BHAGWATI PRASAD AGARWAL,KOLKATA vs. ITO, WARD-34(1), KOLKATA, KOLKATA

ORDER

Per Shri M.Balaganesh, AM

4.1. The brief facts of this issue is that the assessee invested in shares and held the same for a period ranging from one month to one year. The assessee stated that he is Bhagwati Prasad Agarwal A.Yr.2006-07 an investor in shares and accordingly declared capital gains both long and short term depending upon the period of holding the shares. Apart from this, the assessee was also dealing in purchase and sale of shares on speculation basis and deriving income from futures and options and offered the same as his business income. The fact of assessee declaring income from share transactions in the form of capital gains and business income are not disputed. The only point of dispute on this issue is whether the gains on share transactions are to be accepted as gains arising to the assessee in the capacity of investor or a trader. The Learned AO treated the gains from share transactions as business income of the assessee on the following grounds:- a) The assessee did not maintain separate books for share investment and share business. b) Share trading is not the incidental activity of the assessee but a regular and continuous activity of the assessee. c) The assessee is paying interest on loan for the trading of the shares. d) The holding of share of 12,830 out of 1,46,665 is 8.7% and frequency of the purchases and selling cancels the probability of investment. e) Total turnover wsa Rs 8,19,15,1393 for Futures & Options, Rs. 66,22,584 for shares transaction as per Form 10DB. Based on the aforesaid grounds, the Learned AO reworked the net profit from share business at Rs. 1,01,095/- and brought the same to tax. This action of the Learned AO was upheld by the Learned CITA in 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, the Ld. CIT(A) was not justified in confirming the action of the A.O. in treating the surplus of rs.1,01,095/- from share transactions as business income instead of income under the head Capital gains.”

4.2. The Learned AR furnished a paper book containing pages 1 to 57 wherein at pages 13-15, the details of share investments as on 31.3.2006 scrip wise were filed together with the date of purchase ; workings of long term capital gains scrip wise together with date of purchase and date of sale (average period of holding of shares more than one year) were filed in page 16 and workings of short term capital gains

Bhagwati Prasad Agarwal A.Yr.2006-07 scrip wise together with date of purchase and date of sale (average period of holding of shares ranging from one month to less than a year) were filed in pages 17 – 22 of Paper Book ; details of mark to market for futures and options transactions date wise were filed in pages 23 -28 of paper book and copy of return acknowledgement together with computation of total income and assessment order passed u/s 143(3) of the Act dated 12.10.2009 for the Asst Year 2007-08 in pages 29 – 36 of paper book, wherein the assessee’s share transactions have been accepted as investment transactions and capital gains ‘ loss assessed accordingly. Based on these facts, the Learned AR pleaded that the addition made in the sum of Rs. 1,01,095/- treating the share transactions as business income be deleted. In response to this, the Learned DR vehemently relied on the orders of the lower authorities.

4.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR before us. We find that the assessee has been engaging himself in the share transactions both as an investor and as well as trader. It is seen that the assessee had clearly bifurcated the investment and trading transactions including speculative share transactions in his books of accounts and it is also seen that the average period of holding of shares range from one month to more than one year and accordingly short term or long term capital gains are duly offered to tax by the assessee depending upon the period of holding the shares. It is also seen that the Learned AO had also accepted the stand of the assessee in the immediately succeeding assessment year as investment transactions under scrutiny proceedings vide 143(3) order dated 12.10.2009. We find that the frequency of transactions does not really matter and what is to be seen is the intention of the assessee whether he wants to penetrate into the capital market for the purpose of investment or for making speculative gains by doing day trading and dealing in futures and options. It is also seen that the Learned AO had clearly stated in his assessment order that the interest on borrowings were paid by the assessee only for trading in shares and this itself goes to prove that the assessee had clearly bifurcated his activities into two parts – one 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 Bhagwati Prasad Agarwal A.Yr.2006-07 assessee. It is also seen that the assessee has been doing this activity consistently. It is also seen from the balance sheet filed by the assessee that the assessee had clearly classified the share transactions under the head Investments. This itself clearly proves the intention of the assessee that he is only interested in share market only as an investor and not otherwise.

We find that this issue has been elaborately dealt with by the Hon’ble Bombay High Court in the case of CIT vs Gopal Purohit reported in 228 CTR 582 (Bom) , wherein the questions raised before the Bombay High Court and decision rendered thereon are as below:- “(a) Whether, on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in treating the income from sale of 7,59,003 shares for Rs.5,00,12,879/- as an income from short term capital gain and sale of 3,88,797 shares for Rs.6,65,02,340/- as long term capital gain as against the “Income from business” assessed by the A.O. ? (b) Whether, on the facts and circumstances of the case and in law, the Hon’ble ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res judicata to preclude the authorities from holding such transactions as business activities in current year ? (c) Whether, on the facts and circumstances of the case and in law., the Hon’ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income? “ The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received there from should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on 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

Bhagwati Prasad Agarwal A.Yr.2006-07 judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position, that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question. In so far as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under Section 260A. No substantial question of law is raised. The appeal is accordingly dismissed.

It is pertinent to note that the decision of Bombay High Court was subjected to further appeal by the revenue before the Hon’ble Apex Court and the Special Leave Petition (SLP) was dismissed by the Supreme Court. It is also pertinent to note that the CBDT Circular No. 4/2007 dated 15.6.2007 has also recognized possibility of two portfolios i.e one ‘Investment portfolio’ comprising of securities which are to be treated as capital assets and the other ‘Trading portfolio’ comprising of stock in trade which are to be treated as trading assets.

In view of the aforesaid facts and circumstances and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation to treat the assessee as an investor and direct the Learned AO to treat the gains arising out of share transactions as returned by the assessee as capital gains. Accordingly, the ground no.1 raised by the assessee is allowed.

5.1. The brief facts of this issue is that the assessee was in receipt of a loan from Sri Ram Niranjan Saraogi in the sum of Rs. 1,00,000/- on 10.5.2005 during the assessment year under appeal. The assessee furnished the complete details of the loan

Bhagwati Prasad Agarwal A.Yr.2006-07 creditor before the Learned AO including the PAN, income tax assessment particulars of loan creditor, balance sheet and statement of total income together with confirmation of having given the loan to the assessee together with the respective sources. The Learned AO observed that the immediate source of credit was towards cash deposit of Rs. 75,000/- in the bank account of Sri Ram Niranjan Saraogi on 7.5.2005 and balance Rs. 25,000/- out of own funds of the lender. Accordingly, he concluded that the credit worthiness of the loan creditor is not proved by the assessee and accordingly taxed the same u/s 68 of the Act which was also upheld by the Learned CITA. Aggrieved, the assessee is in appeal before us on the following ground:- “2.(a) For that on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition of Rs.1,00,000/- made by the A.O. on account of loan received from Sri Ram Niranjan Saraogi.”

5.2. The Learned AR argued that the loan creditor was having sufficient cash balance of Rs. 81,111/- and out of which a sum of Rs. 75,000/-was deposited by the concerned loan creditor in his bank account and sufficient bank funds and out of which a cheque for Rs. 1,00,000/- was issued by the loan creditor to the assessee as loan. She argued that these facts are quite evident from the bank statement given by the loan creditor and which is also part of the paper book filed herein. She further argued that the assessee’s brother had duly appeared in person before the Learned AO and confirmed the aforesaid transactions. In view of these, she pleaded that the assessee had duly discharged his onus in terms of section 68 of the Act in full and accordingly no addition u/s 68 would lie in the facts and circumstances of the case. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

5.3. We have heard the rival submissions and perused the materials available on record including the paper book and we find that the assessee had duly discharged his onus in full in terms of section 68 of the Act by furnishing all the details and creditworthiness of the loan creditors. Nothing prevented the Learned AO from making verification of these transactions and details filed by the loan creditor with the concerned assessing officer of the loan creditor. We also find that the concerned loan

Bhagwati Prasad Agarwal A.Yr.2006-07 creditor Sri Ram Niranjan Saraogi had got sufficient cash balance as per his books which he had deposited in his bank account in the sum of Rs. 75,000/- and this conduct cannot be doubted with in the facts and circumstances of the case. These facts are quite evident from the cash flow statement of Sri Ram Niranjan Saraogi filed by the Learned AR before us. Hence we have no hesitation in directing the Learned AO to delete the addition made in the sum of Rs. 1,00,000/- u/s 68 of the Act. Accordingly, the ground no. 2 (a) raised by the assessee is allowed.

6.1. This issue is only consequential to the previous ground. While disposing of Ground No. 2(a) raised by the assessee, we have held that the loan received from Sri Ram Niranjan Saraogi in the sum of Rs. 1,00,000/- should not be added u/s 68 of the Act. The Ground No. 2 (b) raised by the assessee is only payment of interest on the said loan of Rs. 1,00,000/-. The Learned AO and Learned CITA observed that the assessee had not actually paid the said interest of Rs. 25,751/- but only credited to the parties account. However, we find from the face of the assessment order itself that the assessee is following mercantile system of accounting and accordingly the assessee is duly entitled for deduction of Rs. 25,751/- towards interest payable on the loan from Sri Ram Niranjan Saraogi. Accordingly, the ground no. 2 (b) raised by the assessee is allowed.

7.1. The brief facts of this issue is that the assessee was in receipt of a loan from Sri Naresh Kumar Bharech in the sum of Rs. 2,00,000/- on 22.8.2005 and Rs. 55,000/- on Bhagwati Prasad Agarwal A.Yr.2006-07 27.12.2005 during the assessment year under appeal. The assessee furnished the complete details of the loan creditor before the Learned AO including the PAN, income tax assessment particulars of loan creditor, balance sheet and statement of total income together with confirmation of having given the loan to the assessee together with the respective sources. The Learned AO disbelived the version of the assessee and brought the loan credit to tax u/s 68 of the Act as unexplained cash credit which was also upheld by the Learned CITA. Aggrieved, the assessee is in appeal before us on the following ground:- “3.(a) For that on the facts and in the circumstances of the case, the Ld. CIT(A) erred in confirming the addition of Rs.2,55,000/- made by the A.O. on account of loan received from Sri Naresh Kumar Bharech.”

7.2. The Learned AR argued that the loan creditor had advanced monies to the assessee only by cheque out of sufficient bank balances available with him on the date of lending. This is quite evident from the bank statements enclosed in the paper book filed. She further argued that the assessee had duly appeared in person before the Learned AO and confirmed the aforesaid transactions. However, at the time of deposition before the Learned AO , the concerned loan creditor could not explain the source of deposit of Rs. 2,06,049/- credited in his bank account on 6.7.2005 and Rs. 45,000/- on 26.12.2005. She argued that the concerned loan creditor Shri. Naresh Kumar Bharech had advanced loan to Shri.Ved Prakash Suresh Kumar in Asst Year 2005-06 amounting to Rs. 2,06,115/- as could be evident from the balance sheet of Shri Naresh Kumar Bharech as on 31.3.2005. This loan was received back with interest on 4.7.2005 and credited in the bank account in the sum of Rs. 2,06,049 /- and Rs. 6,115/- on 11.4.2005. Hence the sources for the credits found in the bank account of the concerned loan creditor also stands clearly explained. From these sources, a sum of Rs. 2,00,000/- was advanced by the concerned loan creditor to the assessee on 22.8.2005. Similarly the concerned loan creditor had received back a loan of Rs. 15,000/- given on 9.11.2005 was received on 23.12.2005 which was credited in his bank account. The concerned loan creditor also received interest from the assessee in the sum of Rs. 45,000/- which was credited in his bank account on 26.12.2005. From these balances, the concerned loan creditor advanced another loan of Rs.

Bhagwati Prasad Agarwal A.Yr.2006-07 55,000/- to the assessee herein on 27.12.2005. All these facts are stated in pages 46- 57 of the paper book. In view of these, she pleaded that the assessee had duly discharged his onus in terms of section 68 of the Act in full and accordingly no addition u/s 68 would lie in the facts and circumstances of the case. In response to this, the Learned DR vehemently supported the orders of the lower authorities.

7.3. We have heard the rival submissions and perused the materials available on record including the paper book and we find that the assessee had duly discharged his onus in full in terms of section 68 of the Act by furnishing all the details and creditworthiness of the loan creditors. Nothing prevented the Learned AO from making verification of these transactions and details filed by the loan creditor with the concerned assessing officer of the loan creditor. We also find that the concerned loan creditor Sri Naresh Kumar Bharech had got sufficient sources in his books to advance monies to the assessee herein. Hence we have no hesitation in directing the Learned AO to delete the addition made in the sum of Rs. 2,55,000/- u/s 68 of the Act. Accordingly, the ground no. 3 (a) raised by the assessee is allowed.

8.1. This issue is only consequential to the previous ground. While disposing of Ground No. 3(a) raised by the assessee, we have held that the loan received from Sri Naresh Kumar Bharech in the sum of Rs. 2,55,000/- should not be added u/s 68 of the Act. The Ground No. 3(b) raised by the assessee is only payment of interest on the said loan of Rs. 2,55,000/-. The Learned AO and Learned CITA observed that the assessee had not actually paid the said interest of Rs. 65,230/- but only credited to the parties account. However, we find from the face of the assessment order itself that the assessee is following mercantile system of accounting and accordingly the assessee is duly entitled for deduction of Rs. 65,230/- towards interest payable on the loan from Bhagwati Prasad Agarwal A.Yr.2006-07 Sri Naresh Kumar Bharech. Accordingly, the ground no. 3(b) raised by the assessee is allowed.

In the result, the appeal of the assessee is allowed.

Order pronounced in the court on 23.09.2015.

Sd/- Sd/- [Mahavir Singh] [M.Balaganesh] Judicial Member Accountant Member Date: 23.09.2015. R.G.(.P.S.) Copy of the order forwarded to:

1. 1. Bhagwati Prasad Agarwal, C/o. M/s. Shiv Shakti Textiles, Gate No.4., Shop No.8, 18, Rabindra Sarani, Kolkata-700001. 2 The I.T.O., Ward-34(1), Kolkata.

3. The CIT-XII, Kolkata, 4. The CIT(A)-XX, Kolkata.