(3) order dated 12.10.2009. We find that the frequency of transactions does not really matter and what is to be seen is the intention of the assessee whether he wants to penetrate into the capital market for the purpose of investment or for making speculative gains by doing day trading and dealing in futures and options. It is also seen that the Learned AO had clearly stated in his assessment order that the interest on borrowings were paid by the assessee only for trading in shares and this itself goes to prove that the assessee had clearly bifurcated his activities into two parts - one

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 19 M/s. Lypons & Roses Pvt. Ltd

towards investment in shares out of own funds of the assessee and other towards trading in shares out of own and borrowed funds of the assessee. It is also seen that the assessee has been doing this activity consistently. It is also seen from the balance sheet filed by the assessee that the assessee had clearly classified the share transactions under the head Investments. This itself clearly proves the intention of the assessee that he is only interested in share market only as an investor and not otherwise. We find that this issue has been elaborately dealt with by the Hon’ble Bombay High Court in the case of CIT vs. Gopal Purohit reported in 228 CTR 582 (Bom), wherein the questions raised before the Bombay High Court and decision rendered thereon are as below:- "(a) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in treating the income from sale of 7,59,003 shares for Rs.5,00,12,879/- as an income from short term capital gain and sale of 3,88,797 shares for Rs.6,65,02,340/- as long term capital gain as against the "Income from business" assessed by the A. O. ? (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 res judicata to preclude the authorities from holding such transactions as business activities in current year? (c) Whether, on the facts and circumstances of the case and in law., the Hon 'ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income? The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received there from should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 20 M/s. Lypons & Roses Pvt. Ltd

one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law. 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 Assessment Year in question. Question (b), therefore, does not also raise any substantial question.

In so far as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under Section 260A. No substantial question of law is raised. The appeal is accordingly dismissed. “

It is pertinent to note that the decision of Bombay High Court was subjected to further appeal by the revenue before the Hon’ble Apex Court and the Special Leave Petition (SLP) was dismissed by the Supreme Court.

5.3.10. We also find that there is no material brought in by the revenue to show that separate accounts of two portfolios are only a smokescreen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present as culled out above , we hold that the

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 21 M/s. Lypons & Roses Pvt. Ltd

surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. Accordingly, the ground no. 2 in ITA No. 1148/Kol/2009 for Asst Year 2005-06 and ground no. 1 in ITA No. 1437/Kol/2009 for Asst Year 2006-07 raised by the revenue are dismissed.

6.1. During the course of hearing, the Learned AR stated that in view of the smallness of the amount, he is not willing to press the ground. This is taken as a statement from the Bar. Hence this ground no.2 raised by the revenue in ITA No. 1437/Kol/2009 is allowed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 20 -01-2016

Sd/- Sd/- ( Mahavir Singh Judicial Member ) (M. Balaganesh, Accountant Member)

Date 20 -01/2016

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 22 M/s. Lypons & Roses Pvt. Ltd

Copy of the order forwarded to:- 1.. The Appellant: Income Tax Officer, Ward 12(1), 3 Govt Pl (W), Kol-1 2 The Respondent: M/s. Lyons & Roses Pvt. Ltd B-103 Rai Enclave 7/1 Sunny Park, Kol-19. Shalimar, Howrah-711103. 3 /The CIT, 4.The CIT(A)

**PRADIP SPS

ITA Nos. 1148/K09, CO No. 52/K/09 & 1437/K/09C-AM 23 M/s. Lypons & Roses Pvt. Ltd