AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2011 (12) TMI 553
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 10(38) by Finance Act, 2004, the legal position becomes crystal clear. (D) That the two court cases sited by the AO i.e. G. Venkataswami Naidu & Co., vs. CIT (35 ITR 194) and CIT vs. Sutlej Cotton Mills Supply Agency Ltd., (100 ITR 706) have no bearings on our case because sec. 111A, sec. 10(38) and S.T.T. were not in place at that time. (E) That the court case quoted by us i.e. "CIT vs. N.C.S. Investment (P) Ltd., (2007) 158 TAXMAN 13 (Mad.) has not been considered. This is fit case to accept short term capital gains. 2) (A) That on the facts and circumstances of the case, the ld. CIT(A)-XII, has grossly erred in confirming the brought forward "SHARE APPLCIATION FORFEITURE ACCOUNT" as unclaimed credit and thus, confirming addition for Rs. 25,00,000/- to the declared income for A.Y. 2007-08. (B) That the amount of Rs. 25,00,000/- which was received as SHARE APPLCATION MONEY in F.Y. 2003-04 and forfeited in December,2004 for non payment of Allotment Money is a CAPITAL RECEIPT and cannot be treated as income of A.Y. 2007-08. How can a capital receipt of previous year, be added to income of current year i.e. A.Y. 2007-08, when the money was received in A.Y. 2004-05 and forfeited ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....(SC), which was reiterated in "CIT v. Sutlej Cotton Mills Supply Agency Limited", 100 ITR 706(SC). It was held that except utilization of the assessee's own funds, the assessee did not fulfill any condition being treated as a trader or investor; that the assessee was a trader in the past and the transactions were shown as short term capital gain only so as to take a tax rate advantage; that the intention of the assessee was thus questionable; that the volume of the transactions was worth crores of rupees; that the activity was not incidental in nature; and that even the auditor had, in the tax audit report, described the nature of business of the assessee as "share trading" and not as business. The AO thus held that the assessee company had shown business to the extent of Rs. 24,05,283/- as short term capital gain. 5. Before the ld. CIT(A), the assessee contended that the AO had erred in denying to the assessee, concessional rate of tax u/s 111-A of the I.T. Act. 6. The ld. CIT(A) did not agree with the contention raised by the assessee. It was held that the assessee was not entitled to the concessional rate of tax u/s 111-A of the Act. It was held that the assessee's argument re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrowed any funds for the purpose of such investments; that the AO, while observing that to earn short term capital gain, an investor is one who makes investment or purchase of certain kind of securities and sells the same after waiting for some time, fail to consider that investment is investment, whether it is for a long term or for a short term; that the period is not decisive; that where the Legislature has so intended, it has prescribed that if the investment is made for more than one year, it is long term and if it is held for less than one year, it is short term; that it has also not been considered that its intention as recorded in the books of account has disclosed and reflected in the balance sheet and the accounting treatment of the income arising on such income, which is decisive; that the AO has erred in observing that in the case of the assessee, in respect of some securities, profits of which have been shown as short term capital gain, sales have been made prior to purchase; that this factual inaccuracy is evident from the APB 59-60; that none of the shares were sold before purchase; that in the case of shares of Dena Bank, the purchase was on 23.5.06, as evident from....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vestment has been continuing over the years; that such investment in shares has been always duly disclosed and accepted in the past; that the assessee had invested its own funds; that the sales were made after the purchases; and that the investment is clearly evidenced by the balance sheet and the profit and loss account. 8. The learned counsel for the assessee has contended that the ld. CIT(A) has erred in confirming the short term capital gain of Rs. 24,05,283/- as income from business and denied the concessional rate of tax u/s 111-A, failed to consider "CIT v. N.S.S. Investments (P)Ltd.", 158 Taxman 13(Mad). 9. The learned counsel for the assessee has further placed reliance on the following case laws:- 1. "Gopal Purohit v. JCIT" , 29 SOT 117(Mum); 2. "CIT v. Gopal Purohit", 228 CTR (Bom) 582; 3. "CIT v. Gopal Purohit", CC 16802/2010, order of the Hon'ble Supreme Court dated 15.11.2010 (copy filed); 4. "CIT v. N.S.S. Investments (P)Ltd.", 158 Taxman 13(Mad); and 5. "Asiatic Oxygen Ltd. V. DCIT", 49 ITD 355(Kol). 10. The learned DR, on the other hand, has placed strong reliance on the impugned order. It has been contended that as rightly observed by the AO, the assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ar, no profits were declared under the head of short term capital gain. 15. The observation of the AO that the assessee was a trader in the past is correct. However, besides being a trader, the assessee has also been an investor in shares. It has been classifying its investment as investment separately. This is clear from the balance sheet for the years ended 31.3.05, 31.3.06 and 31.3.07, respectively (APB 52, 54 and 19). Moreover, in the Note on treatment of securities and investment, as for the year under consideration, (APB 56-58) it has, inter alia, been contended as follows:- "The company since beginning (1995) has dealt in capital markets i.e. securities. Long back the company has resolved that the company shall act as INVESTOR in securities and earn capital gains from capital market. The investment in securities as on 31.03.2007 is Rs. 6019570/-. During the A.Y. 2007-08 the company has earned divided of Rs. 215862/-, and short term gain on shares of Rs. 2405283/-, apart from business income of Rs. 129596/- being income from trading in shares. In A.Y. 206-07 the long term capital gain was Rs. 5236576/-. The treatment of securities as INVESTMENT is based on following: - 1.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stor sells the securities purchased after waiting for some time whereas the assessee had made sales even prior to the purchase, in the case of some securities. In this regard also, the observation of the AO is not correct. The details of short term investments for assessment year 2006-07, as filed before both the Authorities below, are at APB 59-62. In the case of the shares of Dena Bank, the purchase bill (APB 61) is dated 23.5.06, whereas the sale bill (APB 62) is of 25.5.06. The purchase in this case, therefore, obviously, preceded the sale of shares. The transactions of investments were in the following scrips:- 1. Ansal Buildwell 2. Bank of Maharas 3. BSEL Infrastru 4. Dena Bank 5. Hitachi Home 6. India Cements 7. Indusind Bank 8. Lloyds Steel 9. Mahind Ugain 10. Mercator Lines 11. National Steel 12. Indian Oil 13. Sunflag Iron 14. Tata Metalik 15. Tata Steel and 16. UCO Bank 18. The short term capital gain was of Rs. 24,05,284/-. Out of this, short term capital gain of Rs. 9,06,491/- was earned on investment in the shares of BSEL Infra, an amount of Rs. 8,08,018/- was earned on investment in shares of India Cement. A perusal of the chart at APB 59-60 clearly ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....basis of the frequency of the transactions, the AO assessed the entire income as business income. This was held to be not justified, on the rule of consistency, where in the earlier year, the claim of income as shown by the assessee was accepted by the Revenue authorities. It was observed that the only apparent reason that prompted the Revenue authorities for taking a different stand in the year under consideration before the Tribunal was the imposition of Securities Transaction Tax by Finance Act, 2004, exemption of long term capital gain u/s 10(38) and concessional rate of tax at 10% of short term capital gains; that there being no change in the modus operandi of the assessee, the benefits conferred by the Legislative changes could not be taken away; that stakes being high these days, dealings in share transactions necessitates various paraphernalia in order to minimize risk, and therefore, employment of necessary infrastructure by itself again convert an investment activity into a business activity. 22. This decision of the Tribunal was upheld by the Hon'ble Bombay High Court in "CIT v. Gopal Purohit", 34 DTR 52 (supra) as well as by the Hon'ble Supreme Court. 23. In the prese....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d not have any barring on the taxability of the amount involved, if the same have been forfeited; that further, it was evident from the documents filed by the assessee that the shares have been allotted to the respective share applicants as partly paid up, but due to the non-payment of the allotment money, the shares were forfeited; that in the balance sheet, it was not mentioned that partly paid up shares had ever been issued; that from this, it appeared that the documents filed by the assessee in the assessment proceedings had been created after being confronted by the AO; and that anyhow, the assessee had failed to explain as to how the amount of Rs. 25 lakhs was not income in the hands of the assessee. It was in this manner that the AO treated the amount of Rs. 25 lakhs as taxable in the hands of the assessee and added it to the total income of the assessee for the year under consideration. 27. Before the ld. CIT(A), the assessee submitted that part payment of allotment money being 20% of the total commitment made by cheque, as follows:- Rs a) Surinder Kumar Batra 4,00,000/- b) Veena Bhatia 20,00,000/- c) Dr. Ravi Kapoor 1,00,000/- 28. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... share applicants; that these comprises copies of application, cheque, confirmation, Income Tax return, bank statement, PAN and even the request for extension of time for payment of the balance money (APB 28-50); that all these documents duly prove the genuineness of the transactions; that even otherwise, the forfeiture was made in financial year 2004-05, as is evident from the assessee's balance sheet as on 31.3.2005 (APB 52); that in financial year 2003-04, a sum of Rs. 75 lakhs was received , against which, shares of Rs. 6,25,000/- were allotted and a sum of Rs. 43,75,000/- was adjusted against share premium; that the balance of Rs. 25,00,000/- was forfeited; that this forfeiture was done in financial year 2004-05; that there was no change in financial year 2005-06, as evident from the balance sheet as on 31.3.2006 (APB 54); that as available from the balance sheet as on 31.3.07 (APB 19), there has been no change in the current financial year, i.e., assessment year 2007-08 also; that even if the forfeiture, which occurred in financial year 2004-05, is alleged as a revenue receipt, which cannot be taxed in the current financial year; that moreover, the forfeiture of shares cannot....
X X X X Extracts X X X X
X X X X Extracts X X X X
....). Thus, there has been no change in the current financial year, i.e. financial year 2006-07, relevant to assessment year 2007-08. 33. In the above position, even if the forfeiture is to be taken as a revenue receipt, since it came about in financial year 2004-05, it cannot be taxed in the current financial year. 34. It is, however, entirely another matter, that forfeiture of shares cannot be considered as a revenue receipt. This has been settled by "Multan Electric Supply Co. Ltd.", 13 ITR 457(Lahore) (supra), which has been considered and discussed by the Tribunal in "Asiatic Oxygen Ltd. V. DCIT", 49 ITD 359(Kol),(supra). In "Multan Electric Supply Co. Ltd.."(supra), it has been held, inter alia, that any profit which arises on the forfeiture of shares is neither a revenue receipt, nor profit on the working of the company, but is simply the circulating capital of the company, and as such, a capital asset. Taking note of this, in "Asiatic Oxygen Ltd."(supra), it was observed that Schedule VI - Part I of the Companies Act contains the form in which the balance sheet is to be prepared by the company and it indicate that all capital reserves of the company should be disclosed under....