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TMI Blog2016 (3) TMI 978X X X X Extracts X X X X X X X X Extracts X X X X ..... me - 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 there is intermingling of shares and transactions and the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. 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 surplus is 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 - Decided against revenue - ITA No. 1148 & 1437/Kol/09, C.O No. 52/Kol/09 - - - Dated:- 20-1-2016 - Shri Mahavir Singh, Judicial Member, and Shri M. Balaganesh, Accountant Member For The Appellant: Shri Sanjay Mukherjee, JCIT, ld. Sr.DR For The Respondent: Shri R.N Bajoria, Sr. Advocate and Shri A.K. Gupta, FCA, ld.ARs ORDER SHRI M.BALAGANESH, AM These appeals of the revenue and cross objection of the assessee arise out of the orders of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has incurred interest and other expenses directly or indirectly to earn the said income not forming part of total income. 2. Whether on the facts and in the circumstances of the case, ld.CIT(A) was correct in holding that the transactions of frequent purchase and sale of shares/units in a systematic and organized manner give rise to capital gain and not the business income. CO No. 52/2009 [ITA No.1149/Kol/09 A.Y 2005-06] 1 a) For that, the application of Rule 80 of the Income Tax Rules in the case of the Assessee is bad in law and, therefore, cannot be sustained. b) For that, in the original Assessment Order, disallowance u/s 14A was made on estimate at ₹ 23,125/- and the said disallowance of ₹ 23,125/- cannot be increased under any circumstances while giving effect to the Appellate order. c) For that, the Application of Rule 8D(2)(iii) results in enhancement of disallowance of expenditure, increase in the taxable income, and the Learned CIT(A) is not empowered to enhance the liability without proper hearing and notice to the assessee. 2) For that the Commissioner of Income Tax (Appeals) erred in the holding that Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAT NO. 243 of 2012 dated 4.1.2013 had held as under:- The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under income tax. The tribunal has computed expenditure at 1% of such dividend income, which, according to them, is the thumb rule applied consistently. We find no reason to interfere. The appeal is dismissed. Respectfully following the judicial precedent, we direct the Learned AO to disallow 1% of exempt income under this issue and accordingly, the ground no.1 raised by the revenue for Asst Year 2005-06 in ITA No. 1148/Kol/2009 and cross objections of the assessee in CO No. 52 /Kol/2009 are partly allowed. 5. The next issue to be decided in the appeals of the revenue for Asst Years 2005-06 and 2006-07 are as to whether the Learned CITA was justified in holding that the transactions of frequent purchase and sale of shares in a systematic and organized manner would have to be assessed only as capital gains instead of business income. The revenue had raised the same ground for both the asst years as below:- 2. Whether on the facts and in the circumstances of the case, ld.CIT(A) was correct in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and selling these shares. Hence the Ld. AO concluded that the frequent transactions carried out by the assessee are in the nature of business activities and not capital investment as claimed. On first appeal, the Learned CIT(A) appreciated the contentions of the assessee and treated the said gains as capital gains and not business income. Aggrieved, the revenue is in appeal before us. 5.2. The Learned DR argued the holding period of most of the shares were less than 30 days and hence the intention of the assessee was only to earn profits out of buying and selling of shares and not to hold the same as investment for long term purposes. In response to this, the Learned AR argued that the assessee has got two separate portfolios i.e one for investment and other for business. The profit derived from investment activities are offered to tax as short term and long term capital gains depending upon the period of holding the shares and the profit derived from the business activity of trading in shares were offered as income from business. The Ld.Senior Advocate further argued that this practice has been followed by the assessee consistently and the revenue had accepted the same in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t activities of the assessee had to be assessed only as capital gains and not business income. It is also not in dispute that the revenue has been accepting the dual portfolio maintained by the assesseee for years to gether which is quite evident from the scrutiny assessment orders passed by the Learned AO for the Asst Years 2002-03, 2004-05 , 2008-09 and 2010-11, wherein the stand of the assessee reporting both capital gains and business income arising out of purchase and sale of shares have been accepted. Hence we find lot of force in the decision of the Hon ble Apex Court relied on by the Learned AR in the case of Radhasaomi Satsang reported in 193 ITR 321 (SC) on the principle of consistency. We are also in agreement with the arguments of the Learned AR that just because the assessee had made profits out of its investment activities, the same cannot be concluded that the assesseee 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 . What is to be seen is whether the assessee intended to make only profits from dealing in shares or whether the shares were purchased wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment 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 an investor and thereby to charge the income earned by the assessee from share transactions as business income. From the records, it is found that at the time of purchase and sales even during the period prior to 1.10.2004, the assessee was not guided or influenced by lower tax rate in case of short term capital gains as the rate for business income a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. 5.3.3. 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 in scrutiny proceedings. The Hon ble Madras High Court in the case of CIT vs S.Ramamrithan reported in (2008) 217 CTR 206 (Mad) while distinguishing trading and investment, observed that the intention of the assessee is relevant to determine whether an assessee is carrying on the business in shares or investments. The initial intention of the assessee in the instant case is proved beyond doubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in (2015) 375 ITR 118 (Cal) for the Asst Years 2005- 06 and 2006-07 had held as below:- The frequency of transactions in shares alone cannot show that the intention of the investor was not to make an investment. The Legislature has not made any distinction on the basis-of frequency of transactions. The benefit of short -term capital gains can be availed of for any period of retention of shares up to 12 months. Although a ceiling has been provided, there is no indication as regards the floor, which can be as little as one day. The question essentially is a question of fact. The assessee was a certified non-banking financial concern. Its main activities were giving loans and taking loans and-investing in shares and securities. The Assessing Officer, for the assessment years 2005-06 and 2006-07, opined that the activity which, according to the assessee, was on investment account amounted to business activity and, therefore, he treated the shortterm capital gains of ₹ 1,01,00,000 as business income. The Commissioner (Appeals) held that the refusal on the part of the Assessing Officer to accept the short-term capital gains was incorrect. This was confirmed by the Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder challenge is not perverse. 4. The judgment in the case of Dalhousie Investment Trust Co. Ltd. v. CIT[ 1968] 68 ITR 486 (Se) referred by the Assessing Officer does not assist the revenue because in that on appreciation of facts it 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 shown to be similar with those in the case of Dalhousie Investment. 6. For the aforesaid reasons, we are of the opinion that the views expressed both by the CIT and the Tribunal for reasons expressed therein are a possible view. It is, therefore, not open to the revenue to contend that the view taken by the Tribunal is perverse. Question form ulated at the time of admission of the appeal does not appear to have been correctly formulated. The questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an investment. The Revenue preferred an appeal. The learned Tribunal agreeing with the appellate authority dismissed the appeal. The Revenue has once again come up in appeal before us. 3. Mr. Saraf, learned advocate appearing for the Revenue, strenuously submitted that the finding of the learned Tribunal is perverse. The Tribunal ignored the fact that the shares allegedly purchased in July were not taken delivery of till December nor was any payment made when the purchase was allegedly made in the month of July. This submission of Mr. Saraf evidently is based on misreading of the evidence. It would appear from the assessment order that payment was made for the shares in the month of July itself through bill accommodation facility. 4. Mr. Saraf relied upon a judgment in the case of CfT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 (SC). He drew our attention to the following finding recorded by the apex court (page 713) : The finding of the High Court that the clauses of the memorandum of association, viz., clauses 10, 12, l3, 28 and 29 do not authorise the company to acquire and sell shares as business has no relevance in view of the aforesaid res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. We find from the said workings of profit on sale of investments , none of the scripts had been sold by the assessee within a period of 30 days as stated by the Learned DR, except Kotak Mahindra Mutual Fund Short Term Plan which was purchased in March 2004 and redeemed in April 2004. Other than this, all other scripts and mutual funds were held for a minimum period of two months from the date of purchase before its transfer. We also find that certain shares were held by the assessee from March 1995 , October 1996, December 1998, May 2003, June 2003, July 2003, August 2003, September 2003, October 2003 etc onwards which were ultimately sold by the assessee in Asst Year 2005-06. Similarly in Asst Year 2006-07, from the workings of short term capital gains filed in the paper book, we find that only the part of the shares of DSP Merrill Lynch Ltd and Graphite India Ltd were sold within a month. Other than these two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. 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 support thereof. The Assessing Officer did not reject the books of 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. 5.3.7. We find that the assessee had earned dividend income also 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. 5.3.8. We also find that the practice followed by the assessee by offering capital gains for investment activities and business income for trading activities in the earlier years have been consistently accepted by the revenue in section 143(3) proceedings for the Asst Years 2002-03 ; 2004-05 ; 2008-09 and 2010-11 , copy of which orders are placed on record before us. The assessment years under appeal before us are Asst Years 2005-06 and 2006-07. We do not find any logical reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proves the intention of the assessee that he is only interested in share market only as an investor and not otherwise. We find that this issue has been elaborately dealt with by the Hon ble Bombay High Court in the case of CIT vs. Gopal Purohit reported in 228 CTR 582 (Bom), wherein the questions raised before the 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 income from sale of 7,59,003 shares for ₹ 5,00,12,879/- as an income from short term capital gain and sale of 3,88,797 shares for ₹ 6,65,02,340/- as long term capital gain as against the Income from business assessed by the A. O. ? (b) Whether, on the facts and circumstances of the case and in law, the Hon 'ble ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat the assessee as a share trader in preceding year, in spite 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icularly in the case of the assessee. This approach of the Tribunal cannot be faulted The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question. In so far as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not 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 Petition (SLP) was dismissed by the Supreme Court. 5.3.10. We also find 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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