ACIT, CIRCLE - 31, KOLKATA, KOLKATA vs. PRADYUMNA DALMIA, KOLKATA

SHRI M.BALAGANESH, AM

These cross appeals of the revenue and assessee arise out of the order of the Learned CIT(A)-XIX, Kolkata in Appeal No. 113/CIT(A)-XIX/ACIT,Cricle-31/2009- 10 dated 30.4.2010 for Asst Year 2007-08 against the order of assessment framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’). These appeals are taken up together and disposed off by this common order for the sake of convenience.

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ITA No. 1245/Kol/2010 – Assessee’s Appeal

2.1. The brief facts of this issue is that the assessee is an individual deriving interest income from business of advancing of loan , interest from bank deposits, director fees, dividend, interest on Public Provident Fund , Long Term and short term capital gains on sale of shares. The assessee derived a dividend income of Rs.5,29,685/-, Interest income from Public Provident Fund of Rs. 2,48,879/- and Long Term Capital Gains of Rs. 14,03,563/- (exempt) for the Asst Year 2007-08 which do not form part of total income. 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 read with Rule 8D of the Rules and disallowed Rs. 3,41,676/- which was upheld by the Learned CIT(A) on first appeal. Aggrieved, the assessee is in appeal before us on the following ground:- “1. For that on the facts and in the circumstances of the case learned Commissioner of Income Tax-XIX, Kolkata erred in confirming the disallowance of Rs.3,41,676 made by the Assessing Officer u/s. 144A of the I T Act, 1961 read with Rule 8D of the I.T Rules.

2.2. 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 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

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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.

2.3. 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 assessee in ITA No. 1245/Kol/2010 is partly allowed.

2.4 The appeal of the assessee is partly allowed.

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ITA No. 1280/Kol/2010 – Departmental Appeal

3.1. The brief facts of this issue is that the Learned AO noticed that the assessee has shown income from short term capital gains in respect of surplus arising out of purchase and sale of shares amounting to Rs. 57,27,722/-. The assessee argued that he is having only investment portfolio in his balance sheet and hence the resultant surplus would only be taxable as capital gains. The assessee had also derived Long Term Capital Gains of Rs. 14,03,563/- which was claimed as exempt u/s 10(38) of the Act by the assessee. The Learned AO observed that :

- the frequency of transactions in shares was high and the nature of transaction amounted to trading rather than investment. - just because the assesse has been showing the transactions as long term and short term investments in the earlier years, it cannot be held that transactions this year also shall be of the same nature. - the assessee’s intention clearly is selling of shares for earning quick profits and not earning the dividends. - the frequency and time of holding of shares suggests that the transactions are adventure in the nature of trade. Just because the assessee has claimed that the transactions are in the nature of investment does not lead to the conclusion that the transactions are in the nature of investments.

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Based on these observations, the Learned AO shifted the short term capital gains of Rs. 57,27,722/- to business income , but however, he granted exemption for long term capital gains of Rs. 14,03,563/- u/s 10(38) of the Act. On first appeal, the Learned CIT(A) appreciated the contentions and accepted the claim of short term capital gains of the assessee. Aggrieved, the revenue is in appeal before us on the following grounds:-

3.2. The Learned DR vehemently supported the order of the Learned AO. In addition to this, he submitted that out of the total gains on share transactions of Rs. 57,27,722/- derived by the assessee, a sum of Rs. 53,55,489/- was derived out of sale of 35231 shares of Texmaco Ltd. The Learned DR submitted that the stock exchange rates of Texmaco Ltd both high and low figures for each month commencing from April 2005 to March 2006 (Asst Year 2006-07) and from April 2006+ to March 2007 (Asst Year 2007-08) downloaded from the official website. Based on this , he argued that the dividends at the rate of 30% were declared by Texmaco Ltd on 12.5.2006 and immediately after the same, the shares of Texmaco Ltd dwindled to Rs. 751/- in June 2006 as against Rs. 1,018/- in May 2006. 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.

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3.3. In response to this, the Learned AR 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. He further argued that the assessee had made investments in earlier years and income arising from sale of investment has been accepted and assessed as ‘income from capital gains’ by the revenue. He further argued that the CBDT Circular No. 4 of 2007 nowhere states that every gain arising from the sale of shares has to be assessed as business income. He further explained that assessee has earned short term capital gains of Rs. 53,55,489/- from sale of shares of M/s Texmaco Ltd which was acquired by him in Financial Year 2005-06 and kept as investment in the balance sheet of the assessee as on 31.3.2006. He further argued that the assessee had derived both long term as well as short term capital gains on sale of 2269 shares of Texmaco Ltd. The claim of exemption for long term capital gains has been accepted by the Learned AO for the assessment year under appeal. He argued that when a particular scrip held as investment by the assessee is sold in the open market through a recognized stock exchange, how can the Learned AO dispute the short term capital gain arising out of sale of such scrip while accepting the long term capital gains thereon. Hence the view of the Learned AO is fallacious only with an intent to avoid conferring concessional rate of tax on short term capital gains to the assessee in terms of section 111A of the Act. With regard to the comments of the Learned AO on the holding period of shares and frequency of transactions, the Learned AR argued that it is for the assessee to decide when to invest and when to exit from the respective shares. The Learned AR informed that the part of the shares of M/s Texmaco Ltd were sold based on favourable market conditions and the said company and assessee continued to retain 20000 shares of M/s Texmaco Ltd in its balance sheet under investment portfolio. The Learned AR further argued that the assessee has been consistently showing the transactions of purchase and sale of shares only under investment portfolio and the

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same has been accepted by the revenue in earlier years in the scrutiny assessment proceedings and in subsequent assessment year. In response to the argument of the Learned DR that principle of res judicata 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 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. Accordingly, he prayed for confirmation of the order of the Learned CIT(A) in this regard.

4.1. We find that the assessee is engaged in investment activity of purchase and sale of shares for years together and the same has been accepted as capital gains by the revenue. Hence we find lot of force in the decision of the Hon’ble Apex Court relied

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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. We also find that the exemption claimed for Long Term Capital Gains of Rs. 14,03,563/- has been accepted and granted by the Learned AO in the assessment year under appeal.

4.2. 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

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normal rate of tax @ 30%. It is not in dispute that the assessee had not converted any of the shares under investment category into stock in trade.

4.2.1. As stated supra we find that certain shares under investment portfolio were held by the assessee for quite a long time. 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 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.

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4.3. Intention of the assessee

We find the intention of the assessee to maintain the share transactions under investment portfolio from the very beginning is quite evident from the books of accounts wherein assessee had considered the share purchases under ‘investment’ category. This practice has not been found fault by the revenue in the earlier assessment years even in scrutiny proceedings. It is also not in dispute 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. 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.

4.4. 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

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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.”

4.4.1. 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:-

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 .”

4.4.2. 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:-

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"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 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."

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4.5. Existence of borrowed funds

The next point to be addressed in this issue is the existence of borrowed funds for making investments. It is found from the materials available on record that no borrowings were effected by the assessee for the purpose of making investment in shares. This is also quite evident from the fact that the Learned AO while resorting to make additions u/s 14A of the Act read with Rule 8D of the IT Rules, did not resort to make any addition in terms of Rule 8D(2)(ii) of the Rules. This goes to prove that the own funds have been utilised for investment activities of the assessee.

4.5.1. 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.

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assessment order that payment was made for the shares in the month of July itself through bill accommodation facility.

"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."

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4.6. 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 short term capital gains scrip wise containing the name of the scrip, date of purchase, number of shares purchased, purchase price, date of sale, number of shares sold, 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 short term capital gains, 11 out of the 39 scripts were sold within a period of 30 days as stated by the Learned DR. We also find that the majority of the surplus of Rs. 53,55,489/- had been derived by the assessee on sale of part of the shares of M/s Texmaco Ltd and after this sale, the assessee was holding 20000 shares of M/s Texmaco Ltd as its investments as on 31.3.2007. Similarly the assessee had sold 5500 shares of G.E.Shipping Ltd after holding it for a period of 9 months and made surplus of Rs. 4,63,384/-. We find from the entire 39 scrips, the average holding period of shares by the assessee is 4 months. In this regard, we duly appreciate the arguments of the Learned AR that it is for the assessee to decide when to purchase and at what time it had to exit from a particular scrip. We find that the conduct of the assessee clearly proves that the investments were purchased only with a view to earn dividend income and not with an intention to trade in the same. We also find that the Learned AO had duly accepted the claim of Long term capital gains exempted u/s 10(38) of the Act which strengthens the stand of assessee maintaining the shares as investments. Hence the assessee cannot be classified as a trader in shares.

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4.6.1. 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.”

4.7. 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.

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4.8. We also find that the practice followed by the assessee by offering capital gains for investment activities in the earlier years have been consistently accepted by the revenue in section 143(3) proceedings for the Asst Years 2006-07 and 2008-09 (by not preferring further appeal to tribunal against CITA order as informed by Learned AR), copy of which orders are placed on record before us. The assessment year under appeal before us is Asst Year 2007-08. We do not find any logical reason for the revenue to deviate from its consistent stand taken in the earlier years and subsequent year.

4.9. With regard to the reliance placed by the revenue on the decision of Authority of Advance Ruling (AAR) reported in 288 ITR 641 , we find that it only advances the case of the assessee. The ld.CIT(A) in his order held as under: “5.4… … … … In that case the applications were filed for advance rulings by number of foreign institutional investors (FII) who had invested in shares and securities in large number of Indian companies. The investments were made after obtaining permissions from Reserve Bank of India under FEMA and it was in conformity with SEBI regulations. On scrutiny of applications filed by various applicants the Authority noted that non-resident entities from the jurisdiction where capital gains was exempt from taxes, claimed the gains from transaction of sale and purchase of securities on Indian Stock market as capital gains. While in respect of identical transactions some other institutions treated the income arising from such transaction as business profit. These entities further claimed that they did not have permanent establishment in India. Referring to the volume and frequency of transactions; systematic and organized activities carried out in shares, it was argued that these institutional investors were carrying on business of share dealing and trading and therefore income was assessable as business income. Since these entities did not have permanent establishment in India the business profits were claimed to be not liable to tax in India. The Authority then examined the facts relating to investments made by these FIIs; AAR went through the Articles of Trust Deeds of these entities; considered the SEBI regulations and then held that from various transactions in securities in India carried out by the appellants it was seen that they were in the habit of keeping the holdings in various Indian companies from a few month to a few years which clearly

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indicated that the motive and intention of the applicants was to earn return in the form of capital gains rather than earn business profits. The AAR held that in the case of trading, the securities which were purchased and sold, would be termed in the books of the person acquiring it as stock in trade and not Investments. The intention of the foreign institution, as was evident at the time of purchase of securities was a relevant factor and often the conclusive factor in determining whether the transaction was in the nature of trade or in the nature of investment. The authority then at Page 649 observed that the germane question in all these application was whether securities which were subject matter of purchase and sale by the applicants were held by them was of stock in trade so as to give rise to business income or investment in capital assets so as to yield capital gain. While deciding the germane question the authority considered the submissions of the applicants wherein it was argued that the use of the term " investment" in SEBI regulars or applications made was not determinative of nature of income arising from the transaction and it was to be determined on the basis of intention and circumstances. For the purpose of income tax, the term "investment or investments" was to be taken in the "business sense" of laying out money for profit and nature of income had to be considered as per income tax statute and hot in the context of FII regulation and not with reference to the terminology employed. It was contended that the applicants devoted their entire resources to the earning of income by way of trading in securities and it was so done after the study and research in a business like manner and merely because some securities were held by the applicants for relatively longer periods, the income from transactions in securities could not be considered as capital gains. The AAR considered these submissions of the FIIs but ultimately held that the FIIs had made purchase and sale of securities of Indian companies as per SEBI regulation for Investment purposes. AAR held that as per the scheme of the Govt. FIIs had acquired shares and securities as Investments and not as stock in trade. The authority noted that the books of accounts of the applicants were not produced and examination of entries in books of account of the applicant was relevant in considering whether the securities were held as stock in trade or investments. The authority particularly observed that they had no clue about the maintenance of the accounts of the applicant and if these were produced; then from the accounts Authority would have been in a position to ascertain whether the shares were entered in the books of account as stock in trade or capital assets. The Authority observed that under the principles of accounting stock in trade had to be valued at end of each year in the case of share trading, to arrive at or profit of business whereas in the case of investments in capital assets, gains would be determined only on sale of such assets. In absence of books the AAR presumed that shares & securities were held as investments, as per SEBI

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regulation and therefore the AAR held that profit arising to FIIs applicants from sale of securities in India could not be treated as business income.

(5.5) From careful reading of the decision Of the AAR, I find that the said decision advances the appellant's case. In this judgment the AAR has referred to the historic background under which the capital markets in India were opened to institutional investors from abroad Prior to 1992 the foreign entities were not allowed free access to Indian capital markets. The FIIs brought in huge foreign capital and they acquired substantial holdings in the shares of Indian companies. The investments b. the foreign institutional investors were several times more than the institutional investment by Indian companies. The volume of business undertaken by FIIs is several times then investments made by Indian' companies and institutions. According to the AAR the question whether the acquisition of securities is for business purpose or by way of investment; can be decided with reference to the intention of the purchaser at the time of acquisition of security itself. For this purpose the authority held that the entries made in the books the purchaser are relevant because in case of purchase of securities for business purposes; they are shown by way of stock in trade whereas in the case of investment; shares are disclosed in the accounts as investments. If in case of foreign institutional investors who regularly carried on the transactions of purchase and sale of shares at regular intervals and in large volume, the said activity is considered as Investment activity then by the same measure the same activity carried on by an Indian entity cannot be considered as business activity. In my opinion the judicial principle applicable to Foreign Institutional Investors are equally applicable to the Indian entities as well. In both cases the tax entities regularly carry on Investments transactions in Indian securities. There is regularity of transaction and the volumes are large in both the cases. In particular in the appellant’s case the evidence on record established that clear distinction was always maintained between the trading stock, if any, and investment. In the circumstances, applying the ratio laid by AAR in 228 ITR 641 I hold that the gains derived on transfer of investments was assessable as capital gains and not as business profit. “

4.10. 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

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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 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

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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 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. “

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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.

4.11. On appreciation of cumulative effect of several factors present as culled out above and in view of the facts and cirucmstances, we hold that the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares. Accordingly, the grounds raised by the revenue in ITA No. 1280/Kol/2010 for Asst Year 2007-08 are dismissed.

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

Copy of the order forwarded to:- 1.. The Appellant: Shri Pradyumna Dalmia 2/3 Sarat Bose Road, Kol-20. 2 The Respondent: The Assistant Commissioner of Income-tax, Cir-31 10B Middleton Row, 4th Fl., Kol-71. 3 /The CIT, 4.The CIT(A)

**PRADIP SPS

ITA Nos. 1245 & 1280/Kol/2010-C-AM 22 Shri Pradyumna Dalmia