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Deputy Commissioner of Income-tax, Circle-6, Kolkata Versus Lokenath Saraf Securities Pvt. Ltd. and Vica-Versa

2016 (9) TMI 652 - ITAT KOLKATA

Sale of shares and securities held as ‘investment’ - short term capital gains or income from business - Dual portfolio - 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 the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. In the instant case, the l .....

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esent as culled out above, we hold that the net surplus on sale of shares under investment portfolio should be chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio. - Disallowance u/s 14A - Held that:- As decided in assessee’s own case in Asst Year 2005-06 as observed that in the relevant year under consideration i.e. A.Y. 2005-06, Rule 8D was not applicable and, therefore, the disallowance under sectio .....

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he form of dividend and long-term capital gain - I.T.A No. 300/Kol/2011, I.T.A No. 418/Kol/2011 - Dated:- 3-8-2016 - Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM For The Revenue : Shri Aroop Kumar, CIT For The Assessee: S/Shri Ashwani Kumar, C.A & A.K. Jain, AR ORDER Per Shri M. Balaganesh, AM: These cross appeals by revenue and assessee are arising out of order of CIT(A)-VI, Kolkata vide appeal No. 599/CIT(A)-VI/07-08/Cir-6/Kol dated 12.11.2010. Assessment was framed by DCIT, Circl .....

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e quantum involved in the grounds of appeal raised by the revenue is having tax effect of less than ₹ 10 lacs. The CBDT in its recent Circular No. 21 / 2015 dated 10.12.2015 had categorically stated that the appeals preferred by the revenue before the income tax appellate tribunal where the tax effect on disputed issues is less than ₹ 10 lakhs needs to be withdrawn by the revenue. It is also made categorical in the said circular that the same shall be applicable to pending appeals al .....

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d circumstances of the case. 4.1. The brief facts of this issue is that the assessee is a registered stock broker and besides deriving brokering income it also trades in shares and securities. The assessee was having dual portfolio i.e shares held as investments and shares used for trading. For this purpose, the assessee maintained two separate accounts in its books of accounts by clearly bifurcating the shares that are held as investments and shares that are held for trading by giving independe .....

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.2004 50000 Settlement No. 2005018 28.01.2005 30000 Settlement No. 2005048 11.03.2005 20000 110000 38057800 Aftek Infosys tem 7.3.2005 6500 505700 TOTAL 877500 113637300 Admittedly, these shares were transferred on 2.4.2005 at the lower of average rate or market rate. Except the shares of Ultratech Cement Ltd , where the average cost was lesser than the market rate, all the shares were transferred from trading stocks to investments only at the market rates prevailing as on 31.3.2005. It was clai .....

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rom such transfer and short term capital gains were booked. However, assessee again purchased shares of the same company in July 2005 which was sold in November 2005 under trading stock category which resulted in a loss. The assessee earned dividend out of holding of shares purchased during July only. b) The shares of IDBI transferred from trading to investments were sold within 4 months on 4.8.2005. Some more shares of IDBI were purchased on 3.8.2005 and were sold within 2 days on 5.8.2005. The .....

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rading to investments were sold in August. No dividend was earned for holding of these shares. Further shares were purchased in May 2005 were also disclosed as investment shares, but were sold within two and half months that is in August 2005. These sales also resulted in huge capital gains to the tune of ₹ 13 lakhs approx. e) The shares of Zee TV Network were purchased under investment portfolio in Feb 2006 and sold within 15 days resulting in capital gains of more than ₹ 24 lakhs. .....

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ndesh Ltd were also bought under Investment portfolio and sold within a month resulting in gains. Assessee did not receive any dividend out of them. Based on the above observations, the ld AO followed the CBDT Circular No. 4 of 2007 and held that the shares held in investment portfolio were not held by the assessee for the purpose of earning dividend income. It was observed that the shares held under trading portfolio resulted in losses and whereas the shares held in investment portfolio, result .....

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difficult to segregate any amount of borrowing as directly linked to investment. Based on these observations, the ld AO concluded that the shares held in investment portfolio which resulted in short term capital gains had to be taxed as income from business. However, he accepted the fact that there is no bar for having both trading and investment portfolio by an assessee and accordingly accepted the long term capital gains reported by the assessee as such as these shares were held for a long pe .....

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the assessee and upheld the treatment of the ld AO. 5. Aggrieved, the assessee is in appeal before us on the following ground:- 1. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in continuing the AO's action in treating the Short Term Capital Gain of ₹ 11,05,41,076/- on sale of shares & securities held as "investment" as income from the business of trading in shares & securities without any basis and without .....

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reliance on the following decisions in support of his arguments:- a) CIT vs Express Securities Ltd reported in (2014) 364 ITR 488 (Del) b) ACIT vs R Raman (HUF) reported in (2011) 14 taxmann.com 76 (Chennai Tribunal) dated 5.8.2011 c) CIT vs Jubilant Securities P Ltd in ITA No. 588 of 2011 dated 31.3.2011 rendered by Hon ble Delhi High Court d) Chaturanan Industries Ltd vs ACIT in ITA No. 4793/Del/2010 for Asst Year 2006-07 dated 25.2.2014 (Delhi Tribunal) e) ACIT vs Bright Star Investment P Ltd .....

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retained only return is derived therefrom and whereas business assets would be rotated for making profits. Even the recent Circular No. 6/2016 dated 29.2.2016 states that for short term capital gains, department could still interfere and rely on earlier circulars and case laws with principles laid down thereon. The reliance placed by the ld AR on the decision of Delhi High Court in 364 ITR 488 supra were factually distinguishable as the shares in that case were held for a long time and offered .....

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es for trading and investment portfolio stated to have been maintained by the assessee, the ld DR argued that the codes are only given by the assessee to suit his convenience and they are not the codes maintained by the stock exchanges. Hence the same are changeable as per the whims and fancies of the assessee. 5.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of written submissions (pages 1 to 24) ; d .....

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report for AY 2006-07 (pages 62 to 74) ; copy of audited accounts for the year ended 31.03.2006 (pages 75 to 91) ; copy of Form 10DB along with details of STT (pages 92 to 97) and copy of ledger accounts of penalty charges to stock exchange along with relevant documents (pages 98 to 102). 5.4. We find that the decision to hold dual portfolio of trading in shares as well as holding the shares of certain companies under investment category was taken by the assessee way back on 20.5.2003 itself vi .....

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investment portfolio. It is true that the shares held in investment category were sold in part or in full by the assessee and immediately the shares of the same companies were purchased in the trading portfolio. This action of the assessee could neither be faulted with nor any malign intention could be attributed towards the same. The assessee could repurchase the shares of the same company due to various reasons. The assessee has every right to exit at the profitable moment from a particular sc .....

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vestment portfolio or in trading portfolio and the revenue cannot step into the shoes of the assessee in that regard and decide what action should have been taken by a person in the given set of facts and circumstances. The assessee knows its interest best. It cannot be disputed that the assessee had also reported net profit from trading portfolio of trading in shares and securities to the tune of ₹ 3,38,44,526/- in its return of income which cannot be ignored. The assessee has also report .....

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s of short term capital gains from investment portfolio of each scrip clearly mentioning the period of holding of each scrip. 5.5. We find that the assessee had purchased the scrips with a clear intention of holding it as investments only as the period of holding of these shares are also comparatively larger and the version of the ld AO that the period of holding is too short gets defeated. We find that the assessee had indeed had the intention of earning dividends but had also parallely chosen .....

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rted both dividend income and offered short term and long term capital gains on the investment activities and business income for trading activities. 5.6. We also find that the ld AO had accepted the long term capital gains reported by the assessee. We find that the ld AO had not disputed the assessee holding dual portfolio i.e both trading as well as investment portfolio. We find that the ld AO also had stated in his order that the assessee has been consistently maintaining this dual portfolio .....

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ng term capital gains of the assessee. Hence we hold that the principles of consistency should be followed in the instant case. Though the principle of resjudicata does not apply to income tax proceedings, the principle of consistency cannot be given a go by. Reliance in this regard is placed on the decision of the Hon ble Apex Court in the case of Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC), wherein it was held that : As we are aware of the fact that, strictly speaking res judicata d .....

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te 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 of securities transaction tax has been introduced in the statute with effect from 1st Octobe .....

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een admittedly conferred on the investors by the legislature in its wisdom in order to give impetus to the capital markets which would contribute largely to the economic growth of our country. Hence the intention behind granting exemption for LTCG and taxing STCG at concessional rates when STT is suffered should be viewed by applying the Rule of Purposive Construction. Just because from 1st October 2004 onwards, certain tax benefits have been given in respect of capital gains, that cannot, in an .....

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hat 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 assessee as capital gains. Merely because the rate of tax has been reduced in respect of short term capital gains and long term capital gains have been made exempt during the year by way of an amendment to the provisions, that itself, cannot be a ground for the Learned AO to depart from its consistent stand of treating the .....

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res held for investment and (2) shares held for trading purposes. It is not in dispute that in the instant case, the assessee had maintained dual portfolios in its books of accounts and had reported capital gains 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 di .....

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o stated before the ld AO that it had indeed maintained separate codes for shares held as investments and that held as trading. This fact is also mentioned by the ld AO in his assessment order. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment or stock in trade, then onus would shift to revenue to prove that apparent is not real. In the instant case, we find from the details in the paper book that the assessee had duly dis .....

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esultant gains from investment activity would be assessable as capital gains and not business income. We also find that the CBDT in its Instruction No. 1827 dated 31.8.1989 has laid down certain criteria to determine whether an activity of purchase and sale of shares is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given in the books is indicative of assessee's intention whether to hold the shares with a view to earn dividend and lon .....

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This practice has not been found fault by the revenue in the earlier assessment years even in scrutiny proceedings. The shares transferred from trading to investment account were held for a long time which shows that the assessee intended to hold them as investments only. These shares were also transferred at the lower of average cost or market rates which fact is also not disputed and is quite evident from the workings submitted for the same in the paper book. Moreover, as early as on 2.4.2005 .....

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ial intention of the assessee in the instant case is proved beyond doubt from the manner of maintaining two separate portfolios i.e. (1) for investment purposes and (2) for trading purposes. The Learned AR argued that in respect of shares retained under 'investment category' the assessee had taken due delivery 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 .....

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tfolios in its books by proving its intention from the time of purchase of the scrip, without knowing about the future increase / decrease in the share prices, by maintaining a separate code for investment and trading portfolios and by reporting both business income and capital gains. The most excruciating factor is that the ld AO did not bother to disturb the claim of exemption for long term capital gains of the assessee. 5.10. We also find that the Hon'ble Calcutta High Court in the case o .....

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v. Merlin Holding (P.) Ltd. [IT Appeal No. 101 of 2011, 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 rem .....

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t was found as follows:- "On the facts, that 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 .....

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n appreciating the facts and circumstances of the case were perverse. The question is now formulated and is answered in the negative. The appeal is thus dismissed.' 5.11. 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. We find that the ld AO had stated that the loan borrowed during the year from its director by the assessee had been repaid by the assessee before the end of the year. W .....

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r the Asst Year 2005-06 and certain stocks as on 31.3.2005 in trading portfolio were converted into investment on 2.4.2005. None of these shares were bought during the year under appeal using the borrowed funds. As stated earlier, the assessee in the instant case had exited from the particular scrip after holding it for a reasonable period at the profitable moment and had made huge profits due to favourable market conditions. Moreover, the ld AO had not brought any nexus on record that investmen .....

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sition that assessee knows its interest best. 5.12. Frequency of transactions It is nobody s case that the shares held by the assessee in the investment portfolio were bought and sold frequently by the assessee. We have gone through the entire workings of short term capital gains offered by the assessee in respect of various scrips maintained in investment portfolio which are enclosed in pages 29 & 30 of the Paper Book and find that the assessee had not dealt with frequent buying and selling .....

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the shares were held by the assessee. In this regard, we had gone through the entire details of profit on sale of investment scrip wise containing the date of purchase, number of shares purchased, purchase price, date of sale, sale price and resultant book profit or loss which forms part of the paper book filed by the assessee. The shares transferred from trading to investment account were held for a long time which shows that the assessee intended to hold them as investments only. Moreover, as .....

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s - 4 months (c ) Ultratech Cement Co Ltd - 110000 shares - 20 days (d) Aftek Infosystems - 6500 shares - 4 months 24000 shares - 3 months (e) DCHL - 39000 shares - 1 month (f) Bharti Shipyard - 100000 shares - 1 month (g) Sandesh Ltd - 20000 shares - 6 days (h) Engineers India - 25000 shares - 1 month (i) Zee TV - 150000 shares - 18 days (j) Reliance Industries Ltd - 101600 shares - 10 months 100000 shares - 12 months (k) Reliance Capital Ventures - 100000 shares - 11 months 50000 shares - 5 mo .....

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ssessee within a period of 30 days and others were held for a considerable period of time and the assessee had exited due to favourable market conditions even without waiting for the dividend. There is nothing wrong in assessee making huge profits even in investment portfolio by exiting at the right time. One more factor to be considered in the facts of the instant case is that the assessee continued to remain trader in shares even after transferring of the shares from trading into investment po .....

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heard both the parties and perused the records as well as the documents contained in the paper book filed before us. There is no denying the fact that as per the account maintained the assessee had acted both as a trader as well as investor in shares as per the Memorandum and Articles of Association. Accounts 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 repres .....

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ets cannot determine its status or change it from investment (capital) to trading (stock in trade). The audited accounts for the Assessment Year 04-05 and the earlier years placed in the paper book made it clear that every year the assessee had acquired shares for trading purpose and separately also for 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 h .....

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accounts vis a vis the audited accounts u/s 145 of the IT Act before arriving at such a conclusion. The Assessing Officer's finding cannot therefore be accepted." 5.14. We find that the assessee had earned dividend income also wherever declared and eligible, which is quite reflective of the intention of investment and not for profit motive though an investor is not precluded from realizing its investment which may result into profit in favourable circumstances. 5.15. We also find that t .....

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stand of the assessee having dual portfolio and offering income under capital gains and business income. 5.16. We find that the Hon'ble Bombay High Court in the case of Gopal Purohit reported in (2011) 336 ITR 287 (Bom) had considered the issue under consideration wherein the questions raised before the Hon ble Bombay High Court and decision rendered thereon are as below:- (a) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in treating the .....

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pite of existence of similar transaction, which cannot in any way operate as res judicata to preclude the authorities from holding such transactions as business activities in current year? (c) Whether, on the facts and circumstances of the case and in law., the Hon'ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the boo .....

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aw in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received there from should be treated either as short term or, as the case may be, long term capital gain, depending upon the period .....

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, 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 uniformity in tre .....

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ot 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 Petit .....

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rtfolios in the year under appeal and also in the earlier years. The books of accounts of the assessee also support the same. The books of accounts of the assessee were not rejected by the ld AO and the stand of the assessee in offering long term capital gains under investment portfolio is not disputed by the revenue. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present as culled out above, we hold that the net surplus on sale .....

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the normal business income of ₹ 2,25,36,746/- in F&O segment as speculation income in the facts and circumstances of the case. 6.1. The ld AR fairly admitted that this issue is decided against the assessee by the order of this tribunal in ITA No. 417/Kol/2011 for Asst Year 2005-06 dated 14.7.2016. We find that this tribunal in para 16 of the said order had held as under:- 16. As regards Ground No. 2 of the appeal of the assessee for A.Y. 2005- 06, it is observed that the issue involve .....

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ide its order dated 31.07.2009, wherein it was held that income/loss from the F&O transactions prior to 24.01.2006 has to be treated as speculation profit/loss and this position is accepted even by the ld. counsel for the assessee at the time of hearing before us. We, therefore, respectfully follow the said decision of the Special Bench of this Tribunal and uphold the impugned order of the ld. CIT(Appeals) on this issue. Ground No. 2 is accordingly dismissed. Respectfully following the said .....

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hares of Reliance Industries Ltd. according to the FIFO method by treating them as trading shares without considering the facts that the concerned RIL shares transferred from trading to investment account were held thereafter in investment account only which had no connection with the other RIL shares held as trading. Actions of the AO and the Ld.CIT(A) were wholly arbitrary, unreasonable, uncalled for and bad in law. 7.1. In view of our decision given for Ground No. 1 raised by the assessee, th .....

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