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TMI Blog2016 (9) TMI 652X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal raised by the revenue is having tax effect of less than Rs. 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before the income tax appellate tribunal where the tax effect on disputed issues is less than Rs. 10 lakhs needs to be withdrawn by the revenue.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 also. Hence respectfully following the Circular No. 21 / 2015 dated 10.12.2015, we dismiss the appeal of the revenue in ITA No. 300/Kol/2011. ITA NO. 418/Kol/2011 - Assessee Appeal 4. The first issue to be decided in this appeal is as to whether the ld CITA is justified in upholding the action of the ld AO in treating the short term capital gains of Rs. 11,05,41,076/- on sale of shares and securities held as 'investment' as income from business of trading in shares and securities in the facts and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were purchased on 3.8.2005 and were sold within 2 days on 5.8.2005. The purchase on 3.8.2005 was made under investment portfolio and the sale resulted an investment gain of Rs. 35 lakhs approx. No dividend was disclosed as received out of the holding. c) The shares of IFCI transferred from trading to investments were partly sold within 3 days of the transfer. The balance was sold within 4 months and assessee did not hold it for earning of any dividend. The same resulted in investment gain of Rs. 19 lakhs. d) The shares of Aftex Infosystem 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 Rs. 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 Rs. 24 lakhs. No dividend was received from holding of these shares. Actually, assessee received dividend for holding Zee shares as trading stock, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved, 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 Rs. 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 considering the facts on record that the assessee, a registered share 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 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails of short term capital gain (pages 29 to 30) ; copy of board resolution dated 2.4.2005 (page 31) ; copy of board resolutions from 23.1.2003 to 24.2.2005 (pages 32 to 52) ; copy of board resolutions from 2.4.2005 to 3.3.2006 (pages 53 to 59) ; copy of computation of income for AY 2006-07 (pages 60 to 61) ; copy of tax audit 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to exit from the certain investments in profitable situations without waiting for the dividends thereon. We are 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 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 maintainin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties transaction tax, would be liable for concessional rate of tax as against the normal rate of tax @ 30%. This benefit has been 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the assessee had duly discharged its primary onus of demarcating the scripts held for investment and for trading and the resultant gains derived therefrom. Even the CBDT Circular No. 4 of 2007 dated 15.6.2007 envisages the practice of assessee's maintaining dual portfolios. We also find that the decision was rendered by the Hon'ble Bombay High Court in the case of CIT v. Gopal Purohit reported in (2011) 336 ITR 287 (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s directly linked to investment. The assessee had transferred certain shares from its trading portfolio to investment portfolio at the beginning of the year itself i.e on 2.4.2005 pursuant to Board resolution. Moreover, no disturbance to the treatment given by the assessee was done by the ld AO in the scrutiny assessment proceedings for 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp;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 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 50000 shares - 5 months 50000 shares - 2.5 months (n) RCVL - 100000 shares - 11 months 50000 shares - 5 months 50000 shares - 3 months 1600 shares - 2 .5 months (o) Reliance Capital - 40000 shares - 8 days We find from the aforesaid details that only 3 scrips have been sold by the assessee 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir 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 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." 5.14. 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 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 Year 2005-06, copy of which order is placed on record b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. 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. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions namely, those by way of investment on one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law." "In so far as Question (b) is concerned, the Tribunal has observed in paragraph 8.1. of its judgment that the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 Rs. 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 involved therein relating to the treatment given by the Assessing Officer and upheld by the ld. CIT(Appeals) to the income of Rs. 1,71,54,470/- earned as well as loss of Rs. 1,00,42,079/- and Rs. 1,14,73,595/- suffered from the operations in the F&O Segment in the stock broking business as speculation income/loss is squarely covered in favour of the Revenue and against the assessee by the decision of Special Bench of this Tribunal in the case of Shree Capital Services Limited rendered vide its ..... X X X X Extracts X X X X X X X X Extracts X X X X
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