TaxTMI 
TaxTMI 
2012 (6) TMI 473
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....common issue in these two appeals of the revenue is against the order of CIT(A) in directing to compute the profit on sale of shares and securities under the head 'Capital Gains' as against assessed by the Assessing Officer as 'Business Income'. For this, the revenue in both the cases has raised following common grounds: "On the facts and in the circumstances of the case, Ld. CIT(A) has erred in directing to assess the profit on sale of shares and securities under the head 'Capital Gain' instead of 'Business Income' considered by the A.O." 3. Since issues are identical and facts are common, we discuss the facts from ITA No. 586/K/2009. Brief facts relating to the above issue are that the Assessing Officer noted in assessment order that the assessee company is engaged in the business of buying and selling of shares/units. The Assessing Officer also noted the main object of the Company as per Memorandum of Association, which are as under: "(2) To carry on the business of Investment Company and to invest in, acquire, hold and to deal in shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying o....
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....t should, in normal circumstances, be in a position to produce evidence from its records and whether it has maintained distinction between those shares which are its stock-in-trade and those which are the one by way of investments. Also in the case of Janak S. Rangwaila v. ACIT [2007] 11 SOT 627 (Mum) the Hon'ble Mumbai Tribunal has held that it was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction does not change the nature of transaction which are bei....
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.... dividends in addition to the prospect of making profit on sale of such investment shares at an opportune moment without making any burry for sale ignoring dividend. The investment shares and securities purchased and held till their sale had served the dual purpose - i.e., for earning dividend as an incidental income as well as to make profit on sale at appropriate time. The AO did not reject the books of account vis-à-vis the audited accounts u/s. 145 of the Act before arriving at such conclusion. The AOs finding cannot, therefore, be accepted. Considering all the above, it is held that the profit on sale of shares and securities by the assessee is to be assessed under the head 'capital gain'. Aggrieved, now revenue is in appeals before us. 4. Before us Ld. CIT-DR Shri D. R. Sindhal argued on behalf of revenue and also filed written submission. Sh. Sindhal argued that cumulative effect of all factors is to be seen and income declared by assessee is business income. He stated that there is nothing on record to show that purchase of shares was for non-commercial purposes and purchase was also not for getting control Interest of company and even shares sold within a shor....
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.... order is enclosed herewith. Ld. CIT-DR further argued that it is not one reason which decides the issue but the issue can be decided after considering all the facts of the case and it varies from case to case depending on their own facts. He stated that rejection of books of account vis-à-vis the audited account u/s. 145 is not statutory requirement for deciding the issue in hand. Hence, CIT(A) was not justified for his above observation that the A.O. had not rejected books of account vis a vis the audited accounts u/s. 145. He argued that lastly courts held as under: "If the previous decision is plainly erroneous, there is a duty of the court to review it and not perpetuate the mistake i.e., a vital point was not considered or when an earlier relevant statutory provision have not been brought to the notice of court." (i) U.O.I. v. Raghubir Singh [1989] 178 ITR 548 (SC). (ii) Sri Agasthyar Trust v. CIT [1999] 236 ITR 23/103 Taxman 363 (SC). (iii) Shriram Transport Finance Co. Ltd. v. Asstt. CIT [1999] 70 ITD 406 (Mad.). He requested the Bench to consider above submissions, A.O's order before deciding the issue and restore the....
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....e would be obtained by itself is not enough, but in conjunction with the conduct of the assessee and other circumstances, it may point to the trading character of the transaction. The test often applied is whether the assessee has made his shares and securities, the stock-in-trade of a business Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253 (SC). Where initial intention itself is to make profit by resell, transaction is a business venture - It is no doubt correct to say that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares and, if the purpose was investment, the fact that the sale of those shares resulted in a profit will not make that profit revenue income. However, this principle is not applicable to cases where it is found that even the initial purchase of shares by the assessee was not for the purpose of investment; for earning income from dividends, but was with a view to earn profit by resale of those shares - Dalhousie Investment Trust Co. Ltd. v. CIT (1968) 68 ITR 486 (SC). Mere fact that assessee is a big land-holder is not relev....
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.... assets are transferred into stock, then fair market value of the asset on the date of such conversion shall be deemed to be the full value of the consideration according to section 45(2), but there is no provision to deal with the case of transfer of stock to investment account. (vi) If the transaction is not bona fide, then the above stated principles will not be applicable and the loss will not be allowable." 6. Ld. CIT-DR also discussed the concept of relevancy of length of time in his written submissions, which is as under: "It was observed by the Supreme Court in Investment Ltd. v. CIT [1970] 77 ITR 533, that the mere length of time might not be a determining factor. The same view was expressed by the Supreme Court in the case of New Era Agencies (P) Ltd. v. CIT [1968] 68 ITR 585. There the Supreme Court was dealing with preference shares; and it was held that this fact had to be noted, because the case was concerned with preference shares and these shares had been held for a considerable time. The Supreme Court observed that the fact that the appellant had not dealt with the shares for about 14 years from 1949 to 1963 would not be sufficient to draw the inference th....
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....he treatment given by the assessee or department may be relevant. In one case the department itself treated, dealing in shares as business in earlier years and so the Court justified the treatment of loss as business loss in a later year CIT v. Karam Chand Thapar & Bros. (P) Ltd. [1989] 176 ITR 535 (SC). In Express Newspapers Ltd. v. Dy. CIT [1997] 59 TTJ (Mad. Trib.) 516, it was held that where there was adequate evidence to prove that the loss suffered by the assessee in the trading activities of purchase and sale of shares was genuine, such loss could not be disallowed, where assessee's income from sale of shares in earlier years had been treated as business income. In the case of Investment Ltd. v. CIT [1970] 77 ITR 533 (SC), the assessee-company was formed with the objects, amongst others, of dealing in shares, debentures and securities, and it effected transactions of sale and purchase of shares and securities of large magnitude. While determining the nature of shares or securities it was held (i) that the very fact that similar claim was allowed in earlier and later years prima facie led to an inference that the company was a dealer in shares; (ii) that there was no evidence....
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....urchasers are inter-connected is not enough to show the transaction as sham if otherwise the transactions are fair and at market price CIT v. Pitty Bros. (P.) Ltd. [1979] 120 ITR 709 (Bom)." The Ld. CIT-DR further discussed when loss is business loss, In case shares are taken as stock-in-trade, as under: "In case share are taken as stock-in-trade or on trading account, then the loss is business loss, i.e., if the assessee is dealer in shares and incurs loss in dealing in shares that are purchased in the ordinary course of dealing with any other intention. Some of the points are discussed below: Losses in case of dealer in shares: In the case of a dealer, shares are held as stock-in-trade, so loss on sale is revenue loss. But it does not mean that every kind of deal in shares in case of dealer will be business deal and result in revenue loss. In some cases, it is held not on revenue account as below: (i) In a case before Calcutta High Court - Gold Co. Ltd. v. CIT [1973] 92 ITR 121, assessee purchased shares of two companies. Shares of S Ltd. were held for seven and half years and shares of B Ltd. were held for sixteen years. Loss in case of S Ltd. was hel....
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....cy of transactions, the systematic and organized manner or undertaking the transaction, strongly point to the conclusion that the shares could not have been purchased as an investment to earn income from dividend and that the purchase of these shares were with the object of selling them subsequently at a profit. (iii) As a general rule when shares are purchased to sell the same on profit and no other motive is involved, then the transactions resulted into business income/loss. The purchase of these shares was with the object of selling them subsequently at a profit and the shares were in fact sold at considerable profit subsequently. (iv) Whether shares shown as investment or stock-in-trade is not relevant for deciding the issue on hand (Investment Ltd. v. CIT [1970] 77 ITR 533 (SC)). Following the ratio of this judgment, it is immaterial as to whether the shares have been shown as investment or stock-in-trade. So by showing the shares as investment by itself will not prove that the shares were held as investment and by showing them as investment, the assessee will not be benefited following the ratio of this judgment. (v) Whether shares valued at cost or market price is i....
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....units of mutual fund. Ld. counsel stated that intention of the AO to treat "Profit on Sale of Investment" as "Business Income" has arisen due to the fact that w.e.f. 1.9.2004 there was change in the statute by introduction of Section 111A in statute by Finance Act 2004, whereby the gain on Long-Term Investment was made exempt and the gain on short-term investment was liable to be taxed only @ 10% as against the earlier prevailing rate of tax which were quite high at 20% and 30% respectively. He stated that the revenue accepted such profit on sale of investment as capital gain in all earlier years and since such assessment had reached finality, revenue's stand in this particular year is against the principal of consistency. He relied on the decision of Hon'ble Bombay High Court in the case of 330 ITR 485. To elaborate aspect, it was further submitted as under:- A.Y 2002-03 : (a) In assessment year 2002 -03 in the Profit & Loss A/c (Page 106 of the P.B.) the profit on sale of investment has been disclosed at Rs. 43,82,849/-. In such assessment year in the computation of income (Page 369 of the P.B.) the income from capital gain has been reflected at Rs. 69,72,779/- ....
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....ion regarding the profit on sale of investment. In such order the AO considered the profit on sale of investment held for more than three years as capital gain only and for capital gain lesser than such period i.e., less than three years the AO considered such claim as business income. It may kindly be appreciated that the statute provides for holding period of one year only and the consequent gain or loss is treated as long-term gain or loss only. The AO has no authority to tinker with law and since the AO himself treat a part of the gain in such year as capital gain only he has justified his action on sale of investment as capital gain even though apart of such gain has been treated otherwise. The law itself provides as to the period of holdings and the AO has no authorities to change such commission on his whims and fancies." Ld. Counsel stated that revenue having accepted such treatment of gain as capital gain, has no authority to treat the same in a particular manner in assessment year 2005-06 according to its own convenience and hence such gain should be treated as capital gain as declared by the assessee. He contended that AO in his order stated that the assessee' s main ....
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....egister has been maintained separately and this is duly mentioned in relevant pages of accounts of year ended 31.03.2002 (p/b 95), 31.03.2003 (p/b 148), 31.03.2004 (p/b 181) & 31.03.2005 (p/b 219). iv. Investments were valued at cost and stock-in-trade was valued at cost of market value. This fact duly certified in the Audited Accounts. (Pages 107, 162, 199, 236 of Paper Book) v. Assessee company is a NBFC Company (mentioned in Auditor's report at page 220 of paper book) and as per the RBI norms provision of "diminution in value of investment" duly reflected which goes on to show the shares were held as investment only. vi. In Tax Audit Report for A.Y 2002-03 (page 22), A.Y 2003-04 (page 35), A.Y 2004-05 (page 53) & A.Y 2005-06 (page 71) nature of business of the Company was shown as investment in shares and mutual funds. vii. As regards the AO's contention regarding the volume and frequency of the transaction it may kindly appreciate that the shares on which long-term capital gain has been declared treating the year has been brought forward from earlier year only. Please refer page 405 of the P.B. Besides the AO not having rejected the books of ....
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....n issued and this fact is verified from assessee's paper book page 89, where the assessee has attached Annual Report for FY 2001-02 relevant to AY 2003-04, wherein scheme of amalgamation with other companies is incorporated and the same reads as under: "The Company has filed a revised Scheme of Amalgamation with the Hon'ble High Court at Kolkata on 25th September, 2002 pursuant to which Dudhi Limited, Sheela Fiscal Services Pvt. Ltd., Gurgaon Floriculture Limited, Chandni Investments Private Limited, Nav-Jyoti Investment And Dealers Limited and Anumeha Finvest Service Limited are proposed to be amalgamated with the company w.e.f. 1st October, 2001." Even from the Annual Report of FY 2004-05 relevant to AY 2005-06, year under consideration, we find that there is no issue of any fresh shares for which the assessee has received money and even there is no secured or unsecured loan received. Similar is the position in AYs 2002-03, 2003-04 and 2004-05 except the loans appearing as on 31.3.2002 in the Balance Sheet, which is depicted at page 99 of the assessee's paper book and such loan relates to textile business of the assessee company in that year and same have been squared up in....
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....02-2003 Amalgamation Expenses Written Off 22,364 22,364 - Auditors' Remunerations 89,485 81,281 95,206 Bad Debts Written Off - 1,255,719 1,456,977 Bank & Demat Charges 147,792 68,009 32,892 Commission & Brokerage 14,040 37,983 136,897 Contribution to PF etc. 45,782 221,867 150,518 Directors Fees 32,000 24,000 27,000 Electric Charges 51,595 89,806 36,195 Employees' Welfare Expenses 45,493 105,810 356,673 Freight, Transport & Delivery Charges - - 68,350 Insurance Premium 47,957 65,101 194,056 Legal & Professional Charges 645,624 608,442 1,542,386 Listing Fees 10,500 10,500 10,500 Loss on Discard of Store Items - 250,663 2,281,736 Misc. Expenses 414,205 181,591 666,009 Motor Car Expenses 215,756 146,664 230,356 Postage, Telegram & Telephone Exp. 143,802 159,213 215,210 Power & Fuel - - 489,941 Printings Stationery Expenses 77,216 103,096 72,595 Rates & Taxes 519,171 221,721 447,968 Rent 62,434 60,934 60,934 Repairs & Maintenanc....
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....business income, as such as per the requirement of section 145 for making any estimation of income the AO has to first reject the books of account and then proceed, since the same has not been done by the AO the action of AO in such respect suffers infirmity. Another argument of Ld. CIT-DR was that the assessee has carried on this business in a systematic and organized manner, which clearly justifies the action of the AO for holding the income as business income and not capital gains. We find from the facts of the case that the expenses incurred are day-to-day routine expenses necessary for running of the company. The Ld. CIT-DR in this respect has also pointed out that the Bad Debt debited in profit & loss A/c shows that the assessee carrying on business of shares. In this respect, we are of the view that such Bad Debt relates to the textile business of the assessee which was carried on in earlier year and has closed since 2002. Since the money in respect of such business is not recovered from the debtors of such textile business, hence the amount is being written off in a particular year and as such it cannot be construed as routine expenses. 10. Another objection of Ld. CIT-D....
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....s so as to entitle itself to the relief under s. 80J in the initial year can successfully claim the relief, if the prescribed conditions are satisfied in the subsequent years. Hon'ble Court answered that this decision of this court in Satellite Engg. Ltd.'s case (supra) can be of any assistance to the cause of the revenue, because the question with which this court was concerned in that case was altogether a different one in the context in which the Division Bench was speaking. Hon'ble Court finally held that it should be understood that this is subject to the right of the ITO to adjust the relief by fixing the quantum having regard to the respective capital employed in the new undertaking in the year with which he is concerned. 11. Similarly, Hon'ble Madhya Pradesh High Court in the case of CIT v. Bhilai Engg. Corpn. (P.) Ltd. [1982] 133 ITR 687/10 Taxman 87 has held that no fresh material was brought in the assessment proceedings for the years 1974-75 and 1975-76 to show that the finding reached by the ITO in the assessment for the year 1973-74 that the assessee had installed new plant and machinery and had constructed a new building was in any way erroneous. Further, the reli....
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....ting the relief under s. 80J for the assessment year 1973-74, proceeded upon a wrong interpretation of the section. On these facts and circumstances, it was not open to the ITO, in dealing with the assessment for the years 1974-75 and 1975-76, to refuse to grant the relief under s. 80J to the assessee. We are informed that the relief under that section has already been granted to the assessee for the years 1976-77 and 1977-78. For the reason given above, we answer the question as follows : "On the facts and in the circumstances of the case, the Income tax Officer was not competent to disallow the relief under section 80J for the assessment years 1974-75 and 1975-76. " 12. Hon'ble Bombay High Court in the case of CIT v. Darius Pandole [2011] 11 taxmann.com 262 has discussed the Rule of Consistency stating that the principle of res judicata could not as an abstract principle apply to assessment proceedings since each year of assessment had to be considered separately, yet when a fundamental aspect was duly considered after a query was raised by the Assessing officer and was answered by the assessee on the same facts, a change in view was evidently not warranted for the asses....
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....ing grounds in CO No.32/Kol/2009: "1. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the arbitrary, ad hoc and estimated disallowance of expense of Rs. 2,80,686/- u/s 14A of the I.T Act @ 5% of the exempt dividend income of Rs. 56,13,729/- made in the assessment merely on presumption without considering the fact that no expenditure was incurred for earning the said income and without bringing on record any material or evidence to establish the nexus between such alleged expenditure and the earning of said income. Actions of both the A.O and the Ld. CIT(A) were wholly unreasonable, uncalled for and bad in law. 2. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in further enhancing the disallowance of said expense u/s 14A of the Act by a further sum of Rs.3,20,438/- by wrongly applying Rule 8D of the IT Rules presuming it to be applicable also in case of a proceeding pending as on 24.03.2008 without considering that Rule 8D inserted in the IT Rules only w.e.f 24.03.2008 was not applicable for the year under appeal. The Ld. CIT(....