TMI Blog2016 (9) TMI 652X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 section 14A on account of expenditure incurred by the assessee in relation to the exempt income is required to be made on some reasonable basis. In this regard, this Tribunal has taken a consistent view that the disallowance under section 14A on account of expenses incurred in relation to the income at 1% of such exempt income would be fair and reasonable. Following this consistent stand taken by the Tribunal, we restrict the disallowance under section 14A to the extent of 1% of the exempt income in the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng stock to investments:- Name of the Scrip Date of Purchase Qty Amount Reliance 23.02.2005 100000 54605000 IFCI Settlement No. 2005023 4.2.2005 2000 Settlement No. 2005024 7.2.2005 398000 Settlement No. 2005050 15.3.2005 11000 Settlement No. 2005058 28.3.2005 100000 511000 6796300 IDBI 18.1.2005 150000 13672500 Ultratech Cement Settlement No. 2004227 25.11.2004 10000 Settlement No. 2004251 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fosystem transferred from trading 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. No dividend was received from holding of these shares. Actually, assessee received dividend for holding Zee shares as trading stock, which were separately purchased in Sept 2005 and also sold in Sept 2005 resulting in trading loss of ₹ 99,427/-. f) The shares of DCHL, Bharti Shipyard and Engineers India were all purchased under investment portfolio and sold within 1 month of such purchase, never waiting for any dividend and getting resulting gains. g) The shares of Midday Multimedia and Sandesh 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re broker, was not only a trader but also an investor in shares securities. Actions of the A.O and the Ld. CIT(A) were wholly arbitrary, unreasonable, uncalled for and bad in law. 5.1. The ld AO reiterated the arguments made before the lower authorities and vehemently relied on the written submissions filed by the assessee before the ld CITA which are enclosed in pages 1 to 24 of the Paper Book. Apart from that, he placed 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 reported in (2008) 24 SOT 288 (Mumbai Tribunal) f) Sukarma Finance Ltd vs ACIT in ITA Nos. 3588 3589/Del/2010 for Asst Years 2006-07 2007-08 dated 2.5.2014. g) CIT vs Gopal Purohit reported in 228 CTR 582 (Bom) 5.2. In response to this, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails 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 vide Board resolution dated 20.5.2003 which is enclosed in page 35 of the paper book. We find that the director of the assessee company had been duly authorized to hold dual and separate portfolio. The fact of assessee holding dual portfolio is not disputed by the ld AO. In fact, we find that the ld AO had accepted the long term capital gains reported by the assessee from investment portfolio. Having done so, how can the ld AO dispute the short term capital gains reported by the assessee from the 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 asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies, the same cannot be concluded that the assessee had carried on with an intention to do business. For that matter, every assessee would only try to make profits out of their activities, be it investment or business. In the instant case, the assessee had reported 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 in his books and assessed as such. The ld AR also filed the copy of the audited financial statements together with the computation of total income for the years ended 31.3.2004 31.3.2005 wherein the assessee had declared both business income as well as capital gains from dealing in shares and securities. We also find that from the assessment order framed for the Asst Year 2005-06 u/s 143(3) of the Act dated 31.12.2007 that the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 any way, lead to an assumption or presumption that the intention of the assessee at the time of purchase of shares was that of a trader and not of an investor. The treatment of the investment in the books of accounts of the assessee is also a relevant guiding factor. The issue of treatment of income from share transaction as short term capital gains or business income has in fact arisen after the amendment brought with Finance Act 2004 with effect from 1.10.2004. It is an admitted fact on record that prior to amendment when the tax on short term capital gains was at par with business income, the department has been consistently accepting the treatment of income by the 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 assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom) wherein the assessee had maintained dual portfolios and ultimately the court held that the resultant gains from investment activity would be assessable as capital gains and not business income. We also find that the 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 long term appreciation or with a view to carrying on as business. The books of accounts of the assessee were not rejected by the ld AO. 5.9. Intention of the assessee We find the intention of the assessee to maintain two independent portfolios i.e. one for investment purposes and one for trading purposes from the very beginning is quite evident from the books of accounts wherein assessee had separate entries in its ledger accounts at the time of each transaction i.e. at the time of purchase itself. This practice has not been found fault by the revenue in the earlier assessment years even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of CIT v. H K Financiers (P.) Ltd reported in (2015) 61 taxmann.com 175 (Cal) for the Asst Year 2007-08 had held as below:- '3. The Assessing Officer has laid stress on motive. To begin with motive is something, which is locked in the mind of the person. No direct evidence as regards motive is possible. Motive can be inferred from the conduct of the person concerned but that is bound to remain an inference, which may or may not be correct. We have today dictated a judgment in the case of CIT 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 remains then is a question of appreciation of evidence, which has already been done. No fruitful purpose is likely to be served by remanding the matter. We do not find any issue, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .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 investments were made out of borrowed funds, instead, he only states that it is difficult to identify the borrowing utilized for investment. The ld AR argued that since sufficient monies were available to the assessee, it thought it fit to repay the loans to its director and reduce the interest component thereon. We find lot of force in the argument of the ld AR in this regard and that the assessee had taken its decision in a prudent manner which cannot be interfered with, in view of the settled legal position 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh 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 months 50000 shares 2.5 months (l) Reliance Natural Resources Ltd 100000 shares 11 months 50000 shares 5 months 50000 shares 2.5 months 1600 shares 2 months (m) Reliance Ventures - 100000 shares 11 months ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he books as investment shares, the volume of transaction of such shares cannot alter its status from investment to trading. Profit on sale of such investment shares held, as capital assets are assessable under the head capital gain. Period of holding of such assets 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 hurry for self ignoring dividend. The investment shares and securities purchased and held till their sale had dual purpose i.e. for earning dividend as an incidental income as well as to make profit on shares at appropriate time. The conclusions drawn by the Assessing Officer by treating the investment shares as trading shares was based purely on assumptions and presumptions without bringing any record any material or evidence in suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 books of accounts alone are not conclusive proof to decide the income? The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received there from should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficial and arbitrary. In the instant case, the ld AO himself admits that the assessee maintains two separate portfolios 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 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. In view of the aforesaid facts and circumstances, findings given thereon and respectfully following the various judicial precedents relied upon hereinabove, we allow the Ground No. 1 raised by the assessee. 6. The next ground to be decided in this appeal is as to whether the ld CITA is justified in treating the normal business income of ₹ 2,25,36,746/- in F O segment as speculation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 1 raised by the assessee, there is no need to adjudicate this ground and it becomes infructuous. We have already held that the surplus of ₹ 11,05,41,076/- should be treated only as Short Term Capital Gains and not as business income. Hence there is no question of any valuation difference. Hence the Ground No. 3 raised by the assessee is also allowed. 8. The last issue to be decided in this appeal is as to whether the disallowance u/s 14A of the Act could be made in the facts and circumstances of the case. 8.1. The ld AR fairly admitted that this issue is covered by the order of this tribunal in assessee s own case in ITA No. 417/Kol/2011 for Asst Year 2005-06 dated 14.7.2016. We find that this tribunal in para 20 of the said order had held as under:- 20. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that in the relevant year under consideration i.e. A.Y. 2005-06, Rule 8D was not applicable and, therefore, the disallowance under section 14A on account of expenditure incurred by the assessee in relation to the exempt income is required to be made on some reasonable basis. In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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