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2015 (12) TMI 1525 - ITAT KOLKATA

2015 (12) TMI 1525 - ITAT KOLKATA - TMI - Sale of shares - business income or short-term capital gain - Held that:- 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 i .....

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AND SHRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER For the Appellant: Shri S.M. 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. .....

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ed 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. 4. In Ground No 1 raised in this appeal .....

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ultancy services. The return of income for the year under consideration was filed by it on 28.10.2005 declaring total income of ₹ 4,14,94,523/-. In the said return, long-term capital gain on sale of shares made upto 30.09.2004 amounting to ₹ 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 ₹ 18,78,53,164/- was claimed to be exempt under section 10(38) of the Income Tax Act, 1961. During .....

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ssing Officer during the course of assessment proceedings, he was of the view that the profit on sale of shares amounting to ₹ 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-Co .....

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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 .....

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.76 crore. No person will carry out a turnover of more than ₹ 19 crore to get dividend of ₹ 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 .....

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77; 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 .....

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a managing director of both the companies. 9. 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 ass .....

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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 .....

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ever 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 ₹ 24,82,02,119/-. The assessee has paid interest of ₹ 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 int .....

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This conduct of the assessee shows that the distinction between the shares held for trading purposes and for investment purposes is artificial . 7. 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 .....

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geable 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. 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) disputin .....

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d 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 ₹ 3, .....

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Sheet at ₹ 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 ₹ 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 deri .....

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₹ 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 ₹ 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 .....

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rading 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 Equ .....

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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 ca .....

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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, .....

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ent 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 & .....

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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 .....

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gly 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 cos .....

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entitled to account for loss of ₹ 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 no .....

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rom 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 .....

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ulations 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 & .....

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ve 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 appe .....

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d 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 pa .....

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uch 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  .....

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s 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 .....

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. 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 ₹ 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 tra .....

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ctions 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 .....

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are 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 .....

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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 ₹ 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 ass .....

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and, 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 e .....

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ng 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. .....

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nt 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 .....

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d 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 resp .....

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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 .....

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ned 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 .....

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icer. 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 .....

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ed 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 h .....

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937/-. 17. During the year under consideration, the assessee-Company had received exempt income in the form of dividend amounting to ₹ 5,03,14,975/- and long-term capital gain amounting to ₹ 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 th .....

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llowance 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 th .....

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rest 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 ₹ 42,87,15,758/-. I however, find that quantum of many of expenses such as transactions charge, dep .....

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by the appellant wherein the assessee estimated only ₹ 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 ₹ 78,47,93,363/- and Investment in shares amounted to ₹ 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 capit .....

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ring 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 administrat .....

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tances, 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 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 .....

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se 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), whic .....

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, 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 .....

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, 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 preferre .....

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