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TMI Blog2011 (3) TMI 1663X X X X Extracts X X X X X X X X Extracts X X X X ..... :- (1) Disallowance of expenditure u/s. 14A : (a) For that on the facts and in the circumstances of the case, the CIT(A) erred in accepting the disallowance u/s. 14A of the Income Tax Act, 1961 by directing the ld. A.O to apply Rule 8D of the Income Tax Rules which also resulted in enhancement of disallowance. (b) For that on the facts and in the circumstances of the case, the ld. CIT(A) erred in not finding that disallowance u/s. 14A in respect of interest paid is not justified. Alternative with prejudice to above ground no. 1(a) and 1(b) : For that on the facts and in the circumstances of the case, the ld. CIT(Appeals) erred in not accepting the alternative plea of the appellant that clause (iii) of Rule 8D is to be applied with reference to average value of only those investments on which exempted dividend is received during the year. 2. Brief facts relating to controversy involved in the grounds of appeal are that the assessee is a Company engaged in the business of trading in shares and securities and financing. During the course of assessment proceedings, the A.O. observed that the assessee disclosed short-term capital gain of ₹ 40,17,29 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discussed this issue both on facts and law and decided in favour of the appellant. There is a slight difference with the facts of AY 2006-07 to the extent that in the AY 2006-07, the whole surplus on sale/ redemption of shares/ units whether it is long term or short-term or whether it is related to the shares or units was assessed as business income by the AO. However, in the year under consideration of this appeal, the AO had assessed the surplus on redemption of units as capital gain irrespective of the fact whether it is long term or short-term and also the surplus on the sale of shares which were categorized under long term had been assessed as capital gain . Only the short term surplus on sale of shares was assessed as business income . However, the main issue, i.e. treatment of surplus on sale/ redemption of shares/ securities being the same, my observations and grounds of decision made in the aforesaid appeal order for AY 2006-07 hold gold for this appeal also. In the aforesaid appeal order, I have mainly discussed various features/ conditions laid down by judicial forums including jurisdictional Kolkata Tribunal distinguishing trading activity with that of investment ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed ground no. 3 is allowed . Being aggrieved by the order of ld. CIT(A), the Revenue is in appeal before the Tribunal. 4. At the time of hearing before us, the ld. D.R. submitted that the CIT(A) considered the order dated 03.01.2008 of ITAT, Kolkata Bench in the case of DCIT vs.- Reliance Trading Enterprises Ltd. in ITA No. 944/Kol./2008 and decided the issue in favour of the assessee. He submitted that the said case does not apply to the facts of the case of the assessee because in the case of the assessee the object as per Memorandum of Association of assessee-company is to do business of trading in shares and securities. The ld. D.R. referred para 4.3 in respect of the order of CIT(A) for the assessment year 2006-07 and submitted that the CIT(A) while decided the above issue in the assessment year under consideration has considered his said order for assessment year 2006-07. Para 4.3 of the order of the ld. CIT(A) we have already reproduced hereinabove in para 3. 4.1. The ld. D.R. further submitted that the assessee used borrowed funds to finance the shares and hence it could not be said that the assessee purchased shares for the purpose of investment and not for busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hort term capital gain on redemption of units 2,30,621 2,30,621 5. Long term capital loss on redemption of units after indexing of cost (-)17,92,572 (-)10,26,940 24,92,517 32,84,485 The ld. A.R. submitted that the A.O. accepted Items No. 2 to 5 as shown hereinabove except Item No. 1 and treated the said short-term capital gain claimed by the assessee as business income. The ld. A.R. referred to pages 6 to 34 of the paper book, which is a copy of the order of the Hon ble High Court dated 29.03.2004 sanctioning the scheme of amalgamation of some of the Companies including High Profile Investments Limited with the assessee-company with effect from 1st April, 2003. He submitted that the claim of the assessee on short and/or longterm capital gain and/or loss relates to those shares and units, which were held by erstwhile amalgamating company High Profile Investments Limited and to substantiate his submissions referred to pages 22 to 24 of the paper book, which contained the list of equity shares of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that in the said notes, it is specifically mentioned that the investments are shown at cost after providing for any diminution in value and whereas the stock-in-trade in shares are valued at cost or market value, whichever is lower except in the case of unquoted shares, where it is valued at lower of cost or break-up value. The ld. A.R. further submitted that the contention of the ld. D.R. that the assessee has borrowed funds to finance the shares is not factually correct and referred to page 50 of the paper book, which is a copy of the Profit Loss A/c. for the period ending 31.03.2004. He submitted that the assessee received interest of ₹ 24,21,113/- and whereas the interest paid was only ₹ 3,73,849/-. He submitted that most of the shares were acquired by the assessee from the amalgamating company, which were shown by those amalgamating companies as investments and, therefore, the ld. CIT(A) has rightly held that on sale of holding of shares/ redemption of shares as shown by the assessee is capital gain and not business income. The ld. A.R. further submitted that if the nature of transactions is accepted by confirming the order of the ld. CIT(A), ground No. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of ₹ 14,16,25,805/- and the details of the said investment are contained at pages 53-54 of the paper book. Besides above, the assessee has also shown in the balance-sheet at page 49 of the paper book the inventories of shares separately at ₹ 4,82,17,269/-, the details of which are stated at page 55 of the paper book. Therefore, the assessee has shown separately the shares held in investment and shares held as stock-in-trade. It is also observed on perusal of copy of Notes forming part of the accounting policies, placed at page 58 of the paper book it is specifically mentioned that the investments are shown at cost after providing for any diminution in value and whereas stock-in-trade in shares are valued at cost or market value, whichever is lower except in the case of unquoted shares. We also observe that the contention of the ld. D.R. that the assessee had utilized the borrowed funds for investment in shares/ units, has no merits as we observe from page 50 of the paper book which is a copy of the Profit Loss A/c. for the period ending 31.03.2004, the assessee received interest of ₹ 24,21,113/- and whereas interest paid was only ₹ 3,73,849/-. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 representing capital assets. The decision used to be taken by the assessee at the time of purchase itself based on different factors whether any share security was to be held as investment or trading . When the shares are accounted for in the 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 . The period of holding such assets cannot determine its status or change it from investment (capital) to trading (stock-in-trade). The audited a/cs. For the A.Y. 2004-05 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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