C.D. Rao, Accountant Member

1. This appeal by the department is directed against the order of ld. C.I.T.(A)-XIX, Kolkata dated 30/03/2009 for assessment year 2006-07 (wrongly written in Form No. 36 as 2003-04). The only ground raised by the department reads as under :-

1. That the Ld. CIT(A) erred on facts and in law in treating the income of Rs. 3,81,14,632/- derived from trade in shares as capital Gains, even though the material facts brought on record through survey proceedings and assessment proceedings established that said incomes were of the nature of income from business in terms of the guidelines laid down in CBDT circular no. 4 of 2007 dated 15.07.2007.

2. Brief facts on the issue are that while doing scrutiny assessment for the assessment year under appeal, the Ld. A.O. has treated the short-term capital gains as well as long-term capital gains offered by the assessee as income from business by mainly observing as under :-

(i) Nature of business and incomes: The assessee had earlier registered as a broker with the Calcutta Stock Exchange, but is presently only engaged in the business of trade in shares and securities, and has also some incomes from investments. Incomes from trade in shares are charged to tax under the head Income from Business & Profession, and incomes from the transfer of investments are charged to tax under the head Capital Gains. Dividends earned both on investment shares as well as trading stock shares are charged under the head Income from Other Sources.

(ii) Incomes for the year: During the year, the assessee has earned a gross profit of Rs. 1,12,00,617/- from its trade in shares. It has earned Short term Capital Gains of Rs. 40,28,666/-, and Long term capital gains of Rs. 3,11,11,818/-.

In respect of capital Gains incomes, the assessee does not credit gross sales investments, but directly credits certain amounts under the heads Long term and Short term Capital Gains to her profit & loss account. That is, the accounts statements or the return of income does not disclose either gross receipts, carrying costs or disposal proceeds of the investments. It may be noted that this is in circumvention of the norms of disclosure set down in Accounting Standard (AS) 13 Accounting for Investments, issued by the Council of the Institute of Chartered Accountants of India, particularly the contents of clauses (a), (b) and (c)(i) of paragraph 35 therein.

It may be added that the specific computation of such capital gains credited in accounts were not enclosed with return, but prepared and submitted only when specifically requisitioned u/s 142(1).

Further, after analyzing (i) investments vis--vis trade, (ii) nature of investment, (iii) sub-categories of transactions in investment, (iv) dividend as a motive for investments, and (v) loan funds invested in acquiring investments and after taking into consideration various submissions, the Ld. A.O. finally concluded as under :-

7. Conclusions : In view of the above, and with reference to the relevant provisions of the statute, I arrive at the following conclusions:

i. That, despite having a separate DP account for investments, the assessee has not utilized the said account for that declared purpose during the year in question, but has actually conducted trade through both her DP accounts.

ii. That, the assessee has effectively transformed her activities in its investment account without a formal conversion of shares from investment to stock, and without the necessary change in the tax treatment of the profits arising from the same. And that the same was done with her full knowledge of the requirements of law and with a motive of reducing the incidence of tax on her income.

iii. Profits from her trade in quoted shares held in the nominal investment account need to be recomputed and added to business income.

Trading account of quoted shares through investment account

Opening stock

2,30,26,904

Sales

9,54,08,867

Purchases

7,73,07,307

Closing Stock

4,30,39,976

Net Profit (additional)

3,81,14,632







13,84,48,843



13,84,48,843

iv. Since the assessee has had no gains from transfer of her holdings in mutual funds or unquoted shares, no income is being charged under the head capital gains, and total income is recomputed in the following section.

3. On appeal, the Ld. C.I.T.(A) has allowed the appeal of the assessee by mainly observing as under :-

6.6. I find force in the submissions of the A/R that aggregate capital gain of Rs. 3,51,40,484/- inter-alia included Rs. 3,11,11,818/- being long term capital gain. In percentage term 88.54% of the total capital gain derived during financial year 2005-06 was from the shares held for more than one year. During the year under consideration the appellant earned long term capital gain of Rs. 91,91,915/- and Rs. 2,19,19,903/- on transfer of shares of Glaxo Smithkline Pharmaceutical Ltd. and L.I.C. Housing Finance Ltd. respectively. On perusal of balance sheet as on.1.03.2005 it is noticed that the shares of Glaxo were received by the appellant in lieu of 11,770 shares of BURROUGHS WELLCOME LTD. Which were purchased on 07.05.2003 and 26.03.2004. These shares were sold in one lot in assessment year 00607 after holding it for a period more than two years. In the balance sheet as on 31.03.2004 and 31.032005 these shares appeared as investments and in the regular assessment frame for assessment year 2005-06, the A.O. had accepted the fact that these shares were held for investment purposes. The shares of L.J.C. Housing Finance Ltd. were purchased by the appellant during the period 13.03.2001 to 24.05.2002. In the balance sheets of the assessee as at 31.03.2001 to 31.03.2005, these shares always appeared as investment and not as stock in trade. Thus at the time of purchase of these shares the assessee had every intention to hold the shares for investment purposes.

... ....

6.8. I also find that the A.Os action in assessing capital gain profit as business income but not consistent in all respects because he assessed the profit realized on transfer of investment under the head "Business Income". However, the A0 did not allow deduction for valuation toss in computing such business income even though the assessee regularly followed the principles of "Lower of the cost or market value" for valuing inventory. Similarly, the A.O. also did not allow tax rebate u/s. 88E of the Act, pertaining to S.T.T. pay on sale of shares These actions of he A.O. indicate that only so far as assessment of income under the head "Capital Gains" the A.O. disputed the appellants claim. However, if the A.O, was to dispute assessees classification then it was incumbent on A.O. to assess income as per the accounting method and all legal provisions as applicable to the assessment of business income. This aspect was however not taken care by the A.O. which indicates that to the extent the A.O. found the assessees action beneficial to the revenue, the A.O. accepted the same. In my opinion, this was not permissible.

6.9 In the assessment order the A.O. has mentioned that the appellant had taken loan for acquiring investment shares. However, as per the balance sheet as on 31.03.2006 it is seen the appellant herself had given loans and advances of Rs. 78,56,757/-. The amount of loans and advances given by the appellant as on 01.04.2005 were to the tune of Rs. 1,01,40,961/-. During the year under consideration, the appellant has not debited any amount of interest on account of loans. On perusal of ledger extracts of the parties referred by the A.O., it is observed that in all the cases there was opening debit balance in the books of appellant. During the year under consideration, she had withdrawn her own money from these accounts. Thus, in my opinion the inference drawn by the A.O. is misplaced.

... .... ...

6.13 I also find that the view taken by me in the present case is supported by the decision of the I.T.A.T., Kolkata in the case of DCIT, Central Circle-27, Kolkata vs. Reliance Trading Enterprises Ltd. in I.T.A. No. 944 (Kol) of 2008 dated 03.10.2008. In this case the assessee company was a trader as well as an investor in shares. For the year under consideration the assessee has shown short term and long term capital gain aggregating to Rs. 74,89,622/- being the profit on sale of investment shares. However, the A.O. had converted the income shown under the head "capital gain" to "business income". In the first appeal, the claim of the assessee was allowed by the C.I.T.(A). On further appeal by the Revenue in the ITAT, Kolkata, the order of the C.I.T.(A) was upheld by the ITAT by observing as under :-

We have heard both the parties and perused the records as well the documents contained in the Paper Book filed before us There is no denying the fact that as per the accounts maintained the assessee had acted both as a trader as well as investor in shares as per 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 AY. 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 opportune moment without making any hurry for sale ignoring dividend. The investment shares and securities purchased and held till their sale had dual purpose i.e. for earning dividend as an incidental income as well as to make profit on sale at appropriate time. The conclusions drawn by the A.O. by treating the investment shares as trading shares was based purely on assumptions and presumptions without bringing on record any material or. evidence in support thereof. The A.O. did not reject the books of a/c. vis-a-vis the audited accounts u/s 145 of the I. T. Act before arriving at such a conclusion. The A.Os finding cannot, therefore, be accepted. In view of the above, we agree with the decision of the Ld. CIT(A) that the profit on sale of investment shares, securities and mutual fund is assessable under the head "capital gain". We hold accordingly.

The view is also supported by the decisions of I.T.A.T., Mumbai & Delhi Benches as well as decision of Madras High Court in the case of C.I.T. vs. Ramaamirtham (2008) 217 CTR 206. In the said decisions, on which the appellant has placed reliance, the assessees were all reputed stock brokers who regularly carried on broking and share dealing business but simultaneously held shares by way of investments. On transfer of investments the assessee earned capital gains which were assessed as business income. Considering differentiation maintained in the books of accounts between the trading stock and investment, the High Court and Tribunal Benches held that profit derived on transfer of investment was assessable as capital gain.

Aggrieved by this order of the Ld. C.I.T.(A), the Revenue is in appeal before us.

4. At the time of hearing before us, the Ld. Departmental Representative appearing on behalf of the Revenue pointed out various analysis made by the Ld. A.O. in the assessment order and contended that the action of the Ld. A.O. is justified in the facts and circumstances of the case. He, therefore, requested to set aside the order of the Ld. C.I.T.(A) and restore that of the Ld. A.O.

5. On the other hand, the learned counsel appearing on behalf of the assessee submitted that facts mentioned by the Ld. A.O. in the assessment order that the assessee does not credit gross sales of investments but directly credits certain amounts under the heads Long term and Short term Capital Gains to her P/L Account, that is, the account statements or the return of income does not disclose either gross receipts, carrying costs or disposal proceeds of the investments, are factually incorrect. Therefore, he supported the order of the Ld. C.I.T.(A) and requested the Bench to uphold the same.

6. It is pertinent to mention here that since the learned counsel for the assessee has contested the conflict of facts in the assessment order, Bench directed the Ld. Departmental Representative to get the status report from the Ld. A.O. The Ld. A.O. on this issue commented as under :-

Kindly refer to the instructions in your letter under reference, in connection with the appeal in Honble ITAT, wherein you had kindly directed me to offer my comments in respect of certain specific issue. My findings and observations in respect of that issue are noted below for your kind consideration.

It is found that Smt. Jyotsna Desai has maintained two DP accounts bearing no. 1202770000000229 and 1202770000000214 for investment and trading respectively. Having gone through the records, it is apparent that there were no inter depositary transactions between the two DPs.

7. After hearing the rival submissions and keeping in view the specific observations of the Ld. A.O. addressed to the Tribunal that the assessee, Smt. Jyotsna Desai, has maintained two accounts, one for trading and the other for trading purposes, and there were no inter-depositary transactions between these two accounts, we find no infirmity in the order of the Ld. C.I.T.(A) to interfere with. We, therefore, confirm his order on this issue.

8. In the result, the appeal of the department is dismissed.