TMI Blog2015 (12) TMI 1525X X X X Extracts X X X X X X X X Extracts X X X X ..... Sarfarazut Tauheed, JCIT, Sr. D.R., For the Respondent: Shri D.S. Damle, FCA, 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. 2. 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. 3. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 6. 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 ₹ 15.92 crore and the sale consideration of the shares sold is ₹ 19.60 crores. 6(e). The shares on which the assessee has claimed Short Term Capital Gain, dividend received is of ₹ 2.69 lakhs only, as against the gain (differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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. 8. 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 ₹ 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 give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 classificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rading 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 dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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, deliv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 3.67 crores on sale value of ₹ 19.60 crores and earned meagre dividend of ₹ 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 ₹ 5.30 crores. On gross turnover of ₹ 473.28 crores the assessee earned profit margin of ₹ 6.27 crores and earned dividend of ₹ 18,55,294/- only. On the other hand, on transfer of investment shares the appellant realized sale price of ₹ 59,98 crores out of which capital appreciation accounted for ₹ 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 ₹ 4.85 Crores. These facts therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luing 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 . 9. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, 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 ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id on borrowed capital and used for acquiring investment can be worked out as follows: ₹ 3,47,18,279 ___________________ X ₹ 2.06,24,510 = ₹ 28,84,937/- Rs.24,82,02,119 41. In my opinion the said interest of ₹ 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 ₹ 16.76.837/-. The assessee's turnover of share trading business was approx. ₹ 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 ₹ 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 ₹ 31,34,937/- and accordingly the appellant gets relief of ₹ 92,54,321/-. Ground No. 3 4 are accordingly partly allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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