TaxTMI 
TaxTMI 
2019 (1) TMI 258
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.... partnership firm engaged in the business of trading in securities and derivatives on stock exchange through their broker. The return of income for the Asst Year 2013-14 was filed by the assessee on 29.9.2013 declaring total loss of Rs. 1,65,13,565/-. The assessee offered a sum of Rs. 10,329/- for disallowance u/s 14A of the Act in the return of income as expenses incurred for earning exempt income. The assessee firm derived dividend income of Rs. 30,03,253/- and claimed the same as exempt in the return of income. The assessee held all the shares as stock in trade and did not possess any shares as investments. The ld AO show caused the assessee as to why disallowance u/s 14A of the Act should not be made in accordance with the method prescribed in Rule 8D(2) of the Income Tax Rules. The assessee explained that since the shares are held by it only as stock in trade, the dividend income earned thereon is a by-product of share trading operations and that no purchase and sale of shares were made with a specific motive to earn dividend. The firm had earned dividend due to its day to day operations which were carried out in its normal course of business and no specific expenditure was in....
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....s were held as stock in trade by the assessee and not as investments. Hence the computation mechanism provided in Rule 8D of the Rules cannot be applicable. We find that the ld AO though had not mentioned that the disallowance has been made in accordance with third limb of Rule 8D(2) of the Rules explicitly in his order, however, resorted to take the computation mechanism provided therein at 0.5% of average value of investments. We hold that since Rule 8D of the Rules contemplates consideration of average value of investments only and not as stock in trade, the same cannot be adopted in the facts of the instant case. Now it is well settled by the Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC) that the disallowance u/s 14A of the Act is to be made even if the shares are held as stock in trade. Since Rule 8D cannot be adopted herein, the disallowance should be made based on the accounts of the assessee. 2.3.1. We find that the Hon'ble Supreme Court in the case cited supra in para 39 of the order had also observed that eventhough the dividend has been earned as an incidental activity in respect of shares held as stock in trade, it triggers the ....
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....t the assessee purchased the shares of M/s Tuni Textile Mills Limited in Asst Year 2013-14 for Rs. 3,00,68,816/- and sold the same in Asst Year 2013-14 itself for Rs. 5,10,54,500/-. The assessee offered the gains derived on sale of shares as its business income. Since the main activity of the assessee is trading in shares, the gains received on sale of shares of M/s Tuni Textile Mills Limited was also offered to tax by the assessee as income from business in the return of income. The ld AO observed that the assessee was involved in a long drawn process of rigging of stock market prices in collusion with the various entry operators. He observed that the assessee had invested in the shares of M/s Tuni Textile Mills Limited, a company, not having any sound financial position or business activity so as to justify the huge gains in issue. The cases of Sumati Dayal vs. CIT 214 ITR 801 (SC) and CIT vs. Durga Prasad More (1971) 82 ITR (SC) were quoted in support to plead that the assessee had acted in collusion with various entry operators for the purpose of bogus LTCG in issue. This observation of ld AO was admittedly based on the report of the investigation wing of Kolkata Income T....
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....y stock and simply relied on the investigation report of Kolkata Income Tax Department by alleging that the assessee was involved in price rigging of shares artificially which the relevant company did not deserve with a malign intention to either derive exempt long term capital gains or short term capital loss so as to evade payment of taxes. Accordingly, he proceeded to treat the profit from sale of shares as ingenuine by stating that the assessee had connived with its brokers and entry operators for artificial price rigging of share prices and thereby legalized his unaccounted money in the form of sale proceeds of shares. Hence he treated the gains received on sale of shares of Rs. 2,09,85,684/- as unexplained cash credit u/s 68 of the Act and taxed under income from other sources in the assessment. He also added the corresponding expenditure ought to have incurred by the assessee for obtaining these bogus credits and added commission at the rate of 0.50 per Rs. 100 and made addition towards unexplained expenditure in the sum of Rs. 2,55,273/- (5,10,54,500 * 0.5%) . In effect, he made an addition of Rs. 2,12,40,957/- ( 2,09,85,684+2,55,273) under the head income from other sou....
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....ness' to the tune of Rs. 10,91,44,369/-. The ld AO had accepted the transactions of trading in shares in respect of 190 scrips as falling under the head ' business'. The documentation maintained by the assessee is the same for all the 191 scrips and when the said documents are accepted by the ld AO for 190 scrips, there is no reason to disbelieve the same for shares of Tuni Textile Mills Ltd alone. There is absolutely no dispute that the assessee had duly filed the requisite documents in connection with the purchase and sale of shares as detailed supra and that the prices thereon were market driven. Apart from this, the assessee had also earned profit from trading in commodities to the tune of Rs. 24,40,680/- during the year under consideration among other indirect incomes in the form of interest, dividend and interest on IT refund. We find that the ld AO called for the details on purchase and sale of shares of Tuni Textile Mills Ltd in the questionnaire issued along with notice u/s 142(1) of the Act which are enclosed in pages 49 to 50 of the paper book which was specifically on the point of claim of long term capital gains and short term capital loss. We find that the assessee....
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....ons from M/s Badri Prasad & Sons, who was a member of Calcutta Stock Exchange. These shares were held in the demat account of the assessee maintained with M/s CD Equisearch Pvt. Ltd , a member of Mumbai Stock Exchange and ultimately these shares were sold through M/s. CD Equisearch and on such sale, Security Transaction Tax was duly paid. Payments were duly received in the bank account of the assessee. We take note that the purchase of shares by off-market transactions for purchase of shares is not illegal as was held by the Coordinate Bench of this Tribunal in the case of Dolarrai Hemani vs ITO in ITA NO.19/Kol/2014 dated 02.12.2016. The transactions were all through a registered broker (pages 18 and 19 of the paper book), backed by a contract note (page 22 of the paper book) and shares were credited in the demat accounts (page 25 of the paper book) and duly reflected in the books of account. In the light of these evidences on record we are of the opinion that the purchase of shares per-se cannot be held to be bad. 9.1. We note that there was a survey conducted u/s 133A of the Act by the Mumbai Investigation Wing against M/s. Tuni Textile Mills Pvt. Ltd on 02.06.2015 and ....
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....e in preference share was on 25-01-2010, whereas the assessee purchased the shares on 06-04-2011 through the broker. ( i.e after more than one year and three months) We find that the transactions of capital gains as claimed by the assessee was duly backed by relevant documentary evidences which include the following :- (i)The balance sheet of the assessee for the financial year 2011-12 wherein the investment made in these shares were duly recorded and reflected (page 16 of the paper book); ii) The bills of purchase of shares of M/s. Tuni Textile Mills Pvt. Ltd (page 18 of the paper book) iii)Copy of the demat statement maintained with M/s. CD Equi Search where the shares were held (page 24 of the paper book) iv) Copy of the contract notes issued by M/s. CD Equi Search Ltd, Member of Mumbai Stock Exchange having SEBI Registration No.INB010781133 and Code No.087 (page 19 to 22 of the paper book v) The bank statement maintained by the assessee with Bank of Maharshtra reflecting the payment received for the sale of shares (page 23 of the paper book). 9.2. We find force in the contentions of the ld. AR that the AO and CIT(A) was not ....
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....lar date. The AO doubted the transactions due to the high rise in the stock price and for that the assessee cannot be blamed unless there was any material/evidence to prove that the assessee or any one on his behalf has rigged the stock price. It should be noted that the Stock Exchange and SEBI are the statutory authorities appointed by the Govt. of India to ensure that there is no stock rigging or manipulation. The AO has not brought any evidence on record to show that these agencies have alleged any stock manipulation against the assessee or the brokers or the company in question. In absence of any evidence to back the conclusion of AO/CIT(A), it cannot be said that merely because the stock price moved sharply, the assessee was to be blamed for bogus transitions. It is also pertinent to note that the assessee has purchased the stocks through registered brokers and thereafter the assessee has sold the shares through the registered share/stock brokers with Calcutta Stock Exchange, and both have confirmed the transactions and have issued valid contract notes as per law; and in similar case, the Hon'ble Calcutta High Court in the case of Principal CIT vs Rungta Properties in ITA No.1....
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....d sale of shares resulting in long term capital gain. Neither these evidences were found by the AO nor by the ld. CIT(A) to be false or fictitious or bogus. The facts of the case and the evidence in support of the evidence clearly support the claim of the assessee that the transactions of the assessee were genuine and the authorities below was not justified in rejecting the claim of the assessee exempted u/s 10(38) of the Act on the basis of suspicion, surmises and conjectures. It is to be kept in mind that suspicion how so ever strong, cannot partake the character of legal evidence. In the aforesaid facts and circumstance, for allowing the appeal we rely on the decision of the Hon'ble Calcutta High Court in the case of M/s. Alipine Investments in ITA No.620 of 2008 dated 26th August, 2008 wherein the High Court held as follows : "It appears that there was loss and the whole transactions were supported by the contract notes, bills and were carried out through recognized stock broker of the Calcutta Stock Exchange and all the bills were received from the share broker through account payee which are also filed in accordance with the assessment. It appears from the f....
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....re and does not require any specific adjudication. 7. In the result, the appeal of the assessee in ITA No. 846/Kol/2017 is partly allowed. ITA No. 637/Kol/2018 - Asst Year 2013-14 - Assessee Appeal 8. This appeal by the assessee arises out of the order of the Learned Principal Commissioner of Income Tax-12, Kolkata [in short the ld CIT] in Memo No.Pr.CIT- 12/Kol/Tech/263/2017-18/2432-34 dated 26.03.2018 passed u/s 263 of the Income Tax Act, 1961 (in short "the Act") against the order passed by the ACIT, Central Circle-35, Kolkata [in short the ld. AO] under section 143(3) of the Act dated 22.03.2016 for the Assessment Year 2013-14. 9. The only issue involved in this appeal is as to whether the ld CIT was justified in invoking revisionary jurisdiction u/ 263 of the Act in the facts and circumstances of the case. 9.1. The brief facts of this issue are that the assessee is engaged in trading in shares and commodities and had filed its return of income for the Asst Year 2013-14 on 29.9.2013 declaring total income of Rs Nil and claiming carry forward of losses. The assessment was completed u/s 143(3) of the Act on 22.3.2016 making various additions and disallowances. One ....
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....e was agitated in appeal before the ld CITA and that the said appeal was disposed off by the ld CITA in Appeal No. 18/CIT(A)-10/C-35/2016-17/Kol dated 16.2.2017 wherein the action of the ld AO was upheld in this regard. It was also stated that the appeal against this CITA order was pending before this tribunal. It was also pointed out by the assessee before the ld CIT that the assessee had duly submitted before the ld AO regarding the non-applicability of provisions of section 14A of the Act read with Rule 8D of the Rules and that specific explanation for non-applicability of provisions of Rule 8D(2)(ii) of the Rules were also made regarding non-applicability of calculation of proportionate interest. These submissions were duly considered by the ld AO and the ld AO accordingly held that the interest paid on borrowings were used for share trading activities of the assessee and not for the purpose of earning any dividend and accordingly admissible u/s 36(1)(iii) of the Act. It was also specifically pointed out by the assessee before the ld CIT that since the issue of applicability of provisions of section 14A of the Act read with Rule 8D of the Rules had been elaborately dealt by the....