DCIT Cir - 6,kolkata., Kolkata V. M/s K.B. Capital Markets Ltd., Kolkata

ITA 1882/KOL/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4922 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 09-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 21-12-2012
• Court: TRIBUNAL
• Department Lawyers: RAJAT SUBHRA BISWAS; RAJAT KUMAR KUREEL
• Assessee Lawyers: D S DAMLE
• Keywords: Capital asset; Business income; Depreciation; Maximum Marginal Rate; Rule of consistency; Earning of tax free income; Question of law; Assessment record
• Section: 143(3); 14A; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & SHRI WASE EM AHMED, AM] I.T.A NO. 1882/KOL/20 12 ASSESSMENT YEAR : 2008-0 9 D.C.I.T., CIRCLE-6, -VS.- M/S. K.B.CAPIT AL MARKETS LTD. KOLKATA KOLKATA [PAN : AABCK1174F) (APPELLANT) (RESPONDENT) I.T.A NO. 1726/KOL/20 12 ASSESSMENT YEAR : 2008-0 9 M/S. K.B.CAPITAL MARKETS(P)LTD. -VS- D.C.I.T., CI RCLE-6, KOLKATA KOLKATA [PAN : AABCK1174F) (APPELLANT) (RESPONDENT) FOR THE DEPARTMENT : SHRI RAJAT SUBHRA. BISWAS, CI T(DR) & SHRI RAJAT KUMAR KUREEL, JCIT, SR.DR FOR THE ASSESSEE : SHRI D.S.DAMLE, FCA DATE OF HEARING : 09.05.2016. DATE OF PRONOUNCEMENT : 13.05.2016. ORDER PER N.V.VASUDEVAN, JM ITA NO.1882/KOL/2012 IS AN APPEAL BY THE REVENUE WH ILE ITA NO.1726/KOL/2012 IS AN APPEAL BY THE ASSESSEE. BOTH THE APPEALS ARE DIRECTED AGAINST THE ORDER DATED 10.09.2012 OF CIT(A)-VI, KOLKATA, RELATING TO AY 2008-09. 2. THE ASSESSEE IS A COMPANY. THE ASSESSEE DURING THE PREVIOUS YEAR CARRIED ON THE BUSINESS OF SHARE BROKING, SHARE TRADING, DERIVATIV E TRADING AND PORTFOLIO MANAGEMENT 2 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 2 SERVICES. BESIDES THE ABOVE THE ASSESSEE ALSO MADE INVESTMENTS OF ITS SURPLUS FUNDS IN SHARES AND SECURITIES FOR THE PURPOSE OF EARNING DI VIDEND AS WELL AS FOR DERIVING CAPITAL GAIN. THE ASSESEE WAS BOTH A DEALER AS WELL AS INVE STOR IN SHARES. THERE IS NO DISPUTE THAT IN RESPECT OF INCOME FROM PURCHASE AND SALE OF SHARES HELD IN STOCK IN TRADE, WAS DECLARED UNDER THE HEAD FROM BUSINESS AND THAT THE GAIN ON SALE OF SHARES HELD AS INVESTMENTS WAS DECLARED UNDER THE HEAD CAPITAL GA INS. 3. THE ASSESSEE FILED RETURN OF INCOME FOR A.Y.200 8-09 DECLARING TOTAL INCOME AS FOLLOWS :- BUSINESS INCOME NET PROFIT AS PER PROFIT & LOSS A/C 1352,22,624. 00 INCOME TO BE CONSIDERED SEPARATELY LESS DIVIDEND (EXEMPT) 42,38,860.00 INTEREST RECD. IN THIS YEAR FOR LAST YEAR CONSIDERED IN LAST YEAR RETURN 2,36,917.00 CAPITAL GAINS 1089,05,015.00 DEPRECIATION (AS PER IT) 6,98,815.00 1140,79,607.00 211,43,027.00 ADD DEPRECIATION(AS PER ACCO 11,47,217.00 EXPENSES DISALLOWED U/S 14A 825,00,965.00 DIVIDEND STRIPPING U/S 94(7) 37,92 4.00 15,14,479.00 BUSINESS INCOME 226,57,496.00 CAPITAL GAINS TOTAL CAPITAL GAINS 1089,05,015.00 LONG TERM CAPITAL GAINS (EXEMPT U/S 10) 825,00,965.00 SHORT TERM CAPITAL GAINS 264,04,050.00 TAXABLE AT SPECIAL RATE @ 10% U/S 111A 264,04,05 0.00 TAXABLE INCOME 490,61,546.00 3 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 3 4. THE AO ANALYZED THE TRANSACTION WHICH GAVE RISE TO LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN DECLARED BY THE ASSESSEE IN THE R ETURN OF INCOME. HE ANALYSED THE DURATION OF HOLDING, FREQUENCY OF TRANSACTIONS AND CONDUCT OF THE ASSESSEE AND CAME TO THE FOLLOWING CONCLUSIONS. :- THE ABOVE TRANSACTIONS ARE SUMMARIZED IN TABLE-1 A ND TABLE-2. IN TABLE-1, ALL THE TRANSACTIONS WHICH HAVE BEEN CLAIMED BY THE ASSESSE E AS SHORT TERM CAPITAL GAINS HAVE BEEN SUMMARIZED. IN TABLE-2, ALL THE TRANSACTIONS W HICH WERE CLAIMED AS LONG TERM CAPITAL GAINS BY THE ASSESSEE HAVE BEEN SUMMARIZED. TABLE -1 NAME OF THE SCRIP NO.OF SHARES PURCHASE CONSIDERATION SALE CONSIDERATION PROFIT BANK RAJAS 15000 5,72,290/- 12,98,620/- 7,26.330/- BHEL 4100 12,80,400/- 66,39,900/- 53,59,500/- EVEREADY 15459 8,53,252/- 6,62,387/- (1)1,90,865/- GAIL 28000 73,81,145/- 83,72,433/- 9,91,288/- GOLD TECH. 41000 24,11,980/- 42,65,284/- 18,53,303/ - IDBI 71000 56,78,204/- 70,42,400/- 13,64,195/- INDOASIFU 20000 26,65,000/- 20,90,000/- (-)5,75,000 /- IPCL 9900 26,37,573/- 32,05,352/- 5,67,779/- JMFINANCIAL 3007 22,92,743/- 72,17,480/- 49,24,736/ - MCLEODRUS 30000 17,61,000/- 19,53,038/- 1,92,038/- MSKPROJ 11000 7,34,248/- 19,38,225/- 6,63,976/- MTNL 6000 8,40,560/- 9,60,000/- 1,19,440/- PUNJLLYOD 43360 62,84,968/- 1,29,60,376/- 66,75,407 /- SB & TINL 342838 1,47,28,996/- 66,01,854/- (-)81,27 ,142/- SKUMARYNF 100000 77,84,105/- 92,74,162/- 14,90,056/ - SUBEX 1195 5,70,859/- 7,74,240/- 2,03,380/- TRIVENI 115600 59,06,817/- 1,60,72,443/- 1,01,65,62 5/- GRAND TOTAL 857549 6,43,84,147/- 9,07,88,198/- 2,64 ,04,050/- TABLE-2 NAME OF THE SCRIP TOTAL NO.OF SHARES TOTAL PURCHASE VALUE TOTAL SALE VALUE PROFIT L&T 1750 14,83,000/- 42,77,554/- 27,94,553/- MTNL 4000 3,96,200/- 6,40,000/- 2,43,800/- MUKUND LTD. 2399 23,990/- 3,06,975/- 2,82,985/- PENTALOON R. 32370 94,844/- 1,66,93,403/- 1,65,98,5 59/- PUNJI LLOYD 6000 8,98,800/- 28,51,897/- 11,83,957/- SKUMARSYNF 26000 20,05,249/- 34,16,761/- 14,11,511/ - TATA STEEL 1650 6,48,202/- 14,17,325/- 7,69,123/- 4 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 4 TATA TEA 500 96,225/- 3,83,911/- 2,87,686/- TCI 46515 3,96,951/- 61,48,659/- 57,51,707/- UTUSOF 15459 23,59,558/- 62,71,679/- 39,12,120/- AVAYAGCL 14971 35,27,353/- 36,02,095/- 74,741/- BHEL 2900 15,71,290/- 46,92,600/- 31,21,309/- BIRLA JUTE 4209 1,36,261/- 11,51,351/- 10,15,090/- BLUE DART 154 13,259/- 1,23,508/- 1,10,248/- EI HOTEL 31488 16,44,230/- 58,22,280/- 41,78,050/- FEDERAL BANK 22646 39,99,592/- 80,58,550/- 40,58,958/- HINDSANIT 10000 0 9,84,719/- 9,84,719/- ITC 15750 18,34,212/- 32,68,089/- 14,33,876/- JM FINANCIAL 15508 1,22,01,266/- 3,57,16,080/- 2,35,14,813/- KTK BANK 68000 65,32,538/- 1,44,33,259/- 79,00,721/ - ZEE TELE 2500 3,01,007/- 8,92,500/- 5,91,492/- TAURUS MF 8313 1,00,000/- 3,04,488/- 2,04,488/- DISH TV 1438 29,796/- 1,53,147/- 1,23,350/- GRAND TOTAL 335415 4,09,99,926/- 12,35,00,890/- 8,2 5,00,963/- IN ADDITION TO THE ABOVE, THE TRADING RESULT AS DIS CLOSED BY THE ASSESSEE IS SUMMARIZED AS UNDER :- TABLE -3 SALE OF SHARES RS.14,29,53,662/- ADD: INCREASE IN STOCKS RS. 2,72,01,653/- RS.17,01,54,227/- LESS : PURCHASE OF SHARES RS.16,76,21,660/- RS. 25,33,615/- THE TOTAL EXPENSES DEBITED IN THE ACCOUNT IS ABOUT 2.19 CRORES. IF THE TABLE-I, TABLE-2 AND TABLE-3 ARE COMPARED, IT IS OBSERVED THAT THE ASSES SEE COMPANY HAS MISCLASSIFIED THE PROFIT OUT OF PURCHASE AND SALE OF SHARES TO REDUCE ITS TA X LIABILITY. IN TABLE-I, THE ASSESSEE HAS MISCLASSIFIED THE PROFIT OF RS.2,64,04,050/- AS SHO RT TERM CAPITAL GAIN TO GET THE BENEFIT U/S.111 A RELATING TO SPECIAL RATE OF TAXES. IN TAB LE-2, THE ASSESSEE HAS MISCLASSIFIED THE PROFIT AS LONG TERM CAPITAL GAIN TO GET THE BENEFIT OF TAX EXEMPTION. THE TABLE-S REVEALS THAT THE SALES AND PURCHASES OF SHARES WITHOUT ANY SUBSTANTIAL PROFITS HAVE BEEN CLASSIFIED AS TRADING ACTIVITIES. THE ASSESSEE HAS ALSO MANIPU LATED ITS ACCOUNTS SO THAT EXPLANATION BELOW SECTION 73 IS NOT ATTRACTED IN ITS CASE. 5. BASED ON THE ABOVE ANALYSIS OF THE TRANSACTIONS GIVING RAISE TO LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL GAIN, THE AO WAS OF THE VIEW THAT SHORT TERM CAPITAL GAIN OF RS. 5 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 5 2,64,04,050/- AND LONG TERM CAPITAL GAIN OF RS 8,25 ,00,965/- SHOULD BE TREATED AS BUSINESS PROFIT. THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT HAD MAINTAINED DISTINCT PORTFOLIO OF SHARES HELD AS INVESTMENTS AND THAT HE LD AS STOCK-IN-TRADE AND THEREFORE THE HEAD OF INCOME UNDER WHICH IT HAD DECLARED GAIN ON SALE OF SHARES VIZ., SHORT TERM AND LONG TERM CAPITAL GAIN SHOULD BE ACCEPTED. THE AO HOWEVER HELD THAT THE CONTENTION OF THE ASSESSEE CANNOT BE ACCEPTED IN VIEW OF THE DISC USSION MADE BY THE AO ON THE PATTERN OF PURCHASE OF SALE OF SHARES HELD BY THE ASSESSEE AS INVESTMENTS. THE AO ALSO OBSERVED THAT THE MAIN BUSINESS OF THE ASSESSEE WAS PURCHASE AND SALE OF SHARES AND THE CLASSIFICATION OF THE SHARES AS INVESTMENTS AND STO CK-IN-TRADE WAS MERELY A DEVICE TO REDUCE TAX LIABILITY. THE AO FURTHER OBSERVED THAT EXAMINATION OF TABLE-I GIVEN ABOVE WOULD REVEAL THAT (I) THE ASSESSEE HAS PURCHASED 85 7549 SHARES, (II) THE TOTAL PURCHASE CONSIDERATION IS RS.6,43,84,147/-, (III) THE TOTAL SALE CONSIDERATION IS SRS.9,07,88,198/-, (IV) THE AVERAGE HOLDING PERIOD IS LESS THAN SIX MO NTHS, (V) THE PROFIT IS RS.2,64,04,0501- THE ASSESSEE HAS MADE A SERIES OF TRANSACTIONS REGU LARLY AND THESE TRANSACTIONS ARE ITS ORGANIZED AND REGULAR BUSINESS ACTIVITIES. THE ASSE SSEE COMPANY DOES NOT MAINTAIN ANY SEPARATE DEMAT ACCOUNTS FOR THESE TRANSACTIONS. THE ASSESSEE IS A SEBI REGISTERED STOCK BROKER. IT CARRIES OUT ACTIVITIES OF SALE & PURCHAS E OF SHARES AS A MEMBER OF NSE. THE SERIES OF TRANSACTIONS IN TABLE-I CONSTITUTES ADVEN TURES IN THE NATURE OF TRADES. CONSIDERING THE MAGNITUDE AND VOLUME OF TRANSACTION S, THE PERIOD OF HOLDING, FREQUENCY OF TRANSACTIONS AND THE NATURE OF ACTIVITIES AND AL SO COMMON DEMAT ACCOUNTS, THE PROFIT SHOWN IN TABLE 1 WAS HELD BY THE AO AS THE BUSINESS INCOME OF THE ASSESSEE. SIMILARLY FOR TRANSACTIONS EVIDENCED BY TABLE-2 ABOVE, THE AO OBSERVED THAT (I) THE ASSESSEE HAS PURCHASED 335415 SHARES, (II) THE TOTAL PURCHASE CO NSIDERATION IS RS.4,09,99,926/-, (III) THE TOTAL SALE CONSIDERATION IS RS.12,35,00,890/-, (IV) THE PROFIT IS RS.8,25,00,963/-. HE ALSO OBSERVED THAT THE ASSESSEE DID NOT MAINTAIN AN Y SEPARATE DEMAT ACCOUNTS FOR THESE TRANSACTIONS. FOR THE SAME REASONS GIVEN FOR CONCLU DING THAT GAINS ON SALE OF SHARES DESCRIBED IN TABLE-I AS GIVING RAISE TO INCOME FROM BUSINESS, THE AO HELD THAT INCOME FROM PURCHASE AND SALE OF SHARES DESCRIBED IN TABLE -2 IS ALSO INCOME FROM BUSINESS. 6 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 6 THE AO THUS HELD THAT THE PROFIT OF RS.2,64,04,050/ - AS SHOWN IN TABLE-I AND THE PROFIT OF RS.8,25,00,963/- AS SHOWN IN TABLE-2 WERE TO BE TREATED AS THE BUSINESS INCOME OF THE ASSESSEE. 6. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSE E PREFERRED APPEAL BEFORE CIT(A). THE CONTENTION OF THE ASSESSEE BEFORE CIT(A) WAS TH AT (A) THAT THE ASSESSEE OVER A NUMBER OF YEARS WAS CARRYING ON BUSINESS OF DEALING IN SHARES AND SECURITIES AND WAS ALSO MAKING INVESTMENTS OF ITS SURPLUS CAPITAL IN S HARES AND SECURITIES FOR THE PURPOSE OF EARNING DIVIDEND AND DERIVING CAPITAL GAIN. (B) THE ASSESSE HAD IN ITS BOOKS OF ACCOUNTS GIVEN A DISTINCT ACCOUNTING TREATMENT IN RESPECT OF SHARES HELD AS INVESTMENTS AND THE SHARES HELD AS STOCK IN TRADE OF BUSINESS (C) THAT IN THE PAST THE ASSESSMENTS COMPLETED ON SIMILAR SET OF FACTS, THE REVENUE HAS ACCEPTED T HAT THE INCOME ON SALE OF SHARES HELD AS INVESTMENTS GAVE RISE TO CAPITAL GAIN. (D) THE ASSE SSEE RELIED ON THE RULING OF THE AAR IN THE CASE OF FIDELITY NORTH STAR FUND AND OTHERS 28 8 ITR 641 WHEREIN IT WAS HELD THAT THE ENTRIES MADE IN THE BOOKS OF ACCOUNTS WHEREBY T HE SHARES ARE SHOWN AS INVESTMENT OR STOCK IN TRADE WOULD BE MORE MATERIAL IN COMING TO THE OCCLUSION WHETHER THE GAIN SALE OF SHARES WOULD GIVE RISE TO BUSINESS INCOME O R INCOME UNDER THE HEAD CAPITAL GAIN. (E) THE ASSESSEE POINTED OUT THAT GAINS ARISING FRO M SALE ON LONG TERM CAPITAL ASSET CANNOT BY ANY STRETCH OF IMAGINATION BE TREATED AS INCOME FROM BUSINESS AND DISREGARD TO THE CONTENTION OF THE CIT(A) THAT LONG TERM CAPITAL ASS ET AND SHORT TERM CAPITAL ASSET AS DEFINED IN SECTION 2(29A) AND 2(42A) OF THE INCOME TAX ACT, 1961 (ACT). (F) THE ASSESSEE RELIED ON SEVERAL JUDICIAL PRONOUNCEMENTS IN SUPPORT OF ITS CLAIM THAT INCOME FROM SALE OF SHARES HELD AS INVESTMENT CAN GIVE RIS E ONLY TO INCOME UNDER THE HEAD CAPITAL GAIN AND THAT THE ASSESSEE CAN BE BOTH A DEALER IN SHARES HOLDING SHARES AS STOCK IN TRADE AND ALSO HOLDING SHARES AS INVESTMENTS AND THAT THE ENTRIES IN THE BOOKS OF ACCOUNT IN THIS REGARD WILL DECIDE THE HEAD OF INCO ME UNDER WHICH THE GAINS ON SALE OF SHARES WILL BE ASSESSED. 7 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 7 7. THE CIT(A) ON CONSIDERATION OF THE ABOVE SUBMIS SIONS AND THE JUDICIAL PRONOUNCEMENTS CAME TO THE FOLLOWING CONCLUSION : 20. ON THE ANALYSIS OF THE VARIOUS DECISIONS RELIE D UPON BY THE APPELLANT AND THE ASSESSING OFFICER IT IS OBSERVED THAT THERE IS NO S PECIFIC TERMS AND CONDITIONS, WHICH CAN BE APPLIED MECHANICALLY TO COME TO A CONCLUSION. TH E ISSUE REGARDING TAXATION OF GAINS FROM SHARES DEPENDS UPON THE FACTS AND CIRCUMSTANCE S OF EACH CASE. THE HON'BLE APPELLATE COURTS HAVE DETERMINED THE ISSUE ON THE FACTS OF EA CH CASE GIVING THE VARIOUS POINTS/ISSUES CONSIDERED' FOR COMING TO A CONCLUSION REGARDING TH E HEAD OF INCOME UNDER WHICH THE SHARE PROFIT IS TO BE TAXED. 21. THE FREQUENCY OF BUYING AND 'SELLING OF SHARES BY THE APPELLANTS WERE HIGH; ONLY ONE DEMAT ACCOUNT; THE PERIOD OF HOLDING WAS LESS IN TH E CASE OF SHORT TERM CAPITAL GAIN; INTEREST BEING PAID BY APPELLANT ON BORROWED MONEY IN COMMON KITTY FOR TRADING AND INVESTMENTS; THE HIGH TURNOVER WAS ON ACCOUNT OF FR EQUENCY OF TRANSACTIONS; THE ASSESSEES HAD DEALT IN DELIVERY TRADING PURELY WITH THE INTEN TION OF MAKING QUICK PROFITS ON A HUGE TURNOVER; THE PERIOD OF HOLDING OF A MAJORITY OF TH E STOCK WAS FEW DAYS; IN MOST OF THE TRANSACTIONS, THE ASSES SEES DID NOT EVEN HOLD ON T O AT LEAST SOME PART OF THE HUGE PURCHASES AND HAD ENGAGED IN THE SAME SCRIPS FREQUE NTLY; THE INTENTION OF THE ASSESSEES IN BUYING SHARES WAS NOT TO DERIVE INCOME BY WAY OF DI VIDEND ON SUCH SHARES, BUT TO EARN PROFITS ON THE SALE OF THE SHARES; THE ASSES SEES H AD INDULGED IN MULTIPLE TRANSACTIONS OF DIFFERENT QUANTITIES WITH VERY HIGH PERIODICITY. TH ESE PERIODIC TRANSACTIONS, SELECTING THE TIME OF ENTRY AND EXIT IN EACH SCRIP, CALLED FOR RE GULAR DIRECTION AND MANAGEMENT WHICH WOULD INDICATE THAT IT WAS IN THE NATURE OF TRADE; REPEATED TRANSACTIONS, COUPLED WITH THE SUBSEQUENT CONDUCT OF THE ASSESSEES TO RE-ENTER THE SAME SCRIP OR SOME OTHER SCRIP, IN ORDER TO TAKE ADVANTAGE OF MARKET FLUCTUATIONS LENT THE FLAVOUR OF TRADE TO SUCH TRANSACTIONS; THE ASSESSEE WAS PURCHASING AND SELLI NG THE SAME SCRIPS REPEATEDLY, AND WAS SWITCHING FROM ONE SCRIP TO ANOTHER; THE DOMINANT I MPRESSION LEFT ON THE MIND WAS THAT THE SSESSEE HAD NOT INVESTED IN SHARES; MERE CLASSI FICATION OF THESE SHARE TRANSACTIONS AS INVESTMENT IN THE ASSESSEE'S BOOKS OF ACCOUNTS IS N OT CONCLUSIVE; THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE WAS ONLY TO SELL T HE SHARES IMMEDIATELY AFTER PURCHASE; FREQUENCY OF PURCHASE AND SALE OF SHARES SHOWED THA T THE ASSESSEES NEVER INTENDED TO KEEP THESE SHARES AS INVESTMENT; AND IT IS ONLY FOR THE PURPOSE OF CLAIMING BENEFIT OF LOWER RATE OF TAX, UNDER SECTION 111 A OF THE ACT, THAT THEY H AD CLAIMED CERTAIN SHARES TO BE INVESTMENT, THOUGH THESE TRANSACTIONS WERE ONLY IN THE NATURE OF TRADE. THE CHARACTER OF A TRANSACTION CANNOT BE DETERMINED SOLELY ON THE APPL ICATION OF ANY ABSTRACT RULE, PRINCIPLE OR TEST BUT MUST DEPEND UPON ALL THE FACTS AND CIRC UMSTANCES OF THE CASE. 22. THE INVESTMENTS HAS BEEN ACCEPTED BY THE ASSESS ING OFFICER IN HIS ASSESSMENT ORDER PASSED U/S 143(3) DATED 31.12.2009 FOR THE ASSESSME NT YEAR 2007-08 AMOUNTING TO RS.222,733,497/- AS CLOSING BALANCE AS ON 31ST MARC H 2007. THE ASSESSING OFFICER HAS ALSO ACCEPTED THE AMOUNT OF RS.4,55,57,618/- AS CLO SING BALANCE WHICH HAS BEEN SUBSEQUENTLY CALCULATED TO BE INVESTMENTS FOR SHORT TERM CAPITAL GAIN BY THE ASSESSING OFFICER. THERE ARE PECULIAR FACTS AND CIRCUMSTANCES WHERE IN THE EARLIER ASSESSMENT YEAR 2007-08 THE INVESTMENTS SHOWN BY THE APPELLANT HAVE BEEN UPHELD AS INVESTMENTS BY THE 8 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 8 ASSESSING OFFICER BUT IN THE SUBSEQUENT YEAR THE SA ME FIGURE HAS BEEN TREATED AS STOCK IN TRADE FOR DENYING THE BENEFIT OF CAPITAL GAIN ON SA LE OF SHARES. AS PER THE VARIOUS FACTS & CIRCUMSTANCES MENTIONED IN PARA 9 AND AFTER CONSIDE RING THE OBSERVATIONS OF THE ASSESSING OFFICER IN THE ASSESSMENT ORDER AND SUBMISSIONS OF THE APPELLANT AND AFORESAID DISCUSSION ON THIS ISSUE IN DETAIL, THE SHORT TERM CAPITAL GAI NS ON SALE OF SHARES IS BEING HELD TO BE BUSINESS INCOME. IT IS HELD THAT THE SALE AND PURCH ASE OF SHARES SHOWN IN THE INVESTMENTS PORTFOLIO EXCEPT LONG TERM CAPITAL GAINS IS TREATED AS BUSINESS INCOME UNDER THE HEAD OF 'PROFITS & GAINS OF BUSINESS' FOR THE CURRENT ASSES SMENT YEAR. THE GAIN ON SALE OF SHARES HAVING SHORT TERM CAPITAL GAINS IS HELD TO BE ASSES SED AS BUSINESS INCOME. THE LONG TERM CAPITAL GAIN SHOWN BY THE ASSESSEE IS ACCEPTED AS L ONG TERM CAPITAL GAINS. THE APPELLANT WILL NOT GET THE BENEFIT OF CLOSING STOCK OF INVEST MENTS SHOWN IN THE FINAL ACCOUNTS AS ON 31 ST MARCH 2008 TO BE CONSIDERED AS CAPITAL GAINS IN THE ASSESSMENT YEAR 2009-10 MERELY BECAUSE IT HAS BEEN ACCEPTED SO IN THIS APPE LLATE ORDER. THE APPELLANT HAS GIVEN THE DETAILS OF SHARES IN THE INVESTMENT FOLIO IN WHICH THERE IS SHORT TERM CAPITAL GAIN. AS PER APPELLANT THE SHORT TERM CAPITAL GAIN AMOUNTS TO RS .2,64,04,051/-. THE ASSESSING OFFICER WILL TREAT THE SAME I.E. AMOUNTING TO RS.2,64,04,05 1/-. AS BUSINESS INCOME AFTER DUE VERIFICATION AND RS.8,25,00,964/- AS LONG TERM CAPI TAL GAIN. THESE GROUNDS OF APPEAL ARE ACCORDINGLY DECIDED. THE APPEAL ON ISSUE OF SHORT T ERM CAPITAL GAIN TO BE TREATED AS SHORT TERM CAPITAL GAIN INSTEAD OF BUSINESS INCOME IS DIS MISSED. 23. THE HON'BLE APPELLATE COURTS HAVE DETERMINED TH E ISSUE ON THE FACTS OF EACH CASE GIVING THE VARIOUS POINTS/ISSUES CONSIDERED FOR COM ING TO A CONCLUSION REGARDING THE HEAD OF INCOME UNDER WHICH THE SHARE PROFIT IS TO BE TAX ED. THE LONG TERM CAPITAL GAIN AMOUNTING TO RS. 8,25,00,964/- IS HELD TO BE LONG T ERM CAPITAL GAIN EXEMPTED U/S 10(38) OF THE INCOME-TAX ACT, 1961. THE AMOUNT OF RS.2,64,04, 051/- IS HELD TO BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL GAIN. THESE 5 (FIVE) GROUNDS OF APPEAL ARE ACCORDINGLY DECIDED AND THE ORDER OF THE ASSESSING OFFICER IS U PHELD ON THIS ISSUE. 8. AGGRIEVED BY THE ORDER OF CIT(A) HOLDING THAT G AINS ON SALE OF SHARES DECLARED BY THE ASSESSEE AS SHORT TERM CAPITAL GAIN GIVES RISE TO INCOME FROM BUSINESS AND THE CONSEQUENT FINDING OF THE CIT(A) IN THIS REGARD HAS RAISED GROUND NO.1 TO 6 BEFORE THIS TRIBUNAL WHICH READ AS FOLLOWS :- 1) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT CA) ERRED ON FACTS AND IN LAW IN DIRECTING THE AO TO ASSESS THE GAINS REALIZED ON SALE OF INVESTMENT SHARES; HELD FOR PERIOD LESS THAN 12 MONTHS; UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS' AS OPPOSED TO 'SHORT TERM CAPITAL GAINS' CLAIMED BY TH E APPELLANT. 2) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LOWER AUTHORITIES FAILED TO APPRECIATE THAT THE APPELLANT IN IT'S BOOKS HAD MAINTAINED CLEAR DISTINCTION BETWEEN THE TRADING STOCK OF SHARES & INVESTMENTS AND FOLLOWED DIFFERENT AND DISTINCT METHODS OF ACCOUNTING IN RELATION THERETO AND THEREFORE THE CL T (A) WAS UNJUSTIFIED IN UPHOLDING THE ASSESSMENT OF ONLY SHORT TERM CAPITAL GAINS UNDER T HE HEAD 'PROFITS & GAINS OF BUSINESS'. 9 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 9 3) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE LOWER AUTHORITIES NOT HAVING DISPUTED THE GENUINENESS OF THE AUDITED ACCO UNTS NOR HAVING PROVED ANY INFIRMITY IN THE ACCOUNTS NOR HAVING INVOKED PROVISIONS OF SE C. 145 OF THE ACT, THE CIT CA) WAS GROSSLY UNJUSTIFIED IN HOLDING PARA-25 OF THE APPEL LATE ORDER THAT THE INVESTMENT IN SHARES DISCLOSED IN THE BALANCE-SHEET AS ON 31 ST M ARCH 2008; SHOULD NOT BE ACCEPTED TO BE INVESTMENTS IN RELATION TO APPELLANT'S ASSESSMEN T FOR THE A. Y. 2009-10 & ONWARDS. 4) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE FINDINGS OF THE LD. CIT CA) WITH REGARD TO ASSESSMENT OF SHORT TERM CAPITAL GAINS UNDER THE HEAD 'PROFITS & GAINS OF BUSINESS' AND HIS DIRECTION TO THE AO NOT TO ACC EPT DEPICTION OF INVESTMENTS IN SHARES AS ON 31 ST MARCH 2008 AS & BY WAY OF INVESTMENT; IN T HE SUBSEQUENT ASSESSMENT YEAR; BE HELD TO BE PERVERSE AS THE SAME IS NOT BASED ON ANY COGENT MATERIAL AND REASONING AND THE SAME BE HELD TO BE ARBITRARY. 5) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE AO BE DIRECTED TO ASSESS THE SHORT TERM CAPITAL GAINS OF RS.2,64,04,051 /- U NDER THE HEAD 'CAPITAL GAINS' AND BE FURTHER DIRECTED TO CHARGE THE TAX AT THE RATE PRES CRIBED IN SEC. 111A OF THE ACT. 6) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE A'O BE DIRECTED TO ACCEPT RS.27,97,93,524/- BEING INVESTMENT IN SHARES AS ON 31 ST MARCH 2008 AS INVESTMENT FOR A.Y. 2008-09 AND THE SUBSEQUENT YEARS SINCE SUCH IN VESTMENTS WERE ACCOUNTED IN THE BOOKS 'AT COST' AND NOT ON THE PRINCIPLE OF 'LOWER OF THE COST OR MARKET VALUE'. 9. AGGRIEVED BY THE ORDER OF CIT(A) IN COMING TO T HE CONCLUSION THAT THE GAIN ON SALE OF SHARES HELD FOR MORE THAN 12 MONTHS BY THE ASSES SEE GIVE RISE TO LONG TERM CAPITAL GAIN THE REVENUE HAS RAISED GROUND NO.1 BEFORE THIS TRIBUNAL WHICH READ AS FOLLOWS :- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, LD. CIT(A) ERRED IN LAW IN HOLDING THE BUSINESS INCOME FROM SALE OF SHARES TO BE TREATED AS LONG TERM CAPITAL GAIN AND GET EXEMPTION U/S 10(38) OF THE I.T.ACT,1961. 10. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED C OUNSEL FOR THE ASSESSEE, WHO REITERATED THE SUBMISSIONS AS WERE MADE BEFORE CIT( A). THE LEARNED COUNSEL ALSO DREW OUR ATTENTION TO THE CIRCULAR OF CBDT DATED 29.02.2 016 I.E. NO. 6/16 WHEREBY CBDT DATED 29.02.2016 HAS CLEARLY LAID DOWN THAT THE SHA RES AND SECURITIES HELD FOR A PERIOD OF 12 MONTHS, THE GAIN ON SALE OF THOSE SHARES IF C LAIMED BY THE ASSESSEE, AS LONG TERM CAPITAL GAIN SHOULD NOT BE DISPUTED BY THE AO. ACCO RDING TO HIM THEREFORE BASED ON THE AFORESAID CIRCULAR, THE GROUNDS RAISED BY THE REVEN UE HAVE TO BE REJECTED. AS FAR AS GROUND NO.1 & 2 RAISED BY THE ASSESSEE IS CONCERNED , THE LD. COUNSEL FOR THE ASSESSEE 10 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 10 THE ASSESSEE BESIDES REITERATING SUBMISSIONS AS WER E MADE BEFORE CIT(A) ALSO SUBMITTED THAT IN THE ASSESSMENTS COMPLETED FOR A.YRS. 2006-0 7 AND 2007-08, SIMILAR TYPE OF TRANSACTIONS WERE CARRIED OUT BY THE ASSESSEE AND G AIN ON SALE OF SHARES HELD AS INVESTMENT WERE DECLARED AS SHORT TERM CAPITAL GAIN AND THE SAME WERE ACCEPTED BY THE REVENUE IN THE ASSESSMENTS COMPLETED U/S 143(3) OF THE ACT. HE PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS GOPAL PUROHIT 336 ITR 287 WHEREIN THE HONBLE BOMBAY HIGH COURT HELD THAT THOUGH THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO THE ASSESSMENT PROCEE DINGS THERE OUGHT TO BE UNIFORMITY IN TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUM STANCES ARE IDENTICAL. IT WAS ALSO A CASE OF A PERSON WHO DECLARED GAIN ON SALE OF SHARE S HELD AS INVESTMENTS AS CAPITAL GAIN AND THE REVENUE HAD TREATED THE SAID GAIN AS GIVING RAISE TO INCOME FROM BUSINESS. HE ALSO BROUGHT TO OUR NOTICE THAT SLP PREFERRED AGAIN ST THE AFORESAID DECISION OF THE HONBLE BOMBAY HIGH COURT HAS BEEN DISMISSED BY THE HONBLE SUPREME COURT. BESIDES THE ABOVE OUR ATTENTION WAS ALSO DRAWN TO T HE FACT THAT IN ASSESSMENT COMPLETED FOR A.YRS. 2010-11 TO 2012-13 U/S 143(3) OF THE ACT THE REVENUE HAS ACCEPTED THE CLAIM OF THE ASSESSEE THAT GAIN ON SALE OF SHARES HELD AS INVESTMENTS GIVE RISE TO CAPITAL GAIN. THE RELEVANT ASSESSMENT ORDERS WERE PLACED IN THE P APER BOOK FILED BEFORE US. 11. THE LD. DR WHILE PLACING RELIANCE ON THE ORDE R OF AO SUBMITTED THAT THE FACTS AND CIRCUMSTANCES OF EACH WILL NOT BE LOOKED INTO BEFOR E COMING TO THE CONCLUSION WHETHER GAIN ON SALE OF SHARES HELD AS INVESTMENT SHOULD BE TREATED AS CAPITAL GAIN OR INCOME FROM BUSINESS. HE PLACED RELIANCE ON THE CBDT CIRCU LAR NO. CBDT CIRCULAR NO.4/2007 DATED 15/6/2007 , WHEREIN THE DEPARTMENT HAS LAID DOWN CERTAIN GUIDEL INES FOR DECIDING THE QUESTION AS TO WHETHER INCOME FROM SALE OF SHARES WILL GIVE RAISE TO CAPITAL GAIN OR INCOME FROM BUSINESS. 12. WE HAVE GIVEN A CAREFUL CONSIDERATION TO THE R IVAL SUBMISSIONS. AS FAR AS THE APPEAL OF THE REVENUE IS CONCERNED, THE QUESTION IS WHETHER THE LONG TERM CAPITAL GAIN 11 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 11 DECLARED BY THE ASSESSEE CAN BE SAID TO BE INCOME F ROM BUSINESS, THE REASONING GIVEN BY THE AO IN THIS REGARD WAS MAKING A REFERENCE TO THE FACT THAT THE ACTIVITY OF MAKING INVESTMENT HAD BEEN CARRIED OUT BY THE ASSESSEE IN A SYSTEMATIC AND ORGANIZED MANNER AND OVER A NUMBER OF YEARS AND THEREFORE WOULD CONS TITUTE BUSINESS. IN THIS REGARD, WE FIND THAT THIS CONTROVERSY AS TO WHETHER INCOME ON SALE OF SHARES OUGHT TO BE REGARDED AS INCOME UNDER THE HEAD CAPITAL GAIN OR BUSINES S INCOME CREATED LOTS OF DISPUTE AND WITH A VIEW TO CLARIFY THE POSITION THE CBDT HA D COME OUT WITH A CIRCULAR NO.6/2016. THE RELEVANT PORTION OF THE CIRCULAR AS FAR AS THE PRESENT APPEAL OF THE REVENUE IS CONCERNED, IS AS FOLLOWS: IN RESPECT OF LISTED SHARES AND SECURITIES HELD FO R A PERIOD OF MORE THAN 12 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER, IF THE ASSESSEE DESIRES TO TREAT THE INCOME ARISING FROM THE TRANSFER THEREOF AS CAPITAL GAIN, THE SAME SHALL NOT BE PUT TO DISPUTE BY THE ASSESSING OFFICER. HOWEVER, THIS STAND, ONCE TA KEN BY THE ASSESSEE IN A PARTICULAR ASSESSMENT YEAR, SHALL REMAIN APPLICABLE IN SUBSEQU ENT ASSESSMENT YEARS ALSO AND THE TAXPAYERS SHALL NOT BE ALLOWED TO ADOPT A DIFFERENT /CONTRARY STAND IN THIS REGARD IN SUBSEQUENT YEARS; WE ARE OF THE VIEW THAT THE ABOVE CIRCULAR SHOULD S ETTLE THE CONTROVERSY IN FAVOUR OF THE ASSESSEE, IN THE FACTS AND CIRCUMSTANCES OF THE CAS E OF THE ASSESSEE. WE HAVE ALREADY OBSERVED THAT THE ASSESSEE HAS BEEN CONSISTENTLY MA INTAINING TWO PORTFOLIO OF SHARES ONE HELD AS INVESTMENTS AND THE OTHER HELD AS STOCK -IN-TRADE OF BUSINESS OF DEALING IN SHARES. AS FAR AS THE INCOME ON SALE OF SHARES HEL D AS INVESTMENTS IS CONCERNED, THE ASSESSEE HAS ALWAYS BEEN DECLARING SUCH INCOME UNDE R THE HEAD CAPITAL GAIN AND THE SAME HAS BEEN ACCEPTED BY THE REVENUE IN THE PAST A SSESSMENTS. WE THEREFORE UPHOLD THE ORDER OF THE CIT(A) IN THIS REGARD AND DISMISS GROUND NO.1 RAISED BY THE REVENUE. 13. AS FAR AS THE APPEAL OF THE ASSESSEE IS CONCER NED, THE FIRST ISSUE TO BE DECIDED IS AS TO WHETHER THE STCG ON TRANSACTION OF PURCHASE AND SALE OF SHARES UNDERTAKEN BY THE ASSESSEE DURING THE PREVIOUS YEAR IS TO BE ASSESSED UNDER THE HEAD INCOME FROM BUSINESS AS CLAIMED BY THE REVENUE OR INCOME UNDER THE HEAD CAPITAL GAIN AS CONTENDED BY THE ASSESSEE. IF IT IS HELD THAT STCG DECLARED BY THE ASSESSEE HAS TO BE 12 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 12 ACCEPTED UNDER THAT HEAD OF INCOME, THEN THE OTHER GROUNDS OF APPEAL REGARDING VALUATION OF CLOSING STOCK OF SHARES ETC., BECOME A CADEMIC AND NEED NO ADJUDICATION. 14. BEFORE WE DEAL WITH THE FACTS OF THE CASE OF T HE ASSESSEE, WE WILL BRIEFLY NARRATE THE PRINCIPLES APPLICABLE IN DECIDING THE ABOVE ISSUE A S LAID DOWN IN SEVERAL JUDICIAL PRONOUNCEMENTS :- (A) WHETHER A TRANSACTION OF SALE AND PURCHASE OF SHARE S WERE TRADING TRANSACTIONS OR WHETHER THEY WERE IN THE NATURE OF INVESTMENTS IS M IXED QUESTION OF LAW AND FACT. CIT VS. HOLCK LARSEN, 60 ITR 67 (SC). (B) IT IS POSSIBLE FOR AN ASSESSEE TO BE BOTH AN INVEST OR AS WELL AS A DEALER IN SHARES. WHETHER A PARTICULAR HOLDING IS BY WAY OF INVESTMEN T OR FORMED PART OF STOCK IN TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE AND IT IS FOR THE ASSESSEE TO PRODUCE EVIDENCE FROM HIS RECORDS AS TO WHETHER HE MAINTAINED ANY DISTINCTION BETWEEN SHARES WHICH WERE HOLD BY HIM A S INVESTMENTS AND THOSE HOLD AS STOCK IN TRADE. (CIT VS. ASSOCIATED INDUSTRIAL DEVE LOPMENT CO. LTD., 82 ITR 586 (SC). (C) TREATMENT IN THE BOOKS BY AN ASSESSEE WILL NOT BE C ONCLUSIVE. IF THE VOLUME, FREQUENCY AND REGULARITY WITH WHICH TRANSACTIONS AR E CARRIED OUT INDICATE SYSTEMATIC AND ORGANIZED ACTIVITY WITH PROFIT MOTIVE, THEN IT WOULD BE A CASE OF BUSINESS PROFITS AND NOT CAPITAL GAIN. CIT VS. MOTILAL HIRABHAI SPG . AND WVG. CO. LTD., 113 ITR 173 (GUJ); RAJA BAHADUR VISWSHWARA SINGH VS. CIT, 4 1 ITR 685 (SC). (D) PURCHASE WITHOUT AN INTENTION TO RESELL WHERE THEY ARE SOLD UNDER CHANGED CIRCUMSTANCES WOULD BE CAPITAL GAINS. CIT VS. PKN, 60 ITR 65 (SC). PURCHASE WITH AN INTENTION TO RESELL WOULD RENDER THE GAIN PROFIT ON SALE BUSINESS PROFIT DEPENDING ON THE CIRCUMSTANCES OF THE CASE LIKE NATURE AND QU ANTITY OF ARTICLE PURCHASED, NATURE OF THE OPERATION INVOLVED. SAROJ KUMAR MAZUMDAR VS. CIT, 37 ITR 242 (SC). (E) NO SINGLE FACT HAS ANY DECISIVE SIGNIFICANCE AND TH E QUESTION MUST DEPEND UPON THE COLLECTIVE EFFECT OF ALL THE RELEVANT MATERIALS BRO UGHT ON RECORD. JANKI RAM BAHADUR RAM VS. CIT, 57 ITR 21 (SC). 15. THE ABOVE TESTS HAVE AGAIN BEEN REITERATED BY THE CBDT IN ITS CIRCULAR REFERRED TO BY THE LEARNED DR BEFORE US. KEEPING IN MIND, THE A BOVE BROAD PRINCIPLES, WE SHALL NOW EXAMINE THE CASE OF THE ASSESSEE. THE FACTORS WHIC H GO IN FAVOUR OF THE ASSESSEE THAT THE INCOME IN QUESTION IS SHORT TERM CAPITAL GAIN ( STCG) ARE AS FOLLOWS: 1. THE FACT THAT IN THE EARLIER AYS I.E., AY 06-07 & 0 7-08 IN ASSESSMENT COMPLETED U/S.143(3) OF THE ACT, ON IDENTICAL VOLUME OF TRANS ACTION, HAS ACCEPTED THE CASE OF THE ASSESSEE THAT INCOME FROM PURCHASE AND SALE OF SHAR ES IS STCG AND NOT BUSINESS 13 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 13 INCOME. THE SAME POSITION CONTINUED IN ASSESSMENT FOR AY 2010-11 & 2011-12 ALSO. A CHART IS ANNEXED TO THIS ORDER AS ANNEXURE-1 WHICH GIVES THE COMPARATIVE COMPONENT OF CAPITAL GAIN (SHORT TERM/LONG TERM AND INCOME FROM SHARE TRADING. A READING OF THE SAID CHART WOULD SHOW THAT THE VOLUME OF GAIN UNDER THE HEAD STCG HAS BEEN CONSISTENT AND NO ADVERSE INFERENCE CAN BE DRAWN AG AINST THE ASSESSEE IN THIS REGARD. 2. A CHART SHOWING THE AVERAGE HOLDING PERIOD OF INVES TMENTS SOLD DURING THE PREVIOUS YEAR BY THE ASSESSEE INDICATING THE AVERAGE HOLDING PERIOD IS GIVEN AS ANNEXURE-2 TO THIS ORDER. A PERUSAL OF THE SAME WOULD SHOW THAT THE HOLDING PERIOD HAS BEEN SUBSTANTIALLY HIGH IN RESPECT OF SHARES WHICH GAVE RAISE TO STCG. 3. THE SHARES WHICH WERE SOLD AND WHICH GAVE RAISE TO STCG WERE HELD BY THE ASSESSEE AS INVESTMENTS IN ITS BOOKS OF ACCOUNTS. THE TREAT MENT IN THE BOOKS OF ACCOUNTS IS THUS AS INVESTMENTS AND THIS WILL BE ONE OF THE IMPORTAN T CRITERIA WHICH WILL SUPPORT THE PLEA OF THE ASSESSEE THAT THE INCOME IN QUESTION IS STCG . 4. NO BORROWED FUNDS HAD BEEN UTILIZED FOR MAKING INVE STMENTS. 5. THERE IS NO BAR IN LAW THAT A PERSON WHO DOES SHARE TRADING AS BUSINESS CANNOT HOLD SHARES AS INVESTMENTS AND THAT HE CAN HAVE TWO PORT FOLIOS ONE OF SHARES ONE HELD AS INVESTMENT AND THE OTHER AS STOCK-IN-TRADE OF BUSIN ESS. 16. IN CIT VS. GOPAL PUROHIT 228 CTR 582 (BOM), TH E QUESTION OF LAW RAISED WAS REGARDING WHETHER STCG DECLARED BY THE ASSESSEE WAS TO BE ASSESSED AS BUSINESS INCOME OR NOT. QUESTION (B) CONSIDERED BY THE HON BLE BOMBAY HIGH COURT WAS AS FOLLOWS: (B) WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE ITAT WAS JUSTIFIED IN HOLDING THAT PRINCIPLE OF CONSISTE NCY MUST BE APPLIED HERE AS AUTHORITIES DID NOT TREAT THE ASSESSEE AS A SHARE TRADER IN PRE CEDING YEAR, IN SPITE OF EXISTENCE OF SIMILAR TRANSACTION, WHICH CANNOT IN ANY WAY OPERAT E AS RESJUDICATA TO PRECLUDE THE AUTHORITIES FROM HOLDING SUCH TRANSACTIONS AS BUSIN ESS ACTIVITIES IN CURRENT YEAR? 17. THE HONBLE BOMBAY HIGH COURT HELD AS FOLLOWS: 3. IN SO FAR AS QUESTION (B) IS CONCERNED, THE TRI BUNAL HAS OBSERVED IN PARAGRAPH 8.1 OF ITS JUDGMENT THAT THE ASSESSEE HAS FOLLOWED A CO NSISTENT PRACTICE IN REGARD TO THE NATURE OF THE ACTIVITIES, THE MANNER OF KEEPING REC ORDS 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 CONSIDERATI ON, SINCE THE PRINCIPLE OF RES JUDICATA IS NOT APPLICABLE TO ASSESSMENT PROCEEDING S. 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 TREATMENT AND CONSISTENCY WHEN THE FACTS AND CIRCUM STANCES ARE IDENTICAL, PARTICULARLY IN THE CASE OF THE ASSESSEE. THIS APPROACH OF THE T RIBUNAL CANNOT BE FAULTED. THE REVENUE DID NOT FURNISH ANY JUSTIFICATION FOR ADOPT ING A DIVERGENT APPROACH FOR THE 14 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 14 ASSESSMENT YEAR IN QUESTION. QUESTION (B), THEREFOR E, DOES NOT ALSO RAISE ANY SUBSTANTIAL QUESTION. 18. THE ABOVE DECISION OF THE HONBLE BOMBAY HIGH COURT IS CLEARLY APPLICABLE IN THIS CASE. AS WE HAVE ALREADY SEEN THAT THE AO IN AYS 2 006-07 & 2007-08 THE AO ACCEPTED THE PLEA OF THE ASSESSEE AND ASSESSED INCO ME DECLARED ON PURCHASE AND SALE OF SHARES AS GIVING RAISE TO STCG IN ASSESSMENT COMPLE TED U/S.143(3) OF THE ACT. WE HAVE ALSO SEEN THAT THE FACTS AND CIRCUMSTANCES IN THE P RESENT AY AND THE AYS REFERRED TO ABOVE WERE IDENTICAL. THOUGH THE RULE OF RES JUDIC ATA IS NOT APPLICABLE BUT THE PRINCIPLE OF CONSISTENCY WILL DEFINITELY APPLY AND ON THAT BA SIS THE CLAIM OF THE ASSESSEE SHOULD BE HELD TO BE PROPER. 19. THE HONBLE ITAT MUMBAI BENCH DECISION IN THE CASE OF JANAK S.RANGWALA VS. ACIT 11 SOT 627 (MUM) HAS BEEN HELD THAT MAGNITUDE OF THE TRANSACTION DOES NOT ALTER THE NATURE OF THE TRANSACTION. THEREFORE MAGNITUDE OF TRANSACTIONS CARRIED OUT BY THE ASSESSEE, IN OUR VIEW, SHOULD NOT BE VERY MATERIAL IN COMING TO THE CONCLUSION THAT INCOME IN QUESTION IS INCOME FROM BUSINESS. 20. ON A CONSIDERATION OF THE FACTS AND CIRCUMSTAN CES OF THE PRESENT CASE AND IN THE LIGHT OF THE PRINCIPLES LAID IN JUDICIAL PRONOUNCEM ENT REFERRED TO ABOVE, WE ARE OF THE VIEW THAT THE INCOME IN QUESTION HAS TO BE ASSESSED UNDER THE HEAD SHORT TERM CAPITAL GAIN AS DECLARED BY THE ASSESSEE. GR.NO.1 & 2 RAI SED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED. IN VIEW OF THE DECISION ON GROUND NO.1 & 2, WE ARE OF THE VIEW THAT THE OTHER CONNECTED GROUNDS OF APPEAL NO.3 TO 6 ARE EITHER CO NSEQUENTIAL OR DO NOT CALL FOR ANY ADJUDICATION. 21. GROUND NO.7 RAISED BY THE ASSESSEE AND GROUND NO.2 BY THE REVENUE CAN BE DECIDED TOGETHER. THESE GROUNDS READ AS FOLLOWS :- GROUND NO.7 RAISED BY THE ASSESSEE: 15 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 15 7) FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT CA) ERRED IN LAW AND ON FACTS IN UPHOLDING THE DISALLOWANCE OF EXPEN SES U/S 14A IN CONFORMITY WITH RULE 8D OF THE INCOME TAX RULES WITHOUT POINTING OUT ANY SPECIFIC INFIRMITY IN THE ASSESSEE'S WORKING OF THE AMOUNT DISALLOWABLE U/S 14A. GROUND NO.2 RAISED BY THE REVENUE: 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE, LD. CIT(A) ERRED IN LAW IN HOLDING THAT THE OPENING VALUE OF INVESTMENTS WILL BE REDUCED BY THE AMOUNT OF SHORT TERM INVESTMENTS SOLD DURING THE YEAR TO CALCULATE THE D ISALLOWANCE U/S 14A OF THE I.T.ACT. 22. IT IS NOT IN DISPUTE THAT THE ASSESSEE EARNED DIVIDEND INCOME DOES NOT FORM PART OF THE TOTAL INCOME. IN VIEW OF THE PROVISIONS OF SECT ION 14A OF THE ACT WHICH PROVIDES THAT THE EXPENDITURE INCURRED IN EARNING INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT, SHOULD NOT BE ALLOWED AS DEDU CTION WHILE COMPUTING THE TOTAL INCOME, AO WANTED TO DISALLOW EXPENSES CLAIMED BY T HE ASSESSEE IN ARRIVING AT ITS INCOME FROM BUSINESS. THE ASSESSEE ON HIS OWN HAD C OMPUTED THE DISALLOWANCE U/S 14A OF THE ACT ADDED A SUM OF RS.3,29,313/- AND HAD ALS O GIVEN THE BASIS OF SUCH DISALLOWANCE IN ITS SUBMISSION DATED 7.10.2010 FILE D BEFORE THE AO. THE SAID DISALLOWANCE COMPRISED OF DIRECT EXPENDITURE IN NAT URE OF DEMAT CHARGES, TRANSACTION CHARGES AND SALARY OF ONE EMPLOYEE AND 10% OF DIREC TOR'S SALARY INVOLVED IN THE INVESTMENT & BROKING DIVISION. THE AO HOWEVER WAS O F THE VIEW THAT THE AFORESAID DISALLOWANCES WAS NOT PROPER AND HE COMPUTED THE DI SALLOWANCE U/S 14A OF THE ACT BY APPLYING RULE 8-D OF THE INCOME TAX RULES, 1962 (RU LES), WHICH WAS AS FOLLOWS :- THE ASSESSEE HAS COMPUTED THE DISALLOWANCE OF RS.3 ,29,338/- U/S 14A VIDE ITS SUBMISSION DATED 7-10-2010. SINCE IT IS NOT COMPUTE D AS PER RULE 8D, IT IS NOT ACCEPTED. THE ASSESSEE COMPANY HAD EARNED EXEMPT INCOME I.E. DIVIDEND OF RS.4238860/- DURING THIS FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR 2008-09. THE DISALLOWANCE U/S 14A READ WITH RULE 8D IS CALCULATED AS UNDER :- 1)DEPOSITORY CHARGES RS.351494/- OPENING VALUE OF INVESTMENTS RS.222733496/- CLOSING VALUE OF INVESTMENTS RS.279793524/- TOTAL RS.502527020/- AVERAGE VALUE RS.251263510/-..[B] OPENING VALUE OF TOTAL ASSETS RS.268186865/- CLOSING VALUE OF TOTAL ASSETS RS.423659800/- TOTAL RS.691846665/- 16 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 16 AVERAGE VALUE RS.345923332/-..[C] INTEREST RS. 2429451/-[A] 2)A X B = 2429451 X 251263510 = RS.1764646/- C 345923332 3) % OF AVERAGE VALUE OF INVESTMENT RS.251263510/- COMES TO RS.12,56,318/- THEREFORE TOTAL AMOUNT [1+2+3] [351494/- + 1764646/ - + 12,56,318/-] INADMISSIBLE U/S 14A READ WITH RULE 8D COMES TO RS.33,72,458/-. 23. ON APPEAL BY THE ASSESSEE THE CIT(A) CONFIRMED THE ORDER OF AO. 26. I HAVE CONSIDERED THE SUBMISSIONS OF THE AUTHO RISED REPRESENTATIVE AND HAVE PERUSED THE AUDITED ACCOUNTS OF THE APPELLANT FOR THE AY 2008-09. IT IS THE PLEA OF THE APPELLANT THAT IT CARRIES ON BUSINESS A CTIVITIES THROUGH MULTIPLE DIVISIONS THOUGH UNDERLYING TRANSACTIONS CONDUCTED' BY THESE DIVISIONS INVOLVES PURCHASE AND SALE OF SHARES AND SECURITIES. IT IS T HE ASSESSEE'S PLEA THAT IT MAINTAINS SEPARATE ACCOUNTS FOR EACH OF THE DIVISIO N WHICH INTER ALIA INCLUDE INVESTMENT DIVISION FROM WHICH THE ASSESSEE DERIVES INCOME BY WAY OF CAPITAL GAINS AND DIVIDEND. THE INCOME DERIVED FROM THIS DI VISION SUBSTANTIALLY QUALIFIES FOR EXEMPTION UNDER SECTION 10(34) OR 10(38) OF THE I.T. ACT, 1961. THE AUTHORISED REPRESENTATIVE PRIMARILY ARGUED THAT THE EXPENSES INCURRED IN RELATION TO INVESTMENT DIVISION WERE IDENTIFIABLE A ND THEREFORE THE DISALLOWANCE UNDER SECTION 14A SHOULD BE MADE IN RELATION TO EXP ENSES OF THE INVESTMENT DIVISION ONLY AND NOT IN ACCORDANCE TO RULE 8D OF T HE I.T. RULES,1962. IT IS ALSO THE ASSESSEE'S PLEA THAT SINCE NET OWNED FUNDS BY W AY OF CAPITAL AND RESERVES WERE SUFFICIENTLY LARGE TO COVER THE COST OF INVEST MENTS NO PART OF THE INTEREST PAID WAS LIABLE TO BE DISALLOWED UNDER RULE 8D(2)(I I) OF THE ACT. 27. I AM HOWEVER UNABLE TO ACCEPT THE SUBMISSIONS OF THE AUTHORISED REPRESENTATIVE BECAUSE THE DIVISIONAL ACCOUNTS OF T HE ASSESSEE ARE PREPARED BY THE ASSESSEE ACCORDING TO ITS OWN CONVENIENCE AND A S PER ASSESSEE'S SUBJECTIVE ASSESSMENT AS TO WHAT EXPENDITURE WAS RELATABLE TO EACH DIVISION. I DO NOT FIND ANY SCIENTIFIC BASIS ADOPTED BY THE ASSESSEE IN ALL OCATING THE EXPENSES TO EACH DIVISION. THE ASSESSEE HAS MAINTAINED ONE SINGLE AN D COMPOSITE BUSINESS ESTABLISHMENT FOR CARRYING ON DIFFERENT BUSINESS AC TIVITIES IN DIFFERENT SEGMENTS OF CAPITAL MARKETS. THE EXPENSES AND OVERHEADS RELA TE TO SUCH COMMON BUSINESS ESTABLISHMENT RELATE TO INCOMES DERIVED FROM ALL BU SINESS SOURCES AND SEGMENTS. IT IS PRACTICALLY IMPOSSIBLE TO SEGREGATE COMMON BU SINESS OVERHEADS AND CORRELATE THE SAME WITH ANY PARTICULAR SOURCE OF IN COME AT PRESENT PROCEEDINGS. SECTION 14A WAS INTRODUCED IN THE I.T. ACT, 1961 WH ICH CLARIFIED THE LEGISLATIVE INTENT THAT WHERE EXEMPTION IS TO BE ALLOWED THEN T HE EXEMPTION SHOULD BE 17 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 17 ALLOWED IN RESPECT OF NET INCOME AND NOT IN RESPECT OF GROSS RECEIPTS AFTER DEDUCTING EXPENSES PERTAINING TO EXEMPTED INCOME. T HE EXPENSES WHICH ARE DEBITED IN THE TAXABLE INCOME REDUCE IT THEREBY SHO WING A LESSER INCOME AND THEREBY LESS AMOUNT OF TAXES. THE EXPENDITURE INCUR RED FOR EARNING EXEMPTED INCOME IS DEBITED TO REDUCE THE TAXABLE INCOME. RUL E 8D HAS A LEGISLATIVE SANCTION AND IT IS TO BE APPLIED IN ALL CASES WHERE IT IS NOT POSSIBLE TO DETERMINE EXACTLY THE EXPENSES INCURRED IN RELATION TO EARNIN G OF TAX FREE INCOME AND THE APPELLANT HAS ALSO NOT ABLE TO, SHOW THE EXACT EXPE NDITURE INCURRED FOR EARNING EXEMPTED .INCOME. IN A GIVEN CASE, LIKE THE ASSESSE E'S WHERE ASSESSEE MAINTAINS ONE SINGLE BUSINESS ESTABLISHMENT WHICH CATERS TO N EEDS OF ALL SEGMENTS, THERE CANNOT BE ANY CERTAINTY ABOUT THE CORRELATION BETWE EN ANY PARTICULAR HEAD OF EXPENDITURE AND EARNING OF INCOME FROM DIFFERENT SO URCES. IT IS FOR THE SIMPLE REASON THAT THERE CANNOT BE DIRECT AND PROPORTIONAL RELATION BETWEEN EARNING OF INCOME AND INCURRING OF ADMINISTRATIVE EXPENSES. SI MILARLY WHEN ALL BUSINESS TRANSACTIONS; AND BUSINESS FUNDS ARE ROUTED THROUGH A COMMON BANK ACCOUNT INDIVIDUAL IDENTITY OF THE FUNDS IS LOST AND THEREF ORE IT IS IMPOSSIBLE TO ASCERTAIN TO WHAT EXTENT BORROWED AND OWNED FUNDS GET USED IN ACQUIRING INVESTMENTS WHICH PRODUCE DIVIDEND INCOME .. 28. IN THE PRESENT CASE THE ASSESSEE HAS NOT BEEN A BLE TO ESTABLISH WITH SUFFICIENT MATERIAL THAT THE MANNER OF CALCULATING THE AMOUNT DISALLOWABLE FOR EARNING THE EXEMPTED INCOME (I.E. INCOME NOT FORMING PART OF TO TAL INCOME), AS PER HIS WORKING WAS THE CORRECT METHOD AND THAT NO OTHER EX PENSES WERE INCURRED IN RELATION TO EARNING OF TAX FREE INCOME. I AM SATISF IED THAT THE CLAIM OF EXPENDITURE INCURRED AND SHOWN BY THE APPELLANT WITH REGARD TO THE ACCOUNTS IS NOT CORRECT. ONCE THE ASSESSEE HAS FAILED TO ESTABLISH HIS EXPL ANATION THEN THE ONLY COURSE PERMISSIBLE FOR WORKING OUT THE AMOUNT DISALLOWABLE IS APPLICATION OF RULE 8D. I AM SATISFIED THAT THE EXPENSES SHOWN BY THE APPELLA NT ARE NOT CORRECT HAVING REGARD TO THE ENTRIES IN THE BOOKS OF ACCOUNTS. FOR THE REASONS SET OUT ABOVE, I THEREFORE HELD THAT IN THE APPELLANT'S CASE THE DIS ALLOWANCE UNDER SEC 14A WAS REQUIRED TO BE MADE IN CONFORMITY WITH RULE 8D BY T HE ASSESSING OFFICER. THIS GROUND OF APPEAL IS THEREFORE DISMISSED. 29. THE APPELLANT HAS SUO MOTO DISALLOWED AN AMOUNT OF RS.3,29,338/- AS EXPENSES ON THE EARNING OF EXEMPTED INCOME IN THE R ETURN OF INCOME. THE APPELLANT HAS RECEIVED DIVIDEND AMOUNTING TO RS.42, 38,860/- AND CAPITAL GAIN OF RS.8,25,00,963/- AS PER THE FIGURES SHOWN IN THE RE TURN OF INCOME. THE DISALLOWANCE INVOLVES BASICALLY DIRECT EXPENDITURE IN NATURE OF DEMAT CHARGES, TRANSACTION CHARGES AND SALARY OF ONE EMPLOYEE AND 10% OF DIRECTOR'S SALARY INVOLVED IN THE INVESTMENT & BROKING DIVISION. THE DISALLOWANCE MADE BY THE APPELLANT IS INADEQUATE LOOKING INTO THE SCALE OF O PERATIONS, EFFORTS INVOLVED, 18 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 18 ADMINISTRATIVE EXPENDITURE INCURRED BY THE APPELLAN T, AMOUNT INVOLVED IN INVESTMENTS MUCH HIGHER I.E. ALMOST 4 TIMES OF THE STOCK-IN-TRADE AND INVOLVING 80% OF CAPITAL & FREE RESERVES. THE APPELLANT HAS E STABLISHMENT AND OTHER EXPENSES AMOUNTING TO RS.1,86,55,302/- AND DEPRECIA TION OF RS.11,47,217/-. THE INCOME EARNED FROM INVESTMENTS AND SHORT TERM CAPIT AL GAINS (AGAINST WHICH NO EXPENSES HAVE BEEN SHOWN) IS ALMOST 5 TIMES FROM TH E BUSINESS INCOME AGAINST WHICH ALL THE ESTABLISHMENT AND OTHER EXPENSES HAVE BEEN CLAIMED. THE APPELLANT HAS NOT CLAIMED ANY EXPENDITURE EVEN ON SHORT TERM CAPITAL GAIN WHICH WOULD HAVE REDUCED INCOME CHARGEABLE AT THE RATE OF 10% A ND INCREASED THE BUSINESS INCOME CHARGEABLE AT MAXIMUM MARGINAL RATE OF 30%. I AM SATISFIED THAT THE EXPENDITURE DISALLOWED BY THE APPELLANT OF RS.3,29, 338/- IS FAR LESS THAN THE ACTUAL EXPENDITURE INCURRED FOR EARNING INCOME WHIC H DOES NOT FORM PART OF BUSINESS INCOME. .. 35. THE EXPENDITURE AS PER SECTION 14A READ WITH RU LE 8D IS TO BE DETERMINED ON THE BASIS OF THE 'INVESTMENT' CALCULATED IN THIS ORDER. THE OPENING VALUE OF INVESTMENTS WILL BE REDUCED BY THY' AMOUNT OF SHORT TERM INVESTMENTS SOLD DURING THE YEAR WHICH IS INCLUDED IN THE' OPENING I NVESTMENTS. THE CALCULATION OF THE OPENING VALUE OF INVESTMENTS IS AS FOLLOWS: OPENING INVESTMENTS AS PER BALANCE SHEET 22,27,33 ,496 LESS: SHORT TERM INVESTMENTS 4,55,57,618 NET OPENING INVESTMENTS 17,71,75,878 THE CALCULATION FOR THE DISALLOWANCE ON THE BASIS O F THE ABOVE WORKING AS ' SUBMITTED BY THE APPELLANT IS AS FOLLOWS: PARTICULARS AMOUNT (RS.) (I) EXPENDITURE DIRECTLY ATTRIBUTABLE TO EARNING 3,51,494 EXEMPT INCOME . (II)INTEREST NOT DIRECTLY ATTRIBUTABLE-TO ANY PARTI CULAR INCOME = INTEREST EXPENDITURE X AVERAGE VALUE OF INVESTMEN TS AVERAGE OF TOTAL ASSETS 22,84,84,701 = 24,29,451 X 34,59,23,333 16,04, 669 (III)AMOUNT EQUAL TO 0.50% OF THE AVERAGE VALUE OF INVESTMENTS 19 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 19 = 0.50% X 22,84,84,701 11,42,424 EXPENDITURE IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL 30,98,586 INCOME LESS: EXPENDITURE ALREADY DISALLOWED BY APPELLANT (3,29,338) EXPENDITURE TO BE DISALLOWED 27,69,248 36. THEREFORE THE DISALLOWANCE UNDER SECTION 14A RE AD WITH RULE 8D IS CALCULATED AT RS:30,98,586/-. THE APPELLANT ITSELF HAS DISALLOWED AN AMOUNT OF RS.3,29,338/- AND THEREBY THE NET DISALLOWANCE IS D ETERMINED AT RS.27,69,248/-. THE FIGURE OF CLOSING STOCK OF INVESTMENT TAKEN FOR CALCULATION DOES NOT GIVE RISE TO ANY RIGHT TO THE APPELLANT TO CONSIDER THE WHOLE OF CLOSING AMOUNT OF INVESTMENTS NECESSARILY TO BE CONSIDERED AS INVESTM ENT IN THE NEXT YEAR SINCE THE FIGURE HAS BEEN TAKEN ONLY FOR THE PURPOSES OF CALC ULATION OF WORKING OF DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D FO R THIS ASSESSMENT YEAR. THE DISALLOWANCE IS VERY REASONABLE LOOKING INTO THE SC ALE OF TRANSACTIONS INVOLVING EXEMPTED INCOME OF DIVIDENDS AND LONG TERM CAPITAL GAIN. THE ASSESSING OFFICER WILL VERIFY THE FIGURES FROM THE ASSESSMENT RECORD AND DISALLOW THE AMOUNT ACCORDINGLY. IN CASE OF ANY VARIATION, FROM THE FIG URES AS MENTIONED ABOVE, HE WILL PASS A SPEAKING ORDER. THIS GROUND OF APPEAL I S PARTLY ALLOWED .. 24. AGGRIEVED BY THE RELIEF GRANTED BY CIT(A) THE REVENUE HAS RAISED GROUND NO.2 BEFORE THE TRIBUNAL. AGGRIEVED BY THE ORDER OF CIT (A) SUSTAINING THE DISALLOWANCE AS MADE BY AO IN PART THE ASSESSEE HAS RAISED GROUND N O.7 BEFORE THE TRIBUNAL. 25. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT WAS BR OUGHT TO OUR NOTICE AT THE TIME OF HEARING THAT THE DISALLOWANCE UNDER RULE 8D (2)(II) NAMELY DISALLOWANCE OF INTEREST EXPENDITURE OF RS.16,04,669/- CANNOT BE SUSTAINED. IN THIS REGARD OUR ATTENTION WAS DRAWN TO THE ORDER OF CIT(A) FOR A.Y.2007-08 IN APP EAL NO.1018/CIT(A)-VI/2009-10 DATED 31.10.2011 WHEREIN A SPECIFIC FINDING HAS BEE N GIVEN THAT INVESTMENTS IN THAT YEAR WERE MADE OUT OF ASSESSEES OWN FUNDS. IT WAS FURTH ER BROUGHT TO OUR NOTICE THAT THE AFORESAID FINDING OF THE CIT(A) HAS ATTAINED FINALI TY AND THE ORDER OF ITAT IN ITA NO.582/KOL/2011 AND 607/KOL/2011 DATED 05.11.2015 O F ITAT, KOLKATA WAS FILED BEFORE US. THE LD. COUNSEL SUBMITTED THAT DURING TH E PREVIOUS YEAR THERE WERE 20 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 20 INVESTMENTS MADE TO THE TUNE OF RS.5.50 CRORES AND THAT WAS FUNDED OUT OF THE PROFITS DERIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR. IN THIS REGARD OUR ATTENTION WAS ALSO DRAWN TO THE FACT THAT THE INCOME FROM SALE OF SHAR ES, BROKERAGE, PORTFOLIO MANAGEMENT & ADVISORY FEES ETC DERIVED BY THE ASSESSEE DURING THE PREVIOUS YEAR WAS MORE THAN RS.18 CRORES. IT WAS ALSO SUBMITTED THAT THE FUNDS AVAILABLE WITH THE ASSESSEE AS PER THE BALANCE SHEET AS ON 31.03.2008 WAS MUCH MORE THAN T HE INVESTMENTS MADE DURING THE PREVIOUS YEAR. THE LD. COUNSEL FOR THE ASSESSEE PLA CED RELIANCE ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LIMITED (2014) 49 TAXMAN.COM 335 (MUM) WHEREIN THE CONTEXT OF DISALLO WANCE U/S 14A OF THE ACT THE HONBLE BOMBAY HIGH COURT TOOK A VIEW THAT WHERE TH E ASSESSEES OWN FUNDS AND OTHER NON INTEREST BEARING FUNDS WERE MORE THAN THE INVES TMENTS IN TAX FREE SECURITIES NO DISALLOWANCE OF INTEREST U/S 14A OF THE ACT CAN BE MADE. THE HONBLE BOMBAY HIGH COURT IN THIS REGARD PLACED RELIANCE ON THE DECISIO N IN THE CASE OF CIT VS RELIANCE AND POWER LTD. 313 ITR 340 (B). THE LD. COUNSEL FOR THE ASSESSE FURTHER SUBMITTED THAT THE DISALLOWANCE U/S 14A OF THE ACT CANNOT BE MADE ON A NOTIONAL BASIS AND IN THIS REGARD REFERRED TO CERTAIN JUDICIAL PRONOUNCEMENTS. THE LD . DR RELIED ON THE ORDER OF AO. 26. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS. AS FAR AS DISALLOWANCE OF INTEREST EXPENSES UNDER RULE 8D(2)( II) OF THE RULES IS CONCERNED, WE AGREE WITH THE SUBMISSION OF THE ASSESSEE THAT THE ASSESSEE HAD OWN FUNDS OUT OF WHICH IT CAN BE SAID THAT INVESTMENTS WERE MADE AND THEREFORE NO DISALLOWANCE OF INTEREST EXPENSES OUGHT TO HAVE BEEN MADE. A PERUS AL OF BALANCE SHEET OF THE ASSESSEE AS ON 31.3.2008 WILL SHOW THAT THE ASSESSEE HAD OWN FUNDS OF 34.84 CRORES AND INVESTMENT WERE ACQUIRED AT COST OF RS.27.97 CRORES . THEREFORE THE DISALLOWANCE OF INTEREST EXPENSES OF RS. 16,04,669/- IS DIRECTED TO BE DELETED. 27. AS FAR AS DISALLOWANCE OF OTHER EXPENSES UNDER RULE 8D(2)(III) OF THE RULES I.E., DISALLOWANCE OF OTHER EXPENSES IS CONCERNED, WE FIN D THAT THE ASSESSEE HAD SUO MOTO 21 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 21 DISALLOWED AN AMOUNT OF RS.3,29,338/- AS EXPENSES O N THE EARNING OF EXEMPTED INCOME IN THE RETURN OF INCOME. THE ASSESSEE HAS RECEIVED DIVIDEND AMOUNTING TO RS.42,38,860/- AND CAPITAL GAIN OF RS.8,25,00,963/- . THE BASIS OF DISALLOWANCE MADE BY THE ASSESSSEE WAS DIRECT EXPENDITURE IN NATURE OF D EMAT CHARGES, TRANSACTION CHARGES AND SALARY OF ONE EMPLOYEE AND 10% OF DIRECTOR'S SA LARY INVOLVED IN THE INVESTMENT & BROKING DIVISION. THE FINDING OF THE CIT(A) IS THAT THE DISALLOWANCE MADE BY THE ASSESSEE CANNOT BE SAID TO BE ADEQUATE LOOKING INTO THE SCALE OF OPERATIONS, EFFORTS INVOLVED, ADMINISTRATIVE EXPENDITURE INCURRED BY TH E ASSESSEE, AMOUNT INVOLVED IN INVESTMENTS WAS MUCH HIGHER I.E. ALMOST 4 TIMES OF THE STOCK-IN-TRADE AND INVOLVING 80% OF CAPITAL & FREE RESERVES. THE ASSESSEES HAS CLAIMED ESTABLISHMENT AND OTHER EXPENSES AMOUNTING TO RS.1,86,55,302/- AND DEPRECIA TION OF RS.11,47,217/-. THE INCOME EARNED FROM INVESTMENTS AND SHORT TERM CAPIT AL GAINS (AGAINST WHICH NO EXPENSES HAVE BEEN SHOWN) IS ALMOST 5 TIMES FROM TH E BUSINESS INCOME AGAINST WHICH ALL THE ESTABLISHMENT AND OTHER EXPENSES HAVE BEEN CLAIMED. THE ASSESSEE HAD NOT CLAIMED ANY EXPENDITURE EVEN ON SHORT TERM CAPITAL GAIN WHICH WOULD HAVE REDUCED INCOME CHARGEABLE AT THE RATE OF 10% AND INCREASED THE BUSINESS INCOME CHARGEABLE AT MAXIMUM MARGINAL RATE OF 30%. IT CANNOT THEREFORE B E SAID THAT THE REVENUE AUTHORITIES WERE NOT JUSTIFIED IN DISREGARDING THE DISALLOWANCE MADE BY THE ASSESSEE ON ITS OWN BY POINTING OUT SPECIFIC INFIRMITY IN THE ASSESSEES W ORKING OF THE AMOUNT DISALLOWABLE UNDER SECTION 14A OF THE ACT. KEEPING IN MIND THE ABOVE FINDINGS OF THE CIT(A), WE ARE OF THE VIEW THAT THE DISALLOWANCE OF OTHER EXPE NSES AS SUSTAINED BY THE CIT(A) OF RS.11,42,424 UNDER RULE 8D(2)(III) OF THE RULES IS PROPER AND CALLS FOR NO INTERFERENCE. WE HOWEVER CLARIFY THAT THE AMOUNT ALREADY DISALLOW ED BY THE ASSESSEE IN THE COMPUTATION OF TOTAL INCOME SHOULD AGAIN NOT BE ADD ED. IN OTHER WORDS, THE DISALLOWANCE U/S.14A OF THE ACT SHALL BE ONLY RS.11 ,42,424/-. WE HOLD ACCORDINGLY AND PARTLY ALLOW THE GROUND OF APPEAL NO.7 RAISED BY TH E ASSESSEE. 22 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 22 28. THE OTHER GROUNDS OF APPEAL VIZ., GROUNDS NO.8 TO 10 WERE NOT PRESSED BY THE ASSESSEE AS THEY HAVE BECOME INFRUCTUOUS. GROUND N O.11 RAISED BY THE ASSESSEE IS GENERAL IN NATURE AND CALLS FOR NO SPECIFIC ADJUDIC ATION. 29. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS P ARTLY ALLOWED, WHILE THE APPEAL BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE COURT ON 13.05.2016. SD/- SD/- [WASEEM AHMED] [ N.V.VASUDEVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13.05.2016. [RG PS] COPY OF THE ORDER FORWARDED TO: 1.M/S. K.B.CAPITAL MARKETS (P)LTD., 25, SWALLOW LAN E, KOLKATA-700001. 2. D.C.I.T., CIRCLE-6, KOLKATA. 3. CIT(A)-VI KOLKATA 4. CIT-II, KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT.REGISTRAR ITAT KOLKA TA BENCHES 23 ITA NO.1882&1726/KOL/2012 M/S.K.B.CAPITAL MARKETS LTD. A.YR.2008-09 23