Kismet Exports & Investments P. Ltd, ... vs Department Of Income Tax

सव[ौी आर.सी. शमा[, लेखा सदःय एवं संजय गग[ Ûयाियक सदःय के सम¢

BEFORE SHRI R.C. SHARMA, AM AND SHRI SANJAY GARG,JM

आयकर अपील सं./I.T.A. No.8699/Mum/2011 िनधा[रण वष[ / Assessment Year :2008-09 (िनधा[ The DCIT-9(2), M/s. Kismet Exports & Aayakar Bhavan, Investments Pvt. Ltd., Mumbai-400 020 6901/603, Kismet North Avenue, Santacruz (W), Mumbai-400 054

आयकर अपील सं./I.T.A. No.8870/Mum/2011 िनधा[रण वष[ / Assessment Year :2008-09 (िनधा[ M/s. Kismet Exports & The DCIT-9(2), Investments Pvt. Ltd., Aayakar Bhavan, 6901/603, Kismet North Mumbai-400 020 Avenue,Santacruz (W), Mumbai-400 054

(Appellant) .. (Respondent)

ःथायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AACCK 2895C (अपीलाथȸ /Appellant) .. (ू×यथȸ / Respondent) अपीलाथȸ ओर से/ Revenue by: ` Shri Asghar Zain ू×यथȸ कȧ ओर से/Assessee by : Shri Prakash Jotwani सुनवाई कȧ तारȣख / Date of Hearing : 26.11.2014 घोषणा कȧ तारȣख /Date of Pronouncement : 14.01.2015

आदे श / O R D E R

PER SANJAY GARG, JM:

The above titled cross appeals one by the revenue and the other by the assessee directed against the order dated 28.10.2011 of the Commissioner of Income Tax (Appeals) [ here in after referred to as 2 ITA No.8870/M/2011

CIT(A)] are taken together for disposal by this common order. First we take up revenue's appeal in ITA No. 8699/Mum/2011

2. The revenue through its grounds of appeal has agitated the action of the CIT(A) in treating the profit of Rs. 49875149/- earned on redemption of mutual funds as Long Term Capital Gains(LTCG) as against business income treated by the AO. The contention of the revenue is that since the assessee is primarily an investment company, so the income earned should be treated as business income. We find that this issue has been dealt by the Ld. CIT(A) in Para 4 of his order. The Ld . CIT(A) after detailed discussion of the matter has observed that the assessee company had earned long term capital gains on redemption of mutual funds held for more than 1 year. It had been consistently showing the same as investments and assessed as such for the last couple of years. There was nothing on the record that the assessee had traded in the said mutual units. Following the principle of consistency and in the absence of any evidence that the assessee had acted as a trader in the redemption of mutual funds, he held the assessee as investor and directed the Assessing Officer to treat the same as LTCG. We are unable to agree with the contention of the revenue that since the assessee is primarily an investment company, so the income earned should be treated as business income. Law has been now settled on the point through various judicial decisions that even a company having business in trading in shares or securities can also maintain a separate investment portfolio. We therefore do not find any reason to interfere with the well reason order of the CIT(A) on this issue. The appeal of the revenue, thus having no merit is therefore dismissed.

3. Now we take up the assessee's appeal in ITA No. 8870/Mum/2011 3 ITA No.8870/M/2011

4. The assessee vide ground No.1 has agitated the action of the lower authorities in treating the loss of Rs. 16,09,558/- in sale and purchase transaction of shares as business loss as against the claim of Short Term Capital loss.

5. The assessee during the year purchased shares of 19 listed companies aggregating to Rs. 5,24,53,139/- and sold shares of just one scrip i.e. Kotak Mahindra Bank Ltd. at a loss. The scrips of other listed companies had not been sold and were shown under the head investments in the balance sheet. The assessee company had appointed Kotak Securities Ltd as Investment Manager and all the transactions were carried out by them. It was submitted on behalf of the assessee company that the single transaction of sale of 12000 shares of Kotak Mahindra Bank Ltd was executed on a single date 13.3.2008 through single contract note and it was therefore contended that the same be treated as short term capital loss. The AO however treated the same as business loss.

6. The Ld. CIT(A) also confirmed the findings of the AO on this issue observing that in this case both purchase and sale transactions had been executed on a signal day and therefore it represents the trading activity.

7. The assessee before us has submitted that the transactions were carried out through investment manager. It was submitted by the assessee company that 13,000 shares of the Kotak Securities Ltd were directed to be purchased to the investment manager, however, mistakenly 25000 shares were purchased by it. It was immediately directed to restrict the purchase to 13000 shares and rest of the 12000 shares were sold on the same day by incurring loss. The assessee did not carry out any other share transaction during the year. This was the single transaction done by the assessee during the year. The shares of 4 ITA No.8870/M/2011

other companies purchased were held as investment. In view of the above explanation given by the assessee, in our view, the action of the lower authorities in treating the said loss resulting from single transaction of sale of shares for which the assessee has given the plausible explanation, cannot be held to be justified. This issue is accordingly decided in favour of the assessee and it is directed that the said loss to be treated as short term capital loss.

8. The next issue is relating to disallowance u/s. 14A.

9. The AO noted that the assessee had received dividend income of Rs. 50,26,984/- during the year under consideration which was claimed as exempt. The AO calculated the disallowance u/s. 14A by way of applying Rule 8D at Rs. 37,18,573/-.

10. Aggrieved by the order of the AO, the assessee preferred an appeal before the Ld. CIT(A).

11. The Ld. CIT(A) upheld the order of the AO on this issue.

12. The Ld. AR of the assessee before us has submitted that the AO has ignored the working submitted by the assessee and that the AO had not established nexus between the expenditure and the exempt income.

11. We have considered the rival submissions of the ld. representatives of the parties. It may be observed that in the case of 'Godrej & Boyce Manufacturing Co. Ltd.' 328 ITR 81, the Hon'ble Bombay High Court has held that Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable and also not retrospective and applies from A.Y. 2008-09. It has been further held that under section 14A of the Income Tax Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of 5 ITA No.8870/M/2011

expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee.

12. However, a perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the Hon'ble Bombay high Court in the case of Godrej & Boyce (supra) while making the disallowance. He without recording any reasoning for his dissatisfaction with regard to the working/claim of the assessee, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act. The ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance.

13. So keeping in view of the overall facts and circumstances of the case, we restore this issue back to the file of the AO with a direction that the AO will give opportunity to the assessee to place on record all the 6 ITA No.8870/M/2011

relevant facts including its accounts and then examine the computation/calculation made in this regard by the assessee having regard to the accounts of the assessee. The AO will be at liberty to call for any record/evidences or statement etc. from the assessee as may be required by him for deciding the issue under consideration. After going through the details provided by the assessee, if the AO will be satisfied with the claim/calculation made by the assessee, then he will assess the income accordingly. However, if the AO does not agree with the computation made by the assessee and in that event, he will have to record his dissatisfaction with reasoning for the same by way of a speaking order, then he will be at liberty to resort to the provisions of Rule 8D. Needless to say, the assessee will co-operate and promptly supply the necessary details etc. to the AO for deciding the issue under consideration.

14. In the result, the appeal filed by the Revenue is dismissed and the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in the open court on 14.01.2015 .

आदे श कȧ धोषणा खुले Ûयायालय मɅ Ǒदनांकः14.01.2015 को कȧ गई ।

Sd/- Sd/- (R.C. SHARMA) (SANJAY GARG )

लेखा सदःय / ACCOUNTANT MEMBER Ûयाियक सदःय/JUDICIAL MEMBER मुंबई Mumbai; Ǒदनांक Dated 14th January, 2015 व.िन.स./ RJ , Sr. PS 7 ITA No.8870/M/2011

आदे श कȧ ूितिलǒप अमेǒषत/Copy षत of the Order forwarded to :

1. अपीलाथȸ / The Appellant

2. ू×यथȸ / The Respondent.

3. आयकर आयुƠ(अपील) / The CIT(A)-

4. आयकर आयुƠ / CIT

5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai

6. गाड[ फाईल / Guard file.

आदे शानुसार/ ार BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक उप सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपीलीय अिधकरण, अिधकरण मुंबई / ITAT, Mumbai