ITAT upheld deletion of addition as shares were held as investment

1. The assessee was a public interest company following mercantile system of accounting. The assessee company was a non-banking financial company u/s. 45(1A) (of Income Tax Act, 1961) of the RBI Act, 1934, having main object of investment in shares. It had disclosed long term capital loss to the tune of Rs.3,34,30,136/- in its P&L Account. It also disclosed short term capital loss of Rs.36,39,94,084/- in computation of income shown under the head capital gains. According to AO, the entire loss was claimed to be carried forward in the next year. During the course of assessment proceedings, the AO required the assessee to produce the contract notes for verification of long term capital loss and short term capital loss. The AO treated the long term capital loss and short term capital loss as business loss by treating the share transaction business as regular business. He treated the business loss of Rs.(-)39,74,24,220/- as speculative loss as per explanation of Sec. 73 (of Income Tax Act, 1961). The assessee had earned exempted income i.e. dividend of Rs.2,87,49,680/- and claimed the same as exempt u/s. 10(34) (of Income Tax Act, 1961). The assessee computed disallowance u/s. 14A (of Income Tax Act, 1961) at Rs.33,57,610/-. But the AO computed the disallowance by invoking Rule 8D (of Income Tax Rules, 1962) at Rs.71,20,710/-.

2. CIT(A) deleted the addition and the disallowance.

3. On Revenue's appeal, the ITAT held as under:

4. In view of the above facts, we are of the view that the assessee has established that the shares held by it as investment are capital asset and sale of capital asset being shares held as investment for a considerable period i.e. either little less than one year or more than one year are assessable as short term capital gain/loss or long term capital gain/loss and not business income.

5. Another aspect discussed by AO as regards to frequency of transaction, the investor aims at wealth maximization and has to divest the shares at the opportune time to prevent depreciation in investment. And Investor has to take appropriate decision after weighing the risk of carrying the investment with the return thereon. In the process, the assessee may required to sell off part of his investments at appropriate intervals which may lead to high turnover in the investment account. However, it does not mean that the investments are actually held as stock in trade. An investor may frequently buying or selling shares, but shares purchased during a particular year may not be sold in the same year and shares sold during the year which have been purchased more than a year ago.This will be treated as investment and not trading.

6. In view of these facts, we are of the considered view that the CIT(A) has rightly deleted the disallowance of loss by holding the assessee as investor and we confirm the same. This issue of revenue's appeal is dismissed. We find that the assessee has earned dividend of Rs.2,87,49,680/- on a total investment in shares at a figure of Rs.127,68,82,654/- as on 31.03.2008 and of Rs.28,62,60,276/- as on 31.03.2009. The assessee has explained that its own funds comprising of shareholders' fund and reserve and surplus stood at Rs.142,17,62,794/- as on 31.03.2008 and at Rs.106,30,12,044/- as on 31.03.2009. The assessee explained that the assessee's own funds during the relevant assessment year were sufficient to make the above investment. The assessee stated that it has not invested any borrowed funds in purchase of shares rather it is established that the investments were made by utilizing assessee's own funds.

7. In view of the above facts and circumstances, we find no infirmity in the order of CIT(A) in deleting the disallowance and hence, the same is confirmed. This issue of revenue's appeal is dismissed.”

Case Reference- Deputy Commissioner of Income-tax Vs. M/s. A. K. G. Finvest Ltd.

IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA [Before Shri Mahavir Singh, JM & Shri M. Balaganesh, AM] I.T.A No.1341/Kol/2013 Assessment Year: 2009-10