ACIT, CIRCLE - 7, KOLKATA, KOLKATA vs C.D. EQUIFINANCE PVT. LTD., KOLKATA

Income Tax Appellate Tribunal, KOLKATA ‘A’ BENCH, KOLKATA

Before: Shri P.M. Jagtap & Shri S.S. Viswanethra Ravi

I.T.A. No. 1790/KOL./2008 Assessment year: 2005-2006 ITA No. 961/KOL/2010 Assessment Year : 2006-2007 ITA No. 1280/KOL/2011 Assessment Year : 2007-2008 ITA No. 552/KOL/2010 Assessment Year : 2006-2007 Page 1 of 24

IN THE INCOME TAX APPELLATE TRIBUNAL, KOLKATA ‘A’ BENCH, KOLKATA

Before Shri P.M. Jagtap, Accountant Member and Shri S.S. Viswanethra Ravi, Judicial Member

I.T.A. No. 1790/KOL/ 2008 Assessment Year : 2005-2006 & I.T.A. No. 961/KOL/ 2010 Assessment Year : 2006-2007

Assistant Commissioner of Income Tax,...................................Appellant Circle-7, Kolkata, AAyakar Bhawan, 5th Floor, P-7, Chowringhee Square, Kolkata-700 069

-Vs.-

C.D. Equifinance Pvt. Limited, 37, Shakespeare Sarani, 1s t Floor, Kolkata-700 017 [PAN : AACCP 7333 A]

I.T.A. No. 1280/KOL/ 2011 Assessment Year : 2007-2008

Deputy Commissioner of Income Tax,...................................Appellant Circle-7, Kolkata, AAyakar Bhawan, 5th Floor, P-7, Chowringhee Square, Kolkata-700 069

-Vs.-

C.D. Equifinance Pvt. Limited, 37, Shakespeare Sarani, 1s t Floor, Kolkata-700 017 [PAN : AACCP 7333 A]

-A N D-

I.T.A. No. 552/KOL/ 2010 Assessment Year : 2006-2007

C.D. Equifinance Pvt. Limited,...........................................Appellant 37, Shakespeare Sarani, 1s t Floor, Kolkata-700 017 [PAN : AACCP 7333 A]

-Vs.-

Assistant Commissioner of Income Tax,...................................Respondent Circle-7, Kolkata, AAyakar Bhawan, 5th Floor, Room No. 15, P-7, Chowringhee Square, Kolkata-700 069

Appearances by: Shri S.M. Sarfarazut Tauheed, JCIT, Sr. D.R., for the Department Shri D.S. Damle, FCA, for the assessee

Date of concluding the hearing : November 19, 2015 Date of pronouncing the order : December 09, 2015

O R D E R Per Shri P.M. Jagtap:- Out of these four appeals, three appeals being I.T.A. Nos. 1790/KOL/2008, 961/KOL/2010 & 1280/KOL/2011 are the appeals filed by the Revenue for assessment years 2005-06, 2006-07 and 2007-08 respectively, while the remaining appeal being I.T.A. No. 552/KOL/2010 is the appeal of the assessee filed for assessment year 2006-07. Since these appeals involve common issues, the same have been heard together and are being disposed of by a single consolidated order for the sake of convenience.

First we take up the appeal of the Revenue for A.Y. 2005-06 being ITA No. 1790/KOL/2008, which is directed against the order of the ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata dated 04.06.2008.

At the outset, it is noted that there is a delay of eight days on the part of the Revenue in filing this appeal before the Tribunal. In this regard, an application has been filed by the Department seeking condonation of the said delay and keeping in view the reasons given therein as well as the fact that the ld. Counsel for the assessee has not raised any objection in this regard, we condone the said delay and proceed to dispose of this appeal of the Revenue on merit.

In Ground No 1 raised in this appeal, the Revenue has challenged the action of the ld. CIT(Appeals) in accepting the treatment given by the assessee to the profit from sale of certain shares as business income instead of short-term capital gain as held by the Assessing Officer.

The material facts of the case relevant to the issue involved in Ground No. 1 of the Revenue’s appeal are as follows. The assessee is a Company, which is engaged in the business of dealing in shares and securities and rendering financial consultancy services. The return of income for the year under consideration was filed by it on 28.10.2005 declaring total income of Rs.4,14,94,523/-. In the said return, long-term capital gain on sale of shares made upto 30.09.2004 amounting to Rs.8,96,28,890/- was offered to tax by the assessee @ 10% while the long-term capital gain on sale of shares made after 01.10.2004 amounting to Rs.18,78,53,164/- was claimed to be exempt under section 10(38) of the Income Tax Act, 1961. During the year under consideration, the assessee had also earned short-term capital gain on sale of shares made after 01.10.2004, which was subject to levy of STD, amounting to Rs.3,72,46,389/- and after setting off the short-term capital loss on sale of shares made upto 30.09.2004 amounting to Rs.5,09,882/-, net short- term capital gain of Rs.3,67,36,507/- was offered to tax at the concessional rate. Although the claim of the asseesese for long-term

capital gain was accepted by the Assessing Officer during the course of assessment proceedings, he was of the view that the profit on sale of shares amounting to Rs.3,67,36,507/- offered by the assessee as short- term capital gain was in the nature of business income having regard to the relevant facts of the case. He, therefore, required the assessee to explain as to why the said income should not be brought to tax in its hands as business income instead of short-term capital gain. In reply, it was explained by the assessee-Company that it maintains separate Demat account for the purpose of holding securities in the nature of stock-in- trade and investment and the securities purchased as stock-in-trade and investment are credited to the respective Demat accounts. It was contended that this earmarking done by the assessee since the date of purchase of respective shares was sufficient to establish the nature and purpose of acquiring and holding the respective shares and securities as stock-in-trade or investment, as the case may be and the profit arising from sale thereof was accordingly declared as business income and short- term capital gain.

The contention of the assessee was not found acceptable by the Assessing Officer on the basis of the following findings/observations recorded by him in the assessment order:-

“6(C). The Short Term Capital Gain has arisen in the shares of 38 different companies. There are hundreds of transactions of sale and purchase. There are very few scrips of shares which appear in the opening stock as on 1/4/2004. The most of the scrips of shares have been purchased and sold during the year itself.

6(d). The cost of shares purchased is Rs. 15.92 crore and the sale consideration of the shares sold is Rs. 19.60 crores.

6(e). The shares on which the assessee has claimed Short Term Capital Gain, dividend received is of Rs.2.69 lakhs only, as

against the gain (difference of sale & purchase) of more than Rs. 3.76 crore. No person will carry out a turnover of more than Rs. 19 crore to get dividend of Rs. 2.69 lakhs. The dividend received on shares is only incidental, as the assessee happened to hold these shares on record date. Therefore, the motive in sale and purchase of shares and units is not earning of dividend, but to earn business profit.

6(f). The conduct of the assessee company, as discussed above, shows that the shares/units were purchased with an intention to sale them at a profit. Therefore, the treatment given by the assessee to these shares/units in the books of account is not material. The Hon'ble Supreme Court in the cases of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT [1971] 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd. vs. CIT [1979] 116 ITR 1 (SC) has held that accounting entries alone are not determinative of the exact nature, character and scope of the transactions.

7(a). The assessee has received speculation profit of Rs.3,17,35,947/-. This profit has been earned by the assessee in "Futures and Options" transactions. The transactions have taken place throughout the year. An investor would not indulge in speculative transactions.

7(b). From the details of unexpired F & O Contract as on 31.03.2005, it is seen that the assessee had long position in TISCO of 31,050 shares. It is also seen that as on 31.03.2005, the assessee is holding 31493 shares in investment demat account. This is a hedging activity. Thus, there is a clear linkage in the closing stock of the shares in cash market and the short position in the F & 0 market. An investor will not indulge in creating such a linkage between the cash market and F & 0 market.

The assessee is also into intraday trading activity, on which it has made a profit of Rs.45,83,619/-. The assessee company is a sister concern of M/s. C. D. Equisearch Pvt. Ltd., which is a broking house. Shri Chandravadan Desai is a managing director of both the companies.

The magnitude and frequency of purchase and sale is very large. It can be seen from the statement of Short Term Capital Gain and the statement of Sale & Purchases in the futures market as well as from the sale turnover, as discussed in paragraph 6 above.

10.

From the Memorandum and Articles of Association of the company it is seen that trading in shares is the main object of the assessee company.

11(a) The assessee's submission is that the distinction between the shares purchased for investment purpose and shares purchased for trading purpose, is made at the time of purchase itself. The assessee has further stated that it maintains two separate Demat accounts for this purpose. The shares purchased for investment purpose are transferred into or are accumulated into 'Investment Demat Account' and the shares purchased for trading purpose are accumulated into 'Trading Demat Account'. The assessee further submits that this aspect is very important as the distinction is made at the time of purchase itself. This aspect of assessee's submission needs to be given careful consideration. At the outset, the distinction is made by the assessee in having two separate Demat accounts for two different purposes is very artificial. Looking into the background of the managing director, the activities of assessee's sister concern viz. M/s. C. D. Equisearch Pvt. Ltd., the large number of shares in which the assessee has dealt in, the turnover of the transactions, the research used in purchasing and selling shares, the frequency of transactions, the short duration for which the shares are held, all these factors throw light that the assessee is into an organized business activity and all the above facts cumulatively out weigh the solitary fact of having two Demat accounts.

Thus the submission of the assessee that shares from trading demat account are never transferred to the shares in investment demat account is not correct.

11(c). It is further important to note here that the assessee is utilizing borrowed funds for its investment activities. As mentioned previously the outstanding loan as on 31/3/2005 is Rs.24,82,02,119/-. The assessee has paid interest of Rs.2,06,24,510/- on this loan. The payments for trading purchase as well as investment purchase are made from the same account on which the assessee has paid the interest. The bank account is a huge complex account having several entries of deposit and withdrawal.

Thus, it is an undisputed fact that borrowed funds have been utilized for the purpose of making investment. This aspect clearly brings out that it is not a Short Term Capital Gain but a business profit.

11(d). The shares in the trading demat account as well as the shares in the investment demat account are pledged to the Stock Exchange for this purpose of margin money. This conduct of the assessee shows that the distinction between the shares held for trading purposes and for investment purposes is artificial”.

On the basis of the above findings/ observations recorded by him and relying on CBDT Circular No. 4 of 2007 as well as the various judicial pronouncements discussed by him in the assessment order, the Assessing Officer held that the motive of the assessee-Company behind the purchase and sale of shares, as evident from the magnitude of the transactions, assessee’s indulgence in speculative transaction and intra-day transactions, background of the assessee-Company, use of borrowed funds, transfer of shares from one Demat account to another, pledging of the so-called investment in shares for margin money, etc. was to deal in the shares as stock-in-trade as an organized business activity and, therefore, the profit arising from the relevant transactions of purchase and sale of shares amounting to Rs.3,67,36,507/- was chargeable to tax in its hands as business income and not short-term capital gain. Accordingly, the said amount was brought to tax by him in the hands of the assesese under the head “profits and gains of business or profession” at normal rate of tax in the assessment completed under section 143(3) vide an order dated 24.12.2007.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) disputing, inter alia, the treatment given by the Assessing Officer to the profit of Rs.3,67,36,507/- from the transactions of purchase and sale of shares as business income instead of short-term capital gain. During the course of appellate proceedings, elaborate submissions were made on behalf of the assessee before the ld. CIT(Appeals) to meet all the

objections raised by the Assessing Officer while treating the profit from share transactions as business income. The ld. CIT(Appeals) considered and discussed the submissions made by the assessee in respect of each and every point in detail in his impugned order as under:- “22. I have considered the findings of the A.D. in the impugned order & submissions made by the A/Rs. I have given my utmost consideration to the various judicial decisions on which the A.O. and the appellant placed reliance and have considered applicable provisions of law. In these grounds the material question involved is whether the profit of Rs.3,67,36,507/- earned on transfer of shares held for period less than 12 months; is assessable as "business income" or as "short term capital gains. On perusal of the assessment order, other documents and evidences submitted before me, I find that in the annual audited Profit & Loss A/c for the year ended 31st March 2005 the assessee disclosed profit on sale of investment at Rs.31,42,18,561/-. The appellant held shares by way of investment which were disclosed in the Balance Sheet at Rs.81,95,12,412/- and the investments were stated "at cost". In the profit & Loss A/c the appellant disclosed profit from share trading and dealing activities at Rs.6,27,31,216/-. The operational result of share trading business was disclosed in Schedule 'K' to the Profit & Loss A/c, wherein details relating to opening stock, purchase, sales & closing stock of share were disclosed. In the same statement the assessee had also disclosed income derived from derivative trading and speculative trading. In the Profit & Loss A/c the appellant also disclosed dividend income of Rs.5,03,14,975/-. In the computation of total income filed with the return the appellant disclosed business income of Rs.4,14,94,523/- from it's share trading and dealing business, Rs.3,67,36,507/- under the head short term capital gain and long term capital gain Rs.8,96,28,890/-. It appeared from the assessment order that except for the sum of Rs.3,67,36,507/- which appellant returned under the head "short term capital gain", the A.O. accepted the classification of income made by the appellant in relation to other sources of income. The dispute between parties concerns only with correct classification of the head of income for assessing Rs.3,67,36507/-. According to A.O. this sum was assessable as business income & whereas according to the appellant it was assessable as STCG. In his reasoned order the A.O. has referred to numerous facts & issues on the basis of which he concluded that the profit of Rs.3.67 Crores was assessable as business income. On the other hand in the well reasoned submissions, the A/Rs for the assessee contested the A.O's conclusions & findings.

23.

From the facts as are available on record I find that it is not in dispute that the assessee is a dealer in shares and during the year under consideration carried on share trading derivative trading and

share speculation business and earned substantial profit in these business segments. By dint of the order of Calcutta High Court, approving a Scheme of Arrangement between the appellant and M/s.CD Equi-search Pvt. Ltd., share Trading & Investment Divisions of the said company were demerged with retrospective effect from 1st April 2004 and were taken over by the appellant. Accordingly, in A.Y. 2005-06 besides the income of the appellant, income of the 2 demerged Divisions of CD Equi-search Pvt. Ltd. was got assessed in the appellant's hands. It appeared from the record that both, the appellant as well as CD Equi search Pvt. Ltd. carried on share trading & share dealing business in the past. Besides, both the companies held shares and securities for Investment purposes as well. In the financial books the distinction was made between shares for trading purposes and for investment purpose. The classification between 2 types of holding was accepted by the A.O.s in the regular assessments in the past assessment. It is only in A.Y. 2005-06 the A.O. disputed the classification of income in so far as it pertained to assessment of the short term capital gain.

24.

The Supreme Court in case of CIT Vs. Madan Gopal Radheylal [73 ITR 652] held that there cannot be a presumption that every acquisition by a dealer in a particular commodity is an acquisition for the purpose of his business. In each case the intention is to be gathered from the facts of the case and from the conduct of the assessee acquiring the commodity and his dealings with the same. As per the ratio laid down in this decision of the Supreme Court, there cannot be presumption that where an assessee is a dealer in shares, every acquisition by the said dealer is for trading or business purposes. One should therefore, gather the intention with reference to assessee's conduct and the manner in which shares are accounted and dealt with in the books of account of the assessee.

25.

The Supreme Court in the case of CIT Vs. Associated Industrial Development Co. Ltd. [82 ITR 586] has observed that whether any part of the holding of shares is by way of investment or forms part of the stock in trade, is a matter which is within the knowledge of the assessee and therefore, the assessee should be in a position to produce evidence from its record to establish the distinction between the shares held as stock in trade and by way of investment. In the appellant's case, it was assessed to tax in respect of income derived by the demerged divisions of CD Equisearch Pvt. Ltd. From perusal of the approved scheme of arrangement it appeared that the Court approved demerger of two distinct divisions of CD Equisearch Pvt. Ltd. The divisions demerged were Share Trading Division & Investment Division. The said demerger was 'in conformity with Sec. 2(42C) of the Act. Accordingly I find that both the High Court as well as tax authorities have accepted that “Investment Divisoin” of CD Equisearch constituted as an ‘undertaking’ which was distinct

from ‘share trading undertaking’ of CD Equisearch Pvt. Ltd. and these two were distinct from each other.

26.

It also appeared from the annual accounts of the appellant and M/s. CD Equi-search Pvt. Ltd. that the shares were held on 2 distinct account viz. as trading stock & by way of Investment. The trading transactions were routed through appellant's Profit & Loss Account and therefore, opening & closing stock of trading shares & purchase & sale of shares appeared in the Profit & Loss Account. On the other hand, Investments appeared only in the Balance Sheet and the profit made on variation in the investment appeared in the Profit & Loss Account under the nomenclature of ‘profit on sale of investment". I further find that the assessee regularly followed the principles of "lower of the cost or market value" for the purpose of valuing inventory of shares. On the other hand, "investments" were always carried in the Balance sheet "at cost". The method of inventory valuation for trading stock of share was different from the method followed for stating Investment in the books. As a result of the particular method of inventory valuation followed in relation to trading stock of shares, appellant accounted for the loss in the value of inventory due to fall in the market price. However, loss on account of fall in the market price was never taken in to consideration in relation to Investment. It appeared from the past assessments that the distinction between the share trading business and investment was accepted by the A.Y. In particular in the order u/s 143(3) for the A.Y.2003-04 dated 09.03.2006; in case of CD Equi search Pvt. Ltd the A.D. recorded that the assessee was engaged in the business of stock market operations and was earning income from brokerage besides share trading and investment activity. Accordingly in the regular assessments for A.Y.2003-04 & 2004-05 profit on sale of investments was assessed as capital gains and profit from share trading was assessed as business income. Even in the impugned order the A.D. accepted the valuation of inventory of trading shares based on the principle of "lower of cost or market value". The A.O. did not disturb the accounting position relating to carrying lost of investment and the assessee's method of valuing the investment "at cost" was accepted by the A.O. Under the circumstances, I find that the A.O. himself has not been consistent with his own findings and has accepted assessee's methods of valuation to the extent it was beneficial to the Revenue's case.

27.

On perusal of the statement of valuation of "Investment" carried out by following the principle of "lower of the cost or market value" I find that as per the said method of valuation assessee would have been entitled to account for loss of Rs.3,15,96,300/-. Such loss was however, not accounted by the appellant in its books nor claimed in the return because the appellant held these shares as Investment which was carried & stated in the Balance Sheet "at cost". If the A.O.

changed classification of income to "business" then the A.O. should have allowed the deduction for loss arising on account of inventory valuation. However, for the reasons best known to him, A.O. did not allow the deduction for valuation loss though income was assessed under the head business. These facts therefore, establish that the A.O. himself did not per se believe that the appellant was a dealer in shares in so far as the shares were held in the books as "Investment".

28.

As per the ratio laid down by the Supreme Court in 82 ITR 586 the onus was on the appellant to prove the distinction between the shares held as stock in trade or by way of investment. It appeared from the conduct of the assessee & from the entries made in the books of A/c and the return of income filed that the appellant had discharged such onus. Evidences on record clearly established that assessee always distinguished between shares held as stock in trade and shares held as investment. The distinction between the stock in trade and investment was apparent from the fact that 2 distinct demat accounts were maintained by the appellant. According to A.O. maintenance of 2 different demat accounts was an artificial distinction. In my opinion, this finding of the A.D. is based on his surmise and conjecture. From the copies of the demat statements I find that during F.Y. 2004-05 the appellant maintained 2 demat accounts, titled as CD Equisearch Pvt. Ltd (Investment) and CD Equisearch Pvt. Ltd (Trading) Account. The demat accounts were maintained with Depository participant of CDSL recognized by SEBI, over whom the assessee did not have control. As per SEBI & Stock Exchange regulations the deliveries of shares are given immediately after the conclusion of purchase in dematerialized form. Whenever and wherever the appellant purchased shares for trading purposes delivery of shares was taken in the "Trading demat account" and wherever the deliveries were taken Investment Purposes, deliveries were reflected in the "Investment demat account", From the entries appearing in the respective demat account, the intention of the appellant behind acquiring & holding shares either for trading purpose or for investment purpose became manifestly clear. The conduct of the appellant in taking deliveries in 2 different & distinct demat accounts established assessee's intentions behind acquisition of shares for distinct purposes. On these facts therefore, I find force in the submissions of the A/R that overall conduct of the appellant established the distinction between the 2 types of holding & therefore the A.D. could not dispute or disbelieve it for the reasons set out in the order when the appellant's explanations were not found to be untrue.

29.

I further find that the distinction between trading stock & Investment was accepted by the Assessing Officer in relation to long term investment because profit of transfer of shares held for period

exceeding 12 months has been assessed under the head ‘long term capital gains’. From the audited accounts and the return filed, I note that during the relevant year the appellant earned profit on sale of investment of Rs.31.42 crores out of which Rs.27.75 crores pertained to gains from transfer of long term investments. In the impugned order, the AO accepted the assessee’s classification of the head of income and assessed such profit under the head LTCG. It is only in relation to short term capital gain of Rs.3.67 croes which was just over 12% of profit on sale of investment, the AO disputed the classification of the head of income. If the AO accepted the assessee’s book results and classification of the head of income thereby accepted the distinction between stock in trade and investments, there appeared no reason for AO to disbelieve the assessee’s explanations only in relation to short term capital gains.

30.

I also find force in the submissions of the A/Rs that the investments are gradually acquired by the appellant over a period of time. In case of sale of shares of 6 companies the gain was partly long term in nature and partly short term in nature. The long term capital gain of Rs.2,07,545,590/- was accepted by the AO without question. Only the profit of Rs.1,25,57,289/- realized on sale of shares of the same companies and which were held for period less than 12 months, the AO assessed it as business profit. I do not find any logic in this act particularly when all the facts concerning these transactions were same except for the holding period.

31.

In the assessment order the AO has placed much emphasis on the fact that the assessee earned short term capital gain of Rs.3.67 crores on sale value of Rs.19.60 crores and earned meagre dividend of Rs.2.69 lacs, this findings of the AO appears to be factually incorrect. As is evident from P&L Account dividend earning was not meagre 2.69 lacs but it was substantially more at Rs.5.30 crores. On gross turnover of Rs.473.28 crores the assessee earned profit margin of Rs.6.27 crores and earned dividend of Rs.18,55,294/- only. On the other hand, on transfer of investment shares the appellant realized sale price of Rs.59,98 crores out of which capital appreciation accounted for Rs.31.32 crores. In other words, over 53% of the sale price realized on transfer of investment represented appellant's capital gains. On share holding by way of investment the appellant also earned substantial dividend income of Rs.4.85 Crores. These facts therefore, clearly establish that the investments were held mainly for the purpose of earning dividend and realize capital appreciation. These facts clearly prove that observations made by A.O. in paras 5(b)(iii) & 6(d)(e) of his order rather supported the assessee's case. The conduct of the assessee and the manner in which the assessee dealt with the shares as stock in trade and as investment clearly established the distinction between the two. Even after applying the principles propounded by the A.O. himself I find

that clear distinction was always maintained by assessee between the trading & investment activities. Having regard to the all facts of the case therefore, it appeared that the profit of Rs.3.67 Crores realized from transfer of short term investment was assessable as capital gains and not as business profit.

32.

I further find that the A.O's reliance on large number of decisions of the Supreme Court as set out in his assessment order was misplaced. In the present case the A.O. himself admitted the distinction between the shares held as stock in trade and by way of investment. Having accepted the distinctions between the two, the A.O. himself assessed the income of over Rs.27.75 Crores under the head "long term capital gains". The nature of transactions & facts giving rise to incomes relating to short term and long term investment were same. Accounting entries passed in relation to both types of Investments were identical and all the investment transactions passed through the same Investment demat account. In the circumstances, there was no reason for the A. 0 to hold that only the short term capital gain represented business income of the appellant. On these facts therefore, I have no hesitation in holding that transaction in respect of investment in shares gave rise only to capital gains income and it was not assessable under the head "profit & gains of business".

33.

I also find that the A.O's actions in assessing such profit as business income were not consistent in all respects because he assessed the profit realized on transfer of short term investments under the head "business income". As noted the in foregoing the A.O. did not allow deduction for valuation loss in computing such business income even though the assessee regularly followed the principle of "lower of the cost or market value" for valuing inventory. Similarly the A.O. also did not allow tax rebate u/s 88E of the Act., pertaining to STT paid on sale of shares. These actions of the A.O. indicate that only so far as assessment of income under the head "profit & gains of business" the A.O. disputed the appellant's claim. However, if the A.O. was to dispute assessee's classification then it was incumbent on A.O. to assess income as per the accounting methods & all legal provisions as applicable to the assessment of business income. This aspect was however, not taken care of by the A.O. which indicates that to the extent the A.O. found the assessee's action beneficial to the Revenue, the A.O. accepted the same. In my opinion this was not permissible”.

After discussing all the relevant aspects of the matter in detail with reference to the facts and figure available on record, the ld. CIT(Appeals) found merit in the contention raised on behalf of the assessee before him

that the Circular No. 4 of 2007 issued by the CBDT and relied upon by the Assessing Officer actually supported the case of the assessee keeping in view that two separate portfolios for the shares purchased as investment and shares purchased as stock-in-trade were maintained by the assessee. He also found that the case laws relied upon by the Assessing Officer to come to his conclusion were distinguishable on facts and actually some of the case laws so relied upon including especially the decision of the Authority for Advanced Ruling in Fidelity North Star Fund 288 ITR 641 advanced the claim of the assessee. Accordingly, relying on the said judicial pronouncements as well as the CBDT Circular No. 4 of 2007 and having regard to all the facts and circumstances of the case as discussed by him elaborately in his impugned order, the ld. CIT(Appeals) held that the profit of Rs.3,67,36,507/- was earned by the assessee on the shares and securities purchased and held as investment and the same, therefore, was chargeable to tax in the hands of the assessee as short-term capital gains and not business income.

10.

The ld. D.R. strongly relied on the order of the Assessing Officer in support of the Revenue’s case on this issue and contended that all the material aspects, which are relevant to decide as to whether the relevant shares were purchased and held by the assessee as stock-in-trade or investment, have been duly taken into consideration by the Assessing Officer.

11.

The ld. Counsel for the assessee, on the other hand, strongly supported the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee on this issue and contended that the detailed submissions made by the assessee before the ld. CIT(Appeals) as well as the findings/ observations recorded by the ld. CIT(Appeals) thereon in his impugned order may be taken into consideration while deciding this issue. He also

pointed out that a similar claim of the assessee for short-term capital gain was accepted by the Assessing Officer in the earlier years including the immediately preceding year, i.e. A.Y. 2004-05. In this regard, he invited our attention to the copy of the assessment order passed by the Assessing Officer under section 143(3) for A.Y. 2004-05 as placed at page no. 53 of his paper book. He also submitted that the profit arising from sale of shares held in investment portfolio for the period of more than one year was declared by the assessee as long-term capital gain and the same was accepted by the Assessing Officer. He contended that the sale of such shares within a period of one year, however, was treated by the Assessing Officer as business income by taking an inconsistent stand. He also contended that the same Assessing Officer in the assessment order passed for the same year, i.e. A.Y. 2005-06 in the case of Merlin Holdings (P) Limited had taken a similar stand by treating the short-term capital gain offered by the assessee as business income for the similar reasons and the order of the ld. CIT(Appeals) allowing the claim of the assessee in that case has been upheld by the Tribunal vide its order dated 18.10.2010 passed in ITA No. 1407/KOL/2009. He also pointed out that the said order of the Tribunal has been upheld by the Hon’ble Calcutta High Court in ITA No. 101 of 2011 dated 12.05.2015.

12.

We have considered the rival submissions and also perused the relevant material available on record. The issue before us is whether the profit arising from the sale of the relevant shares and securities is chargeable to tax in the hands of the asseessee as short-term capital gain as held by the ld. CIT(Appeals) or as business income as held by the Assessing Officer. The answer to this question depends mainly upon the intention of the assessee to acquire and hold the relevant shares. This intention is to be gathered from the facts and circumstances involved in each case and such facts and circumstances are required to be considered

and appreciated in the light of various guidelines laid down in the various judicial pronouncements as well as the relevant CBDT Circulars. In this regard, it is observed that the ld. CIT(Appeals) in his impugned order has considered all the relevant facts and figures of the assessee’s case in the light of such guidelines to come to the conclusions that the relevant shares were acquired and held by the assessee as investment and therefore, the profit arising from sale of such shares was chargeable to tax as short-term capital gain and not as business income.

13.

We have already extracted the relevant findings/observations recorded by the ld. CIT(Appeals) in this regard in the foregoing portion of this order and a perusal of the same clearly shows that two separate portfolios were maintained by the assessee in respect of shares purchased and held as stock-in-trade and investment not only in the year under consideration but even in the earlier years and the claim of the assessee for short-term capital gain in respect of profit arising from the shares held in investment portfolio was accepted by the Assessing Officer in the earlier years including the immediately preceding year. As found by the ld. CIT(Appeals), separate Demat accounts were maintained by the asseessee for shares held as stock-in-trade and for shares held as investment and the fact that the shares held as investment were directly credited to the separate Demand account maintained for investment on the date of purchase itself clearly shows that the intention of the assessee right from the beginning was to acquire and hold the relevant shares as investment only. As pointed out on behalf of the assessee before the ld. CIT(Appeals) as well as before us, the transfer of shares from one Demat account to another Demat account was only on account of conversion of shares held as investment into stock-in-trade and there was no transfer of shares held as stock-in-trade into investment in its books of account.

14.

As noted by the ld. CIT(Appeals), the relevant shares credited to the separate Demat account maintained by the assessee for investment were also treated as investment in the books of account of the assessee and the same were valued at cost. On the other hand, the shares credited to the Demat account maintained by the assessee for stock-in-trade were given the same treatment in its books of account and the same were not only valued at cost or market price, whichever is lower, but even the substantial profit earned by the assessee from the sale thereof was offered to tax as business income. Similarly profit arising from derivative transactions and intra-day transactions was offered by the assessee as business income. As found by the ld. CIT(Appeals), if the shares held by the assessee as investment were to be valued at cost or market price, whichever is lower going by the treatment given by the Assessing Officer to the said shares as stock-in-trade while bringing the gain in question as business income to tax in the hands of the assessee, the assessee would have become entitled for loss of Rs.3,15,96,300/-. However, no such loss was claimed by the assessee-Company showing its clear intention to hold the said shares as investment and not stock-in-trade. It is also observed that the profit arising from the sale of shares held in investment portfolio for a period of more than one year was offered by the assessee to tax as long-term capital gain and the same was accepted by the Assessing Officer. He, however, gave different treatment to the shares held in the same portfolio for a period of less than one year, which, as rightly contented by the ld. Counsel for the assessee is self contradictory and inconsistent. Even the findings given by the Assessing Officer regarding low income from dividend and utilization of borrowed funds by the assessee for the purchase of relevant shares are found to be factually wrong by the ld. CIT(Appeals) on verification of relevant facts and figures and the ld. D.R. at the time of hearing before us has not been able to bring anything on record to controvert or rebut the same.

15.

If all the findings recorded by the ld. CIT(Appeals) in his impugned order as discussed above, which have remained un-rebutted or uncontroverted by the ld. D.R., are considered in the light of the relevant CBDT Circular No. 4 of 2007 as well as the judicial pronouncements cited on behalf of the assessee and relied upon by the ld. CIT(Appeals) in his impugned order, we find ourselves in agreement with the ld. CIT(Appeals) that the relevant shares were purchased and held by the assessee as investment and, therefore, the profit arising from the transactions of purchase and sale thereof is liable to tax in the hands of the assessee as short-term capital gain and not business income. The decision of the Coordinate Bench of this Tribunal in the case of Merlin Holding Private Limited involving similar issue and identical facts and circumstances, which has been upheld by the Hon’ble Calcutta High Court, further supports our view. We, therefore, uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assesese for short-term capital gain and dismiss Ground No. 1 of the Revenue’s appeal.

16.

In Ground No. 2 of its appeal for A.Y. 2006-07, the Revenue has challenged the action of ld. CIT(Appeals) in restricting the disallowance of Rs.1,23.89,258/- made by the Assessing Officer under section 14A to Rs.31,34,937/-.

17.

During the year under consideration, the assessee-Company had received exempt income in the form of dividend amounting to Rs.5,03,14,975/- and long-term capital gain amounting to Rs.18,78,53,164/-. No disallowance on account of expenses incurred in relation to the said exempt income, however, was offered by the assesese as required by the provisions of section 14A. In this regard, the contention raised on behalf of the assessee before the Assessing Officer was that the investment in shares was entirely made by it out of own

funds and there were no expenses specifically incurred in relation to the earning of the exempt income. This contention of the assessee was not found acceptable by the Assessing Officer and applying Rule 8D, he worked out the expenditure incurred by the assessee in relation to the earning of exempt income at Rs.1,23.89,258/-. Accordingly, the disallowance under section 14A was made by him to that extent.

18.

The disallowance made by the Assessing Officer under section 14A read with Rule 8D was challenged by the assessee in the appeal filed before the ld. CIT(Appeals) and after considering the submissions made by the assessee as well as the material available on record, the ld. CIT(Appeals) restricted the disallowance made by the Assessing Officer under section 14A to Rs.31,34,937/- for the following reasons given in paragraph nos. 40 & 41 of his impugned order:- “40. I have considered the submissions of the A/R and perused the order of the A.O. on the subject. According to the A/Rs the borrowed capital was partly used for making investments from which the appellant earned dividend income which was fully exempt and capital gains income which was partly taxable. In the impugned order the A.O. has reproduced the appellant's working of interest allocation amongst different income segments. I find that A.O. per se did not dispute or disbelieve the appellant's working of interest allocation. It is however found that the A.O. made disallowance purely on estimate by allocating gross expenses in the ratio of tax exempt income to gross income. In my opinion the estimate of the amount disallowable u/s 14A as made by the A.O. is not legally and factually correct. The A.O. considered the "net profit margins" in various transactions to arrive at base figure of RS.42,87,15,758/-. I however, find that quantum of many of expenses such as transactions charge, depository charges, interest paid on borrowed capital depend on the "turnover" and not on the "net profit margins" earned by the assessee. According to methodology adopted by the A.O. he apportioned the expenses between tax exempt income and taxable income in the income proportion which does not appear to be logically appropriate. If at all, the allocation could have beeen made on the basis of turnover. At the same time I do not approve the working of allocation of interest made by the appellant wherein the assessee estimated only Rs.9,79,465/- as relatable to investments. From the appellant's Balance Sheet as on 31.03.2005 I find that appellant's net own funds

were Rs.78,47,93,363/- and Investment in shares amounted to Rs.81,95,12,142/-. In the past assessments it has been accepted by the A.O. that the borrowed capital was used for carrying on share trading business; meaning thereby the investments were made by the appellant out of its own capital and reserves. In the year under consideration however I find that the appellant's own funds and reserves were not sufficient to meet the cost of investment as on 31.03.2005 and there was net deficit of Rs.3,47,18,279/- which was met out of borrowed capital. The appellant's loan liability as on 31.03.2005 was Rs.24,82,02,119/- on which the interest of Rs.2,06,24,510/- was paid by the appellant. Accordingly the pro-rata interest paid on borrowed capital and used for acquiring investment can be worked out as follows:

Rs. 3,47,18,279 ___________________ X Rs.2.06,24,510 = Rs.28,84,937/- Rs.24,82,02,119 41. In my opinion the said interest of Rs.28,84,937/- represents interest paid on borrowed capital which used for acquiring investments in shares which yielded the appellant tax exempt dividend and capital gains income and therefore the same was disallowable u/s 14A of the Act. As regards administrative expenses I find that the aggregate administrative expenses were only Rs.16.76.837/-. The assessee's turnover of share trading business was approx. Rs.473 crores which far exceeded the proceeds realized from sale of investments and dividend income. Having regard to the magnitude of share trading turnover and other income I hold that the ends of justice shall meet if the sum of Rs.2.5 lacs is disallowed as expenditure incurred in relation to tax exempt income. In the circumstances, the disallowance u/s 14A is confirmed for Rs.31,34,937/- and accordingly the appellant gets relief of Rs.92,54,321/-. Ground No. 3 & 4 are accordingly partly allowed”.

19.

We have heard the rival submissions on this issue and also perused the relevant material available on record. As rightly submitted by the ld. Counsel for the assessee, Rule 8D is applicable only from assessment year 2008-09 and the same being not applicable to the year under consideration, i.e. A.Y. 2005-06, the disallowance made by the Assessing Officer under section 14A by applying the said Rule was not sustainable. As further submitted by him, the disallowance under section 14A for the assessment years upto 2007-08 is required to be worked out on

reasonable basis and the disallowance so worked out by the ld. CIT(Appeals) being fair and reasonable in the facts and circumstances of the case, the same deserves to be confirmed. The ld. D.R., on the other hand, has not been able to raise any material contention to show that the disallowance as worked out by the ld. CIT(Appeals) under section 14A is not reasonable. We, therefore, find no justifiable reason to interfere with the order of the ld. CIT(Appeals) on this issue and upholding the same, we dismiss the Ground No. 2 of the Revenue’s appeal.

20.

Now we take up the cross appeals filed for the assessment year 2006-07 being ITA No. 552/KOL/2010 (assessee’s appeal) and ITA No. 961/KOL/2010 (Revenue’s appeal), which are directed against the order of the ld. CIT(Appeals)-VIII, Kolkata dated 23.02.2010.

21.

As regards the revenue’s appeal for A.Y. 2006-07, the ld. Representatives of both the sides have agreed that the solitary issue involved therein relating to the chargeability of the profit of Rs.6,23,19,253/- to tax under the head “short-term capital gains” or “income from business or profession” is similar to the one involved in revenue’s appeal filed in the case for assessee for AY 2005-06, which has already been decided by us in favour of the assessee in the foregoing portion of this order. As the issue involved in AY 2006-07 as well as the material facts relevant thereto are admittedly similar to that A.Y. 2005- 06, we follow our conclusion drawn in A.Y. 2005-06 and uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for short-term capital gain on account of profit arising from the transactions of purchase and sale of shares. Revenue’s appeal for assessment year 2006-07 is accordingly dismissed.

22.

The solitary issue raised in assessee’s appeal for A.Y. 2006-07 relates to the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) under section 14A read with Rule 8D.

23.

During the year under consideration, the assessee had earned exempt income in the form of dividend amounting to Rs.6,76,04,070/-. No disallowance on account of expenses incurred in relation to the said exempt income, however, was offered by the assessee as required by the provisions of section 14A. The Assessing Officer worked out such expenses attributable to the earning of exempt income on proportionate basis at Rs.17,41,640/- and made a disallowance to that extent under section 14A. On appeal, the ld. CIT(Appeals) directed the Assessing Officer to work out the disallowance to be made under section 14A by applying the Rule 8D. Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred this appeal before the Tribunal.

24.

We have heard the arguments of both the sides and also perused the relevant material available on record. As pointed out by the ld. Counsel for the assessee from the written submissions filed by the assessee before the ld. CIT(Appeals), which is reproduced by the ld. CIT(Appeals) in his impugned order, the issue relating to disallowance made by the Assessing Officer under section 14A in AY 2006-07 as raised in Grounds No. 3 & 4, was not pressed by the assessee. Since this issue was not pressed by the assessee during the course of hearing before the ld. CIT(Appeals), we agree with the ld. Counsel for the assessee that there was no necessity for the ld. CIT(Appeals) to decide the same on merit and his decision on this issue directing the Assessing Officer to make the disallowance under section 14A by applying Rule 8D is liable to be set aside. We, therefore, set aside the impugned order of the ld. CIT(Appeals) on this issue and allow the appeal of the assessee.

25.

Now we take up the Revenue’s appeal for A.Y. 2007-08 being ITA No. 1280/KOL/2011, which is directed against the order of the ld. Commissioner of Income Tax (Appeals)-VIII, Kolkata dated 29.07.2011.

26.

At the time of hearing before us, the ld. Representatives of both the sides have agreed that the solitary issue involved in this appeal relating to the chargeability of the profit of Rs.1,58,09,214/- to tax under the head “short-term capital gains” or “income from business or profession” is similar to the one involved in revenue’s appeal filed in the case for assessee for AY 2005-06, which has already been decided by us in favour of the assessee in the foregoing portion of this order. As the issue involved in AY 2007-08 as well as the material facts relevant thereto are admittedly similar to that A.Y. 2005-06, we follow our conclusion drawn on for A.Y. 2005-06 and uphold the impugned order of the ld. CIT(Appeals) allowing the claim of the assessee for short-term capital gain on account of profit arising from the transactions of purchase and sale of shares. Revenue’s appeal for assessment year 2007-08 is accordingly dismissed.

27.

In the result, all the appeals filed by the Revenue are dismissed, while the appeal of the assessee is allowed.

Order pronounced in the open Court on December 09, 2015. Sd/- Sd/-

(S.S. Viswanethra Ravi) (P.M. Jagtap) Judicial Member Accountant Member Kolkata, the 9th day of December, 2015

Copies to : (1) Deputy/Assistant Commissioner of Income Tax, Circle-7, Kolkata, AAyakar Bhawan, 5th Floor, P-7, Chowringhee Square, Kolkata-700 069

(2) C.D. Equifinance Pvt. Limited, 37, Shakespeare Sarani, 1s t Floor, Kolkata-700 017

(3) Commissioner of Income-tax (Appeals)- VIII, Kolkata (4) Commissioner of Income Tax, Kolkata (5) The Departmental Representative (6) Guard File

By order

Assistant Registrar, Income Tax Appellate Tribunal, Kolkata Benches, Kolkata Laha/Sr. P.S.

ACIT, CIRCLE - 7, KOLKATA, KOLKATA vs. C.D. EQUIFINANCE PVT. LTD., KOLKATA