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2016 (3) TMI 978 - ITAT KOLKATA

2016 (3) TMI 978 - ITAT KOLKATA - TMI - Disallowance u/s 14A of the Act read with Rule 8D(2)(ii) and (iii) of the Rules - Held that:- 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 [2010 (8) TMI 77 - BOMBAY HIGH COURT ]. However, it is not in dispute that the assessee had derived taxable income as well as .....

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ions of frequent purchase and sale of shares in a systematic and organized manner - assessed as capital gains OR business income - Held that:- There is no material brought in by the revenue to show that separate accounts of two portfolios are only a smokescreen and there is no real distinction between two types of holdings. This could have been done by showing that there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not re .....

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alaganesh, Accountant Member For The Appellant: Shri Sanjay Mukherjee, JCIT, ld. Sr.DR For The Respondent: Shri R.N Bajoria, Sr. Advocate and Shri A.K. Gupta, FCA, ld.ARs ORDER SHRI M.BALAGANESH, AM These appeals of the revenue and cross objection of the assessee arise out of the orders of the Learned CIT (A)-XII, Kolkata in Appeal No. 729/XII/Cir-12/07-08 dated 31.3.2009 for Asst Year 2005-06 and Appeal No. 310/XII/Cir-12/08-09 dated 28.5.2009 for the Asst Year 2006-07 against the orders of ass .....

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his common order for the sake of convenience. 4. The first issue to be decided in revenue s appeal in Asst Year 2005-06 and cross objection of the assessee for Asst Year 2005-06 is as to whether disallowance u/s 14A of the Act read with Rule 8D(2)(ii) and (iii) of the Rules could be made in the facts and circumstances of the case. 4.1. The brief facts of this issue is that the assessee is an investment company engaged in the business of dealing, trading and investing in shares and securities inc .....

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5% of ₹ 4,63,906/- amounting to ₹ 23,125/- for the Asst Year 2005-06. On first appeal, the Learned CIT(A) directed the Learned AO to adopt the provisions of Rule 8D(2)(iii) of the Rules to make disallowance u/s 14A of the Act for the Asst Year 2005-06. Aggrieved, the revenue is in appeal and assessee has preferred cross objections before us on the following grounds:- 1. On the facts and in the circumstances of the case, the ld. CIT(A) erred in directing the AO to follow the method as .....

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nized manner give rise to capital gain and not the business income. CO No. 52/2009 [ITA No.1149/Kol/09 A.Y 2005-06] 1 a) For that, the application of Rule 80 of the Income Tax Rules in the case of the Assessee is bad in law and, therefore, cannot be sustained. b) For that, in the original Assessment Order, disallowance u/s 14A was made on estimate at ₹ 23,125/- and the said disallowance of ₹ 23,125/- cannot be increased under any circumstances while giving effect to the Appellate ord .....

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of Income Tax (Appeals) failed to appreciate the fact that even sub-section (2) of Section 14A of the Act in which the said rule was inserted was introduced in the statute book with effect from 1 April 2007 and was admittedly applicable only from Assessment Year 2007-08 as stated in the memo explaining the Finance Bill 2006. 3) For that no expenses were incurred by the appellant for earning dividend income. Further and in any event the Assessing Officer as well as the Commissioner of Income Tax .....

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of the Act has got retrospective application in the statute, disallowance thereon could be restricted to 1% of exempt income as has been held by the Jurisdictional High Court in the case of CIT vs R.R.Sen & Brothers P Ltd in G.A.No. 3019 of 2012 in ITAT No. 243 of 2012 dated 4.1.2013. In response to this, the Learned DR fairly conceded to the submission of the Learned AR. 4.3. We have heard the rival submissions. The relevant assessment year under appeal is 2005-06 at which point of time , .....

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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, a .....

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06 and 2006-07 are as to whether the Learned CITA was justified in holding that the transactions of frequent purchase and sale of shares in a systematic and organized manner would have to be assessed only as capital gains instead of business income. The revenue had raised the same ground for both the asst years as below:- 2. Whether on the facts and in the circumstances of the case, ld.CIT(A) was correct in holding that the transactions of frequent purchase and sale of shares/units in a systemat .....

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ent head, the Learned AO observed that the assessee had disclosed long term capital gains of ₹ 50,10,740/- after indexation and claimed exemption for the same ; and disclosed ₹ 71,90,242/- as short term capital gains after setting off carried forward losses of ₹ 10,06,203/-. Under the head business income , the Learned AO observed that the assessee had disclosed ₹ 3,09,988/- as profit from trading in shares. The assessee was carrying on both trading and investment activit .....

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the intention was to invest in shares and that the shares were held as long term investment only in earlier years and gains from sale of investments always assessed under the head capital gains. However, as per the memorandum of Association of the company, the Learned AO observed that the main business of the assessee is to acquire, subscribe to , hold, dispose off and deal in shares/units. The Learned AO also felt that the assessee had carried on in a systematic and an organized manner, numero .....

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appeal, the Learned CIT(A) appreciated the contentions of the assessee and treated the said gains as capital gains and not business income. Aggrieved, the revenue is in appeal before us. 5.2. The Learned DR argued the holding period of most of the shares were less than 30 days and hence the intention of the assessee was only to earn profits out of buying and selling of shares and not to hold the same as investment for long term purposes. In response to this, the Learned AR argued that the assess .....

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iny assessment proceedings for the earlier years and in subsequent assessment years in the scrutiny assessment proceedings, wherever applicable. In response to the argument of the Learned DR that principle of resjudicata does not apply to income tax proceedings, the Learned AR argued that the principle of consistency cannot be given a go bye and for which he placed reliance on the decision of the Hon ble Apex Court in the case of Radhasaomi Satsang reported in 193 ITR 321(SC). The Learned AR fur .....

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ld for more than one year also for which long term capital gains were reported by the assessee and it is for the assessee to decide when to exit from the relevant investment depending upon the favourable market conditions. He further placed on record the copy of the tribunal order in assessee s own case , among other decisions, for the Asst Year 1992-93, wherein this tribunal had accepted the plea of the assessee that the gains derived from investment activities of assessee were accepted as capi .....

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years and compilation of various case laws on the impugned issue. We find that the assessee is engaged in investment activity and business activity for years together. We also find that the coordinate bench decision of this tribunal for the Asst Year 1992-93 in assessee s own case in ITA No. 2943/Cal/1996 dated 28.9.2001 had accepted the plea of the assessee that the gains arising out of investment activities of the assessee had to be assessed only as capital gains and not business income. It is .....

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earned 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 a .....

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s and business income for trading activities. 5.3.1. Whether introduction of concessional rate of tax on short term capital gains and exemption of long term capital gains pursuant to introduction of securities transaction tax (STT) would change the character of the transaction We find that the entire gamut of transactions are to be viewed in the context of dominant intention of the assessee whether to hold a particular scrip in investment portfolio or in trading portfolio. We find that the levy .....

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able for concessional rate of tax as against the normal rate of tax @ 30%. We also find that the Learned AO had not brought any evidence on record that the assessee was trying to shift any of its trading assets from the trading portfolio of shares & units to the investment portfolio to take advantage of lower tax rates under the head capital gains and vice versa wherever losses were incurred on sale of investments. It is not in dispute that the assessee had not converted any of the shares un .....

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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 .....

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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, .....

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ins and business income separately as per the consistent practice followed by the assessee over the years and accepted by the revenue in the earlier years. It is well settled that it is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment or .....

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Court in the case of CIT vs Gopal Purohit reported in 228 CTR 582 (Bom) wherein the assessee had maintained dual portfolios and ultimately the court held that the resultant gains from investment activity would be assessable as capital gains and not business income. We also find that the valuation of investments has been done by the assessee at cost as could be evident from the accounting policies forming part of the audited financial statements. 5.3.2.1. We also find that the CBDT in its Instruc .....

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wo independent portfolios i.e one for investment purposes and one for trading purposes from the very beginning is quite evident from the books of accounts wherein assessee had separate entries in its ledger accounts at the time of each transaction i.e at the time of purchase itself. This practice has not been found fault by the revenue in the earlier assessment years even in scrutiny proceedings. The Hon ble Madras High Court in the case of CIT vs S.Ramamrithan reported in (2008) 217 CTR 206 (Ma .....

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elivery of shares on its purchase and given due delivery of shares on its sale. The Learned AR further informed that the assessee had also kept separate records to record the transactions of each category i.e delivery based and nondelivery based. It is settled law that a particular income is from business or from investment must be decided according to the general common sense view of those who deal with those matters in the particular circumstances. The most excruciating factor to be looked int .....

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e 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 .....

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raised by the assessee are allowed. 5.3.4.1. We also find that the Hon ble Calcutta High Court in the case of CIT vs Merlin Holding P Ltd reported in (2015) 375 ITR 118 (Cal) for the Asst Years 2005- 06 and 2006-07 had held as below:- The frequency of transactions in shares alone cannot show that the intention of the investor was not to make an investment. The Legislature has not made any distinction on the basis-of frequency of transactions. The benefit of short -term capital gains can be avail .....

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assessee, was on investment account amounted to business activity and, therefore, he treated the shortterm capital gains of ₹ 1,01,00,000 as business income. The Commissioner (Appeals) held that the refusal on the part of the Assessing Officer to accept the short-term capital gains was incorrect. This was confirmed by the Tribunal. On appeal : Held, dismissing the appeal, that the assessee had adduced proof to show that some transactions were intended to be business transactions, some tran .....

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tly held against the views of the Assessing Officer. On the basis of the submissions made on behalf of the Revenue, it was not possible to say that the view entertained by the Commissioner (Appeals) or the Tribunal was not a possible view. Therefore, the decision of the Tribunal could not be said to be perverse. No fruitful purpose was likely to be served by remanding the matter . 5.3.4.2. We also find that the Hon ble Calcutta High Court in the case of CIT vs H K Financiers (P) Ltd reported in .....

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011, dated 12-5- 2015] wherein the following views have been expressed by us: "From the tenor of the submissions made by Mr. Saraf noted above, it appears that the case of the revenue is that in the facts of the case the finding that the income was earned from investment could not have been recorded. If that is the proposition then it is for the revenue to show that such a finding is not possible in law. That was not even suggested. What remains then is a question of appreciation of evidenc .....

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the appellant dealt with the shares of McLeod and Co. and the allied companies as stock-in-trade, that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade. The profit derived by the appellant from the sale of shares was therefore a revenue receipt and as such liable to income-tax." 5. The facts of the case are not shown to be similar with those in the case of Dalh .....

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case were perverse. The question is now formulated and is answered in the negative. The appeal is thus dismissed. 5.3.5. Existence of borrowed funds The next point to be addressed in this issue is the existence of borrowed funds and payment of interest thereon by the assessee. The Learned CIT(A) had given a factual finding that no nexus has been brought on record between the borrowed funds and the investments made. The Learned CIT(A) found that for the Asst Year 2005-06, the assessee had made s .....

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ition to generation of own funds in the form of sale of shares held as investments. This goes to prove that the own funds along with borrowed funds have been utilised for both investment and trading activities of the assessee. He accordingly held that the finding of the Learned AO that borrowed funds were utilized for investments to be factually incorrect. This finding given by the Learned CIT(A) is not refuted by the Learned DR before us for both the asst years under appeal. We find that the Ho .....

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Officer, an appeal was preferred by the assessee which was allowed by the Commissioner of Income-tax (Appeals) holding that the transaction was really in the nature of an investment. The appellate authority discussed reasons as to why was the transaction in the nature of an investment. The Revenue preferred an appeal. The learned Tribunal agreeing with the appellate authority dismissed the appeal. The Revenue has once again come up in appeal before us. 3. Mr. Saraf, learned advocate appearing fo .....

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on facility. 4. Mr. Saraf relied upon a judgment in the case of CfT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC). He drew our attention to the following finding recorded by the apex court (page 713) : "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 th .....

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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 T .....

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as a possible view in the facts and circumstances of the case. The judgment is not, however, an authority for the proposition that since purchase was made by borrowed funds, it is bound to become a business transaction. The Tribunal in that case had taken a possible view. Therefore, the apex court did not interfere. 6. No other submission was made. We are of the opinion that the view taken by the learned Tribunal in this case is also based on evidence and is a possible view. There is, as such, n .....

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, sale price and resultant book profit or loss which forms part of the paper book filed by the assessee. We find from the said workings of profit on sale of investments , none of the scripts had been sold by the assessee within a period of 30 days as stated by the Learned DR, except Kotak Mahindra Mutual Fund Short Term Plan which was purchased in March 2004 and redeemed in April 2004. Other than this, all other scripts and mutual funds were held for a minimum period of two months from the date .....

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month. Other than these two shares, the average period of 4 months has been maintained by the assessee from the date of purchase. We also find from the workings of long term capital gains for Asst year 2006-07, the shares were held for a period of 13 months. This shows that the assessee always intended these shares to be retained only under the investment category and it will be highly improper to state that these shares / units were held as stock in trade by the assessee. We find that this asp .....

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ccounts 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 .....

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or 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 .....

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motive though an investor is not precluded from realizing its investment which may result into profit in favourable circumstances. 5.3.8. We also find that the practice followed by the assessee by offering capital gains for investment activities and business income for trading activities in the earlier years have been consistently accepted by the revenue in section 143(3) proceedings for the Asst Years 2002-03 ; 2004-05 ; 2008-09 and 2010-11 , copy of which orders are placed on record before us .....

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case of CIT vs Gopal Purohit reported in (2011) 336 ITR 287 (Bom) and 228 CTR 582 (Bom) had considered the issue under consideration and held as under:- 4.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the Learned AR before us. We find that the assessee has been engaging himself in the share transactions both as an investor and as well as trader. It is seen that the assessee had clearly bifurcated the investment and trading .....

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oceedings 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 sh .....

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learly 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 tr .....

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eding 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 e .....

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he 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 .....

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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 u .....

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unt 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 .....

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