No.- I.T.A No. 300/Kol/2011, I.T.A No. 418/Kol/2011

Shri N. V. Vasudevan, JM & Shri M. Balaganesh, AM

For The Revenue : Shri Aroop Kumar, CIT
For The Assessee: S/Shri Ashwani Kumar, C.A & A.K. Jain, AR

ORDER

Shri M. Balaganesh, AM:-These cross appeals by revenue and assessee are arising out of order of CIT(A)-VI, Kolkata vide appeal No. 599/CIT(A)-VI/07-08/Cir-6/Kol dated 12.11.2010. Assessment was framed by DCIT, Circle-6, Kolkata u/s.143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2006-07 vide his order dated 23.12.2008. Both the appeals are taken up together for the sake of convenience

2. The appeal filed by the revenue is time barred by 10 days and revenue has filed a condonation petition. After perusing the condonation petition and the concession given by the Ld. AR for condoning the delay, we condone the delay and admit the appeal of revenue for hearing.

3. We find from the quantum involved in the grounds of 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before the income tax appellate tribunal where the tax effect on disputed issues is less than Rs. 10 lakhs needs to be withdrawn by the revenue.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 held as investments and shares used for trading. For this purpose, the assessee maintained two separate accounts in its books of accounts by clearly bifurcating the shares that are held as investments and shares that are held for trading by giving independent and separate codes for each category. The assessee transferred the following shares from its trading stock to investments:-

Admittedly, these shares were transferred on 2.4.2005 at the lower of average rate or market rate. Except the shares of Ultratech Cement Ltd , where the average cost was lesser than the market rate, all the shares were transferred from trading stocks to investments only at the market rates prevailing as on 31.3.2005. It was claimed that there was no significant variation in the market rates between 31.3.2005 and 2.4.2005.

The ld AO observed that the assessee always had separate portfolio of trading stock and investment shares and on 2.4.2005, it passed a resolution by which the aforesaid shares were transferred from trading stock to investments. The ld AO made the following observations in his order:-

a) All the shares of Ultratech Cement Ltd which were transferred from trading to investments were sold within 1 month from such transfer and short term capital gains were booked. However, assessee again purchased shares of the same company in July 2005 which was sold in November 2005 under trading stock category which resulted in a loss. The assessee earned dividend out of holding of shares purchased during July only.

b) The shares of IDBI transferred from trading to investments were sold within 4 months on 4.8.2005. Some more shares of IDBI 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 were separately purchased in Sept 2005 and also sold in Sept 2005 resulting in trading loss of Rs. 99,427/-.

f) The shares of DCHL, Bharti Shipyard and Engineers India were all purchased under investment portfolio and sold within 1 month of such purchase, never waiting for any dividend and getting resulting gains.

g) The shares of Midday Multimedia and Sandesh Ltd were also bought under Investment portfolio and sold within a month resulting in gains. Assessee did not receive any dividend out of them.

Based on the above observations, the ld AO followed the CBDT Circular No. 4 of 2007 and held that the shares held in investment portfolio were not held by the assessee for the purpose of earning dividend income. It was observed that the shares held under trading portfolio resulted in losses and whereas the shares held in investment portfolio, resulted in gains. It was further observed that not a single share which had been purchased during the year or converted out of trading stock were held for long term purposes. The ld AO further observed that though the assessee had squared up its borrowed capital of Rs. 18.74 crores by the end of the year, but during the year, it had borrowed a sum of Rs. 18.9 crores as short term borrowings from its Director and paid interest of Rs. 1.39 crores for the year. He further observed that it is difficult to segregate any amount of borrowing as directly linked to investment. Based on these observations, the ld AO concluded that the shares held in investment portfolio which resulted in short term capital gains had to be taxed as income from business. However, he accepted the fact that there is no bar for having both trading and investment portfolio by an assessee and accordingly accepted the long term capital gains reported by the assessee as such as these shares were held for a long period of time.

4.2. In appeal, the assessee objected to the treatment of the ld AO by treating Rs. 11,05,41,076/- as income from business as against the capital gain reported by the assessee. The assessee also contested the action of the ld AO in changing the valuation of stock disclosed as investment and considering such value at Rs. 4,55,86,196/- and consequently computing the trading profit on shares at Rs. 11,05,41,076/-. However, the ld CITA did not appreciate the contentions of the assessee and upheld the treatment of the ld AO.

5. Aggrieved, 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 ITA No. 588 of 2011 dated 31.3.2011 rendered by Hon’ble Delhi High Court
d) Chaturanan Industries Ltd vs ACIT in ITA No. 4793/Del/2010 for Asst Year 2006-07 dated 25.2.2014 (Delhi Tribunal)
e) ACIT vs Bright Star Investment P Ltd reported in (2008) 24 SOT 288 (Mumbai Tribunal)
f) Sukarma Finance Ltd vs ACIT in ITA Nos. 3588 & 3589/Del/2010 for Asst Years 2006-07 & 2007-08 dated 2.5.2014.
g) CIT vs Gopal Purohit reported in 228 CTR 582 (Bom)

5.2. In response to this, the ld DR argued that the action of the assessee in transferring certain shares from trading portfolio to investment portfolio is a mere tax avoidance measure. The intention of the assessee is only to trade in shares and normally investments would be retained only return is derived therefrom and whereas business assets would be rotated for making profits. Even the recent Circular No. 6/2016 dated 29.2.2016 states that for short term capital gains, department could still interfere and rely on earlier circulars and case laws with principles laid down thereon. The reliance placed by the ld AR on the decision of Delhi High Court in 364 ITR 488 supra were factually distinguishable as the shares in that case were held for a long time and offered as long term capital gains and it was held that the amendment in Oct 2004 in the Act cannot be the sole criterion for shifting of heads of income as the intention of the assessee is important. The case law relied upon is in the context for taxing LTCG and not STCG. Similarly all the case laws relied on by the ld AR are only on the taxability of LTCG and STCG. Hence he stated that none of the case laws relied by the ld AR are applicable to the facts of the case. With regard to the independent codes for trading and investment portfolio stated to have been maintained by the assessee, the ld DR argued that the codes are only given by the assessee to suit his convenience and they are not the codes maintained by the stock exchanges. Hence the same are changeable as per the whims and fancies of the assessee.

5.3. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee comprising of written submissions (pages 1 to 24) ; details of shares transferred from stock to investments (Page 25) ; copy of stock valuation report (page 26) ; details of profit on investment account (pages 27 to 28) ; details 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 from investment portfolio. Having done so, how can the ld AO dispute the short term capital gains reported by the assessee from the investment portfolio. It is true that the shares held in investment category were sold in part or in full by the assessee and immediately the shares of the same companies were purchased in the trading portfolio. This action of the assessee could neither be faulted with nor any malign intention could be attributed towards the same. The assessee could repurchase the shares of the same company due to various reasons. The assessee has every right to exit at the profitable moment from a particular scrip either in part or in full and due to sentimental reasons and the same could again be repurchased by an assessee. These actions cannot be questioned just because it results in an incidental tax loss to the revenue. Moreover, even in business, the assessee would not deliberately indulge in a transaction to incur loss. Hence the allegation cast on the assessee is not appreciated. It is well settled that it is for the assessee to decide as to whether a particular scrip is to be retained under investment portfolio or in trading portfolio and the revenue cannot step into the shoes of the assessee in that regard and decide what action should have been taken by a person in the given set of facts and circumstances. The assessee knows its interest best. It cannot be disputed that the assessee had also reported net profit from trading portfolio of trading in shares and securities to the tune of Rs. 3,38,44,526/- in its return of income which cannot be ignored. The assessee has also reported short term capital gains of Rs. 6,31,19,616/- in its return of income. This is a telling instance of the intention of the assessee which is proved beyond doubt. We find that the assessee had provided detailed workings of profit derived from investments in respect of shares purchased and sold during the year for each scrip in investment portfolio to the tune of Rs. 4,26,10,595/- which is enclosed in page 28 of the paper book. We also find that the assessee had provided detailed workings of short term capital gains from investment portfolio of each scrip clearly mentioning the period of holding of each scrip.

5.5. We find that the assessee had purchased the scrips with a clear intention of holding it as investments only as the period of holding of these shares 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 maintaining this dual portfolio in his books and assessed as such. The ld AR also filed the copy of the audited financial statements together with the computation of total income for the years ended 31.3.2004 & 31.3.2005 wherein the assessee had declared both business income as well as capital gains from dealing in shares and securities. We also find that from the assessment order framed for the Asst Year 2005-06 u/s 143(3) of the Act dated 31.12.2007 that the ld AO had accepted the claim of short term capital gains and long term capital gains of the assessee. Hence we hold that the principles of consistency should be followed in the instant case. Though the principle of resjudicata does not apply to income tax proceedings, the principle of consistency cannot be given a go by. Reliance in this regard is placed on the decision of the Hon’ble Apex Court in the case of

Radhasoami Satsang vs CIT reported in 193 ITR 321 (SC), wherein it was held that :

As we are aware of the fact that, strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and the parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.

5.7. Whether introduction of concessional rate of tax on short term capital gains and exemption of long term capital gains pursuant to introduction of securities transaction tax (STT) would change the character of the transaction

We find that the entire gamut of transactions are to be viewed in the context of dominant intention of the assessee whether to hold a particular scrip in investment portfolio or in trading portfolio. We find that the levy of securities transaction tax has been introduced in the statute with effect from 1st October 2004 relevant to Asst Year 2005-06, wherein if a sale of shares transaction is routed through a recognized stock exchange and securities transaction tax is suffered by the assessee, then the long term capital gains arising on such sale would be exempt u/s 10(38) of the Act. Similarly with effect from 1.4.2005, the short term capital gains, if subjected to levy of securities 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 par with business income, the department has been consistently accepting the treatment of income by the assessee as capital gains. Merely because the rate of tax has been reduced in respect of short term capital gains and long term capital gains have been made exempt during the year by way of an amendment to the provisions, that itself, cannot be a ground for the Learned AO to depart from its consistent stand of treating the assessee as an investor and thereby to charge the income earned by the assessee from share transactions as business income. Moreover, as stated earlier, it is not in dispute that the ld AO himself had admitted in his order that the assessee has been maintaining dual portfolios i.e trading and investment portfolio in the year under appeal and also in the earlier years.

5.8. Dual portfolio - whether permitted

We also find that nothing prohibits an assessee from holding dual portfolios i.e. (1) shares held for investment and (2) shares held for trading purposes. It is not in dispute that in the instant case, the assessee had maintained dual portfolios in its books of accounts and had reported capital gains and business income separately as per the consistent practice followed by the assessee over the years and accepted by the revenue in the earlier years. It is well settled that it is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. In the instant case, the assessee had duly created a separate code for shares held for investment purposes and separate code for shares held for trading and the director of the assessee company Shri Suresh Kumar Saraf was also duly authorized by the Board Resolution dated 20.5.2003 to maintain separate portfolios and delink the trading and investment transactions. The assessee had presented the accounts and had also stated before the ld AO that it had indeed maintained separate codes for shares held as investments and that held as trading. This fact is also mentioned by the ld AO in his assessment order. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment or stock in trade, then onus would shift to revenue to prove that apparent is not real. In the instant case, we find from the details in the paper book 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 find the intention of the assessee to maintain two independent portfolios i.e. one for investment purposes and one for trading purposes from the very beginning is quite evident from the books of accounts wherein assessee had separate entries in its ledger accounts at the time of each transaction i.e. at the time of purchase itself. This practice has not been found fault by the revenue in the earlier assessment years even in scrutiny proceedings. The shares transferred from trading to investment account were held for a long time which shows that the assessee intended to hold them as investments only. These shares were also transferred at the lower of average cost or market rates which fact is also not disputed and is quite evident from the workings submitted for the same in the paper book. Moreover, as early as on 2.4.2005 ( ie.at the beginning of the year itself) the assessee had duly expressed its intention by passing a board resolution for transferring certain shares in trading account to investment portfolio. The Hon'ble Madras High Court in the case of CIT v. S. Ramaamirthan reported in (2008) 217 CTR 206 (Mad) while distinguishing trading and investment, observed that the intention of the assessee is relevant to determine whether an assessee is carrying on the business in shares or investments. The initial intention of the assessee in the instant case is proved beyond doubt from the manner of maintaining two separate portfolios i.e. (1) for investment purposes and (2) for trading purposes. The Learned AR argued that in respect of shares retained under 'investment category' the assessee had taken due delivery of shares on its purchase and given due delivery of shares on its sale. The Learned AR further informed that the assessee had also kept separate records to record the transactions of each category i.e delivery based and nondelivery based. It is settled law that a particular income is from business or from investment must be decided according to the general common sense view of those who deal with those matters in the particular circumstances. The most excruciating factor to be looked into at this juncture is the conduct of the assessee. In the instant case, the bona fide conduct of the assessee is proved beyond doubt from the manner in which it had maintained the dual portfolios in its books by proving its intention from the time of purchase 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 case the finding that the income was earned from investment could not have been recorded. If that is the proposition then it is for the revenue to show that such a finding is not possible in law. That was not even suggested. What remains then is a question of appreciation of evidence, which has already been done. No fruitful purpose is likely to be served by remanding the matter. We do not find any issue, which has remained unattended. For the aforesaid reasons, we hold that the judgment under challenge is not perverse."

4. The judgment in the case of Dalhousie Investment Trust Co. Ltd. v. CIT (1968) 68 ITR 486 (SC) referred by the Assessing Officer does not assist the revenue because in that on appreciation of facts it was found as follows:-

"On the facts, that the appellant dealt with the shares of McLeod and Co. and the allied companies as stock-in-trade, that they were in fact purchased even initially not as investments but for the purpose of sale at a profit and therefore the transactions amounted to an adventure in the nature of trade. The profit derived by the appellant from the sale of shares was therefore a revenue receipt and as such liable to income-tax."

5. The facts of the case are not shown to be similar with those in the case of Dalhousie Investment.
6. For the aforesaid reasons, we are of the opinion that the views expressed both by the CIT and the Tribunal for reasons expressed therein are a possible view. It is, therefore, not open to the revenue to contend that the view taken by the Tribunal is perverse. Question formulated at the time of admission of the appeal does not appear to have been correctly formulated. The question could only be, whether the views expressed upon appreciating the facts and circumstances of the case were perverse. The question is now formulated and is answered in the negative.

The appeal is thus dismissed.'
5.11. Existence of borrowed funds

The next point to be addressed in this issue is the existence of borrowed funds and payment of interest thereon by the assessee. We find that the ld AO had stated that the loan borrowed during the year from its director by the assessee had been repaid by the assessee before the end of the year. We find that the ld AO also observed that the assessee had both own funds and borrowed funds in its kitty and it is difficult to segregate any amount of borrowing as 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 regard and that the assessee had taken its decision in a prudent manner which cannot be interfered with, in view of the settled legal position that assessee knows its interest best.

5.12. Frequency of transactions
It is nobody’s case that the shares held by the assessee in the investment portfolio were bought and sold frequently by the assessee. We have gone through the entire workings of short term capital gains offered by the assessee in respect of various scrips maintained in investment portfolio which are enclosed in pages 29 & 30 of the Paper Book and find that the assessee had not dealt with frequent buying and selling of shares. Since the assessee is maintaining dual portfolio, there were purchases of the same shares in the trading portfolio by the assessee which were earlier sold by it from investment portfolio. But in investment portfolio, there are no frequency of transactions by the assessee. Hence the adjudication of this aspect in the instant case would only be superfluous.
5.13. Period of Holding of shares

We find that one of the main arguments of the revenue seems to be the shorter duration for which the shares were held by the assessee. In this regard, we had gone through the entire details of profit on sale of investment scrip wise containing the date of purchase, number of shares purchased, purchase price, date of sale, sale price and resultant book profit or loss which forms part of the paper book filed by the assessee. The shares transferred from trading to investment account were held for a long time which shows that the assessee intended to hold them as investments only. Moreover, as early as on 2.4.2005 ( i.e. at the beginning of the year itself) the assessee had duly expressed its intention by passing a board resolution for transferring certain shares in trading account to investment portfolio. These facts are staring on us and not disputed. Hence there cannot be any allegation for reduction of taxes that could be raised on the assessee. The following table would prove the holding period of shares of each scrip :-

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. There is nothing wrong in assessee making huge profits even in investment portfolio by exiting at the right time. One more factor to be considered in the facts of the instant case is that the assessee continued to remain trader in shares even after transferring of the shares from trading into investment portfolio. Even after the shares in investment portfolio were sold, the assessee still continued to remain as trader in shares by purchasing the shares in trading category. The assessee had also replenished its investments in the investment portfolio by way of fresh purchases during the year. We place reliance on the Co-ordinate Bench decision of this tribunal in the case of Dy. CIT v. Reliance Trading Enterprises Ltd. in ITA No. 944/Kol/2008 dated 3.1.2008 wherein it was held that :

"We have heard both the parties and perused the records as well as the documents contained in the paper book filed before us. There is no denying the fact that as per the account 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 decisions used to be taken by the assessee at the time of purchase itself based on different factors whether any share and 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. Period of holding of such assets cannot determine its status or change it from investment (capital) to trading (stock in trade). The audited accounts for the Assessment Year 04-05 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 self 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 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 before us. The assessment year under appeal before us is Asst Year 2006-07. We do not find any logical reason for the revenue to deviate from its consistent stand taken in the earlier years accepting the stand of the assessee having dual portfolio and offering income under capital gains and business income.

5.16. We find that the Hon'ble Bombay High Court in the case of Gopal Purohit reported in (2011) 336 ITR 287 (Bom) had considered the issue under consideration wherein the questions raised before the Hon’ble Bombay High Court and decision rendered thereon are as below:-

(a) “Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in treating the income from sale of 759003 shares for Rs. 5,00,12,879/- as an income from short term capital gain and sale of 388797 shares for Rs. 6,65,02,340/- as long term capital gain as against the "Income from business" assessed by the A. O. ?

(b) Whether, on the facts and circumstances of the case and in law, the Hon'ble ITAT was justified in holding that principle of consistency must be applied here as authorities did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res judicata to preclude the authorities from holding such transactions as business activities in current year?

(c) Whether, on the facts and circumstances of the case and in law., the Hon'ble ITAT was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards to the nature of transaction without appreciating that the entries in the books of accounts alone are not conclusive proof to decide the income?

The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. 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 each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The revenue did not furnish any justification for adopting a divergent approach for the Assessment Year in question. Question (b), therefore, does not also raise any substantial question.

In so far as Question (c) is concerned, again there cannot be any dispute about the basic proposition that entries in the books of account alone are not conclusive in determining the nature of income. The Tribunal has applied the correct principle in arriving at the decision in the facts of the present case. The finding of fact does not call for interference in an appeal under Section 260A. No substantial question of law is raised. The appeal is accordingly dismissed.” '

It is pertinent to note that the decision of Bombay High Court was subjected to further appeal by the revenue before the Hon'ble Apex Court and the Special Leave Petition (SLP) was dismissed by the Supreme Court.

5.17. We also find that there is no material brought in by the revenue to show that separate accounts of two portfolios are only a smokescreen and there is no real distinction between two types of holdings. This could have been done by showing that the distinction sought to be created between two types of portfolios is not real but only artificial and arbitrary. In the instant case, the ld AO himself admits that the assessee maintains two separate portfolios in the year under appeal and also in the earlier years. The books of accounts of the assessee also support the same. The books of accounts of the assessee were not rejected by the ld AO and the stand of the assessee in offering long term capital gains under investment portfolio is not disputed by the revenue. Therefore, in absence of any material to the contrary, and on appreciation of cumulative effect of several factors present as culled out above, we hold that the net surplus on sale of shares under investment portfolio should be chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolio.

In view of the aforesaid facts and circumstances, findings given thereon and respectfully following 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 order dated 31.07.2009, wherein it was held that income/loss from the F&O transactions prior to 24.01.2006 has to be treated as speculation profit/loss and this position is accepted even by the ld. counsel for the assessee at the time of hearing before us. We, therefore, respectfully follow the said decision of the Special Bench of this Tribunal and uphold the impugned order of the ld. CIT(Appeals) on this issue. Ground No. 2 is accordingly dismissed.”

Respectfully following the said decision, we dismiss the ground no.2 raised by the assessee .

7. We find that the ld AO had valued the shares of Reliance Industries Ltd kept in investment portfolio at the lower of cost or market price using FIFO method which was upheld by the ld CITA. Aggrieved, the assessee is in appeal before us on the following ground:-

“3. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in continuing the A.O's action in revaluing the stock of shares of Reliance Industries Ltd. according to the FIFO method by treating them as trading shares without considering the facts that the concerned RIL shares transferred from trading to investment account were held thereafter in investment account only which had no connection with the other RIL shares held as trading. Actions of the AO and the Ld.CIT(A) were wholly arbitrary, unreasonable, uncalled for and bad in law.”

7.1. In view of our decision given for Ground No. 1 raised by the assessee, there is no need to adjudicate this ground and it becomes infructuous. We have already held that the surplus of Rs. 11,05,41,076/- should be treated only as Short Term Capital Gains and not as business income. Hence there is no question of any valuation difference. Hence the Ground No. 3 raised by the assessee is also allowed.

8. The last issue to be decided in this appeal is as to whether the disallowance u/s 14A of the Act could be made in the facts and circumstances of the case.

8.1. The ld AR fairly admitted that this issue is covered by the order of this tribunal in assessee’s own case in ITA No. 417/Kol/2011 for Asst Year 2005-06 dated 14.7.2016. We find that this tribunal in para 20 of the said order had held as under:-

“20. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that in the relevant year under consideration i.e. A.Y. 2005-06, Rule 8D was not applicable and, therefore, the disallowance under section 14A on account of expenditure incurred by the assessee in relation to the exempt income is required to be made on some reasonable basis. In this regard, this Tribunal has taken a consistent view that the disallowance under section 14A on account of expenses incurred in relation to the income at 1% of such exempt income would be fair and reasonable. Following this consistent stand taken by the Tribunal, we restrict the disallowance under section 14A to the extent of 1% of the exempt income in the form of dividend and long-term capital gain and allow partly Ground No. 5 of the assessee’s appeal.”

Respectfully following the said decision, we direct the ld AO to disallow 1% of Exempt Income to the tune of Rs. 1,21,547/- (1% of Rs. 1,21,54,752/-). Accordingly, the ground no. 4 raised by the assessee is partly allowed.

9. In the result, the appeal of the revenue is dismissed as not maintainable and the appeal of the assessee is partly allowed.