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2016 (6) TMI 483 - ITAT KOLKATA

2016 (6) TMI 483 - ITAT KOLKATA - TMI - Assessment of income - capital gain v/s business income - Held that:- To clarify the position the CBDT had come out with a Circular No.6/2016. We are of the view that the above Circular should settle the controversy in favour of the Assessee, in the facts and circumstances of the case of the Assessee. We have already observed that the Assessee has been consistently maintaining two portfolio of shares one held as investments and the other held as stock-in-t .....

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laimed by the revenue or income under the head ‘capital gain’ as contended by the assessee? - Held that:- The income in question has to be assessed under the head “Short Term Capital Gain” as declared by the Assessee

Disallowance u/s 14A - Held that:- As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it can be said that investments were made and therefore .....

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stments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The Assessee had not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. It cannot therefore be said that the revenue authorities were not justified in disreg .....

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otal income should again not be added. In other words, the disallowance u/s.14A of the Act shall be only ₹ 11,42,424/-. - Decided partly in favour of assessee - I.T.A No. 1882/Kol/2012, I.T.A No. 1726/Kol/2012 - Dated:- 13-5-2016 - Sri N. V. Vasudevan, JM And Shri Waseem Ahmed, AM For the Department : Shri Rajat Subhra. Biswas, CIT(DR) & Shri Rajat Kumar Kureel, JCIT, Sr.DR For the Assessee : Shri D.S.Damle, FCA ORDER Per N.V.Vasudevan, JM ITA No.1882/Kol/2012 is an appeal by the Reven .....

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deriving capital gain. The assesee was both a dealer as well as investor in shares. There is no dispute that in respect of income from purchase and sale of shares held in stock in trade, was declared under the head from business and that the gain on sale of shares held as investments was declared under the head capital gains . 3. The assessee filed return of income for A.Y.2008-09 declaring total income as follows :- BUSINESS INCOME NET PROFIT AS PER PROFIT & LOSS A/C INCOME TO BE CONSIDERE .....

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25,00,965.00 SHORT TERM CAPITAL GAINS 264,04,050.00 TAXABLE AT SPECIAL RATE @ 10% U/S 111A 264,04,050.00 TAXABLE INCOME 490,61,546.00 4. The AO analyzed the transaction which gave rise to long term capital gain and short term capital gain declared by the assessee in the return of income. He analysed the duration of holding, frequency of transactions and conduct of the assessee and came to the following conclusions. :- The above transactions are summarized in table-1 and table-2. In table-1, all .....

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,288/- Gold tech. 41000 24,11,980/- 42,65,284/- 18,53,303/- IDBI 71000 56,78,204/- 70,42,400/- 13,64,195/- INDOASIFU 20000 26,65,000/- 20,90,000/- (-)5,75,000/- IPCL 9900 26,37,573/- 32,05,352/- 5,67,779/- JMFINANCIAL 3007 22,92,743/- 72,17,480/- 49,24,736/- MCLEODRUS 30000 17,61,000/- 19,53,038/- 1,92,038/- MSKPROJ 11000 7,34,248/- 19,38,225/- 6,63,976/- MTNL 6000 8,40,560/- 9,60,000/- 1,19,440/- PUNJLLYOD 43360 62,84,968/- 1,29,60,376/- 66,75,407/- SB & TINL 342838 1,47,28,996/- 66,01,854/ .....

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- 1,65,98,559/- Punji Lloyd 6000 8,98,800/- 28,51,897/- 11,83,957/- Skumarsynf 26000 20,05,249/- 34,16,761/- 14,11,511/- Tata Steel 1650 6,48,202/- 14,17,325/- 7,69,123/- Tata Tea 500 96,225/- 3,83,911/- 2,87,686/- TCI 46515 3,96,951/- 61,48,659/- 57,51,707/- UTUSOF 15459 23,59,558/- 62,71,679/- 39,12,120/- AVAYAGCL 14971 35,27,353/- 36,02,095/- 74,741/- BHEL 2900 15,71,290/- 46,92,600/- 31,21,309/- BIRLA JUTE 4209 1,36,261/- 11,51,351/- 10,15,090/- BLUE DART 154 13,259/- 1,23,508/- 1,10,248/- E .....

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963/- In addition to the above, the trading result as disclosed by the assessee is summarized as under :- Table -3 Sale of Shares Rs.14,29,53,662/- Add: Increase in stocks ₹ 2,72,01,653/- Rs.17,01,54,227/- Less : Purchase of shares Rs.16,76,21,660/- ₹ 25,33,615/- The total expenses debited in the account is about 2.19 crores. If the table-I, table-2 and table-3 are compared, it is observed that the assessee company has misclassified the profit out of purchase and sale of shares to re .....

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Explanation below Section 73 is not attracted in its case. 5. Based on the above analysis of the transactions giving raise to long term capital gain and short term capital gain, the AO was of the view that short term capital gain of ₹ 2,64,04,050/- and Long Term Capital Gain of ₹ 8,25,00,965/- should be treated as business profit. The assessee submitted before the AO that it had maintained distinct portfolio of shares held as investments and that held as stock-in-trade and therefore .....

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merely a device to reduce tax liability. The AO further observed that examination of Table-I given above would reveal that (i) the assessee has purchased 857549 shares, (ii) the total purchase consideration is ₹ 6,43,84,147/-, (iii) the total sale consideration is sRs.9,07,88,198/-,(iv) the average holding period is less than six months, (v) the profit is ₹ 2,64,04,0501- The assessee has made a series of transactions regularly and these transactions are its organized and regular busi .....

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n in table 1 was held by the AO as the business income of the assessee. Similarly for transactions evidenced by Table-2 above, the AO observed that (i) the assessee has purchased 335415 shares, (ii) the total purchase consideration is ₹ 4,09,99,926/-, (iii) the total sale consideration is ₹ 12,35,00,890/-, (iv) the profit is ₹ 8,25,00,963/-. He also observed that the Assessee did not maintain any separate demat accounts for these transactions. For the same reasons given for con .....

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of the assessee before CIT(A) was that (a) that the assessee over a number of years was carrying on business of dealing in shares and securities and was also making investments of its surplus capital in shares and securities for the purpose of earning dividend and deriving capital gain. (b) the assesse had in its books of accounts given a distinct accounting treatment in respect of shares held as investments and the shares held as stock in trade of business (c) that in the past the assessments .....

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income under the head capital gain. (e) the assessee pointed out that gains arising from sale on long term capital asset cannot by any stretch of imagination be treated as income from business and disregard to the contention of the CIT(A) that long term capital asset and short term capital asset as defined in section 2(29A) and 2(42A) of the Income Tax Act, 1961 (Act). (f) the assessee relied on several judicial pronouncements in support of its claim that income from sale of shares held as inve .....

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sions relied upon by the appellant and the Assessing Officer it is observed that there is no specific terms and conditions, which can be applied mechanically to come to a conclusion. The issue regarding taxation of gains from shares depends upon the facts and circumstances of each case. The Hon'ble appellate Courts have determined the issue on the facts of each case giving the various points/issues considered' for coming to a conclusion regarding the head of income under which the share .....

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a majority of the stock was few days; in most of the transactions, the asses sees did not even hold on to at least some part of the huge purchases and had engaged in the same scrips frequently; the intention of the assessees in buying shares was not to derive income by way of dividend on such shares, but to earn profits on the sale of the shares; the asses sees had indulged in multiple transactions of different quantities with very high periodicity. These periodic transactions, selecting the tim .....

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on the mind was that the ssessee had not invested in shares; mere classification of these share transactions as investment in the assessee's books of accounts is not conclusive; the intention of the assessee at the time of purchase was only to sell the shares immediately after purchase; frequency of purchase and sale of shares showed that the assessees never intended to keep these shares as investment; and it is only for the purpose of claiming benefit of lower rate of tax, under Section 111 .....

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/- as closing balance as on 31st March 2007. The Assessing Officer has also accepted the amount of ₹ 4,55,57,618/- as closing balance which has been subsequently calculated to be investments for short term capital gain by the Assessing officer. There are peculiar facts and circumstances where in the earlier assessment year 2007-08 the investments shown by the appellant have been upheld as investments by the Assessing Officer but in the subsequent year the same figure has been treated as st .....

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gains is treated as business income under the head of 'profits & gains of business' for the current assessment year. The gain on sale of shares having short term capital gains is held to be assessed as business income. The long term capital gain shown by the assessee is accepted as long term capital gains. The appellant will not get the benefit of closing stock of investments shown in the final accounts as on 31 st March 2008 to be considered as capital gains in the Assessment Year 2 .....

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on issue of short term capital gain to be treated as short term capital gain instead of business income is dismissed. 23. The Hon'ble appellate Courts have determined the issue on the facts of each case giving the various points/issues considered for coming to a conclusion regarding the head of income under which the share profit is to be taxed. The long term capital gain amounting to ₹ 8,25,00,964/- is held to be long term capital gain exempted u/s 10(38) of the Income-tax Act, 1961. .....

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follows :- 1) For that on the facts and in the circumstances of the case, the CIT CA) erred on facts and in law in directing the AO to assess the gains realized on sale of investment shares; held for period less than 12 months; under the head "profits & gains of business" as opposed to "short term capital gains" claimed by the appellant. 2) For that on the facts and in the circumstances of the case, the lower authorities failed to appreciate that the appellant in it's .....

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y infirmity in the accounts nor having invoked provisions of Sec. 145 of the Act, the CIT CA) was grossly unjustified in holding Para-25 of the Appellate Order that the Investment in shares disclosed in the Balance-sheet as on 31 st March 2008; should not be accepted to be Investments in relation to appellant's assessment for the A. Y. 2009-10 & onwards. 4) For that on the facts and in the circumstances of the case, the findings of the Ld. CIT CA) with regard to assessment of short term .....

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051 /- under the head 'capital gains' and be further directed to charge the tax at the rate prescribed in Sec. 111A of the Act. 6) For that on the facts and in the circumstances of the case, the A'O be directed to accept ₹ 27,97,93,524/- being Investment in shares as on 31 st March 2008 as Investment for A.Y. 2008-09 and the subsequent years since such Investments were accounted in the books "at cost" and not on the principle of "lower of the cost or market value .....

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ard the submissions of the learned counsel for the assessee, who reiterated the submissions as were made before CIT(A). The learned counsel also drew our attention to the Circular of CBDT dated 29.02.2016 i.e. No. 6/16 whereby CBDT dated 29.02.2016 has clearly laid down that the shares and securities held for a period of 12 months, the gain on sale of those shares if claimed by the assessee, as long term capital gain should not be disputed by the AO. According to him therefore based on the afore .....

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y the revenue in the assessments completed u/s 143(3) of the Act. He placed reliance on the decision of Hon ble Bombay High Court in the case of CIT vs Gopal Purohit 336 ITR 287 wherein the Hon ble Bombay High Court held that though the principle of res judicata is not applicable to the assessment proceedings there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. It was also a case of a person who declared gain on sale of shares held as investme .....

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nts give rise to capital gain. The relevant assessment orders were placed in the paper book filed before us. 11. The ld. DR while placing reliance on the order of AO submitted that the facts and circumstances of each will not be looked into before coming to the conclusion whether gain on sale of shares held as investment should be treated as capital gain or income from business. He placed reliance on the CBDT Circular No. CBDT Circular No.4/2007 dated 15/6/2007, wherein the department has laid d .....

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had been carried out by the Assessee in a systematic and organized manner and over a number of years and therefore would constitute business. In this regard, we find that this controversy as to whether income on sale of shares ought to be regarded as income under the head capital gain or Business Income created lots of dispute and with a view to clarify the position the CBDT had come out with a Circular No.6/2016. The relevant portion of the circular as far as the present appeal of the revenue i .....

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adopt a different/contrary stand in this regard in subsequent years; We are of the view that the above Circular should settle the controversy in favour of the Assessee, in the facts and circumstances of the case of the Assessee. We have already observed that the Assessee has been consistently maintaining two portfolio of shares one held as investments and the other held as stock-in-trade of business of dealing in shares. As far as the income on sale of shares held as investments is concerned, t .....

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ome from business as claimed by the revenue or income under the head capital gain as contended by the assessee. If it is held that STCG declared by the Assessee has to be accepted under that head of income, then the other grounds of appeal regarding valuation of closing stock of shares etc., become academic and need no adjudication. 14. Before we deal with the facts of the case of the assessee, we will briefly narrate the principles applicable in deciding the above issue as laid down in several .....

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uce evidence from his records as to whether he maintained any distinction between shares which were hold by him as investments and those hold as stock in trade. (CIT Vs. Associated Industrial Development co. Ltd., 82 ITR 586 (SC). (c) Treatment in the books by an assessee will not be conclusive. If the volume, frequency and regularity with which transactions are carried out indicate systematic and organized activity with profit motive, then it would be a case of business profits and not capital .....

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Mazumdar Vs. CIT, 37 ITR 242 (SC). (e) No single fact has any decisive significance and the question must depend upon the collective effect of all the relevant materials brought on record. Janki Ram Bahadur Ram Vs. CIT, 57 ITR 21 (SC). 15. The above tests have again been reiterated by the CBDT in its Circular referred to by the learned DR before us. Keeping in mind, the above broad principles, we shall now examine the case of the assessee. The factors which go in favour of the Assessee that the .....

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ital gain (Short term/Long term and income from share trading. A reading of the said chart would show that the volume of gain under the head STCG has been consistent and no adverse inference can be drawn against the Assessee in this regard. 2. A chart showing the average holding period of investments sold during the previous year by the Assessee indicating the average holding period is given as annexure-2 to this order. A perusal of the same would show that the holding period has been substantia .....

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business cannot hold shares as investments and that he can have two portfolios one of shares one held as investment and the other as stock-in-trade of business. 16. In CIT Vs. Gopal Purohit 228 CTR 582 (bom), the question of law raised was regarding whether STCG declared by the Assessee was to be assessed as business income or not. Question (b) considered by the Hon ble Bombay High Court was as follows: (b) Whether, on the facts and circumstances of the case and in law, the Hon ble ITAT was jus .....

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e 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 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 .....

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rly applicable in this case. As we have already seen that the AO in AYs 2006-07 & 2007-08 the AO accepted the plea of the Assessee and assessed income declared on purchase and sale of shares as giving raise to STCG in assessment completed u/s.143(3) of the Act. We have also seen that the facts and circumstances in the present AY and the AYs referred to above were identical. Though the rule of res judicata is not applicable but the principle of consistency will definitely apply and on that ba .....

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esent case and in the light of the principles laid in judicial pronouncement referred to above, we are of the view that the income in question has to be assessed under the head Short Term Capital Gain as declared by the Assessee. Gr.No.1 & 2 raised by the Assessee are accordingly allowed. In view of the decision on ground No.1 & 2, we are of the view that the other connected grounds of appeal No.3 to 6 are either consequential or do not call for any adjudication. 21. Ground No.7 raised b .....

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the facts and circumstances of the case, Ld. CIT(A) erred in law in holding that the opening value of investments will be reduced by the amount of short term investments sold during the year to calculate the disallowance u/s 14A of the I.T.Act. 22. It is not in dispute that the assessee earned dividend income does not form part of the total income. In view of the provisions of section 14A of the Act which provides that the expenditure incurred in earning income which does not form part of the t .....

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arges and salary of one employee and 10% of Director's salary involved in the investment & broking division. The AO however was of the view that the aforesaid disallowances was not proper and he computed the disallowance u/s 14A of the Act by applying Rule 8-D of the Income Tax Rules, 1962 (Rules), which was as follows :- The assessee has computed the disallowance of ₹ 3,29,338/- u/s 14A vide its submission dated 7-10-2010. Since it is not computed as per Rule 8D, it is not accepte .....

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Rs.691846665/- Average Value Rs.345923332/-…..[C] Interest ₹ 2429451/-……[A] 2)A x B = 2429451 x 251263510 = Rs.1764646/- C 345923332 3) ½% of average value of investment ₹ 251263510/- comes to ₹ 12,56,318/- Therefore total amount [1+2+3] [351494/- + 1764646/- + 12,56,318/-] inadmissible u/s 14A read with Rule 8D comes to ₹ 33,72,458/-. 23. On appeal by the assessee the CIT(A) confirmed the order of AO. 26. I have considered the submissions of .....

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ay of capital gains and dividend. The income derived from this division substantially qualifies for exemption under Section 10(34) or 10(38) of the I.T. Act, 1961. The Authorised Representative primarily argued that the expenses incurred in relation to investment division were identifiable and therefore the disallowance under Section 14A should be made in relation to expenses of the investment division only and not in accordance to Rule 8D of the I.T. Rules,1962. It is also the assessee's pl .....

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on. I do not find any scientific basis adopted by the assessee in allocating the expenses to each division. The assessee has maintained one single and composite business establishment for carrying on different business activities in different segments of capital markets. The expenses and overheads relate to such common business establishment relate to incomes derived from all business sources and segments. It is practically impossible to segregate common business overheads and correlate the same .....

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earning exempted income is debited to reduce the taxable income. Rule 8D has a legislative sanction and it is to be applied in all cases where it is not possible to determine exactly the expenses incurred in relation to earning of tax free income and the appellant has also not able to, show the exact expenditure incurred for earning exempted .income. In a given case, like the assessee's where assessee maintains one single business establishment which caters to needs of all segments, there c .....

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wned funds get used in acquiring investments which produce dividend income .. 28. In the present case the assessee has not been able to establish with sufficient material that the manner of calculating the amount disallowable for earning the exempted income (i.e. income not forming part of total income), as per his working was the correct method and that no other expenses were incurred in relation to earning of tax free income. I am satisfied that the claim of expenditure incurred and shown by t .....

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e 8D by the Assessing Officer. This ground of appeal is therefore dismissed. 29. The appellant has suo moto disallowed an amount of ₹ 3,29,338/- as expenses on the earning of exempted income in the return of income. The appellant has received dividend amounting to ₹ 42,38,860/- and capital gain of ₹ 8,25,00,963/- as per the figures shown in the return of income. The disallowance involves basically direct expenditure in nature of demat charges, transaction charges and salary of .....

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₹ 11,47,217/-. The income earned from investments and short term capital gains (against which no expenses have been shown) is almost 5 times from the business income against which all the establishment and other expenses have been claimed. The appellant has not claimed any expenditure even on short term capital gain which would have reduced income chargeable at the rate of 10% and increased the business income chargeable at maximum marginal rate of 30%. I am satisfied that the expenditure .....

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alculation of the opening value of investments is as follows: Opening Investments as per Balance Sheet 22,27,33,496 Less: Short Term Investments 4,55,57,618 Net Opening Investments 17,71,75,878 The calculation for the disallowance on the basis of the above working as ' submitted by the appellant is as follows: Particulars Amount (Rs.) (i) Expenditure directly attributable to earning exempt income 3,51,494. (ii) Interest not directly attributable-to any particular income= Interest expenditure .....

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s disallowed an amount of ₹ 3,29,338/- and thereby the net disallowance is determined at ₹ 27,69,248/-. The figure of closing stock of investment taken for calculation does not give rise to any right to the appellant to consider the whole of closing amount of investments necessarily to be considered as investment in the next year since the figure has been taken only for the purposes of calculation of working of disallowance under Section 14A read with Rule 8D for this assessment year .....

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ed by the order of CIT(A) sustaining the disallowance as made by AO in part the assessee has raised ground no.7 before the Tribunal. 25. We have heard the rival submissions. It was brought to our notice at the time of hearing that the disallowance under Rule 8D (2)(ii) namely disallowance of interest expenditure of ₹ 16,04,669/- cannot be sustained. In this regard our attention was drawn to the order of CIT(A) for A.Y.2007-08 in appeal No.1018/CIT(A)-VI/2009-10 dated 31.10.2011 wherein a s .....

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uring the previous year. In this regard our attention was also drawn to the fact that the income from sale of shares, brokerage, portfolio management & advisory fees etc derived by the assessee during the previous year was more than ₹ 18 crores. It was also submitted that the funds available with the assessee as per the balance sheet as on 31.03.2008 was much more than the investments made during the previous year. The ld. Counsel for the assessee placed reliance on the decision of the .....

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3 ITR 340 (B). The ld. Counsel for the assesse further submitted that the disallowance u/s 14A of the Act cannot be made on a notional basis and in this regard referred to certain judicial pronouncements. The ld. DR relied on the order of AO. 26. We have given a very careful consideration to the rival submissions. As far as disallowance of interest expenses under Rule 8D(2)(ii) of the Rules is concerned, we agree with the submission of the Assessee that the Assessee had own funds out of which it .....

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expenses is concerned, we find that the Assessee had suo moto disallowed an amount of ₹ 3,29,338/- as expenses on the earning of exempted income in the return of income. The Assessee has received dividend amounting to ₹ 42,38,860/- and capital gain of ₹ 8,25,00,963/-. The basis of disallowance made by the Assesssee was direct expenditure in nature of demat charges, transaction charges and salary of one employee and 10% of Director's salary involved in the investment & .....

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