M/s CHL (South) Hotels Ltd., New Delhi V. DCIT, New Delhi

CO 142/DEL/2011

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 6579 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 11 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 03-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: AMIT GOEL
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI K.D. RANJAN ITA NO. 1452/DEL/2011 ASSESSMENT YEAR: 2006-07 DEPUTY COMMISSIONER OF IT, VS. CHL (SOUTH) HOTELS LTD., CIRCLE 3(1), HOTEL CROWNE PLAZA SURYA, NEW DELHI. NEW FRIENDS COLONY, NEW DELHI. (PAN: AACCC6152E) (APPELLANT) (RESPONDENT) CROSS OBJECTION NO.142/DEL/2011 ITA NO. 1452/DEL/2011 ASSESSMENT YEAR: 2006-07 CHL (SOUTH) HOTELS LTD., VS. DEPUTY CIT, HOTEL CROWNE PLAZA SURYA, CIRCLE 3(1), NEW FRIENDS COLONY, NEW DELHI. NEW DELHI. (PAN: AACCC6152E) (CROSS-OBJECTOR) (RESPONDENT) DEPARTMENT BY: SHRI ROHIT GA RG, SR.DR ASSESSEE BY: SHRI AMIT GO EL, CA ORDER PER RAJPAL YADAV: JUDICIAL MEMBER AGAINST THE ORDER OF LEARNED CIT(APPEALS) DATED 25 .1.2011 PASSED IN ASSESSMENT YEAR 2006-07, THE REVENUE HAS FILED THE PRESENT APPEAL. ON RECEIPT OF NOTICE IN THE REVENUES APPEAL, ASSESSEE HAS FILED CROSS-OBJECTION BEARING NO.142/DEL/2011. 2. IN THE APPEAL, THE SOLITARY GRIEVANCE OF THE REV ENUE IS THAT LEARNED CIT(APPEALS) HAS ERRED IN DIRECTING THE ASSESSING O FFICER TO TREAT THE PROFIT 2 ARISEN ON SALE OF SHARES AS A SHORT TERM CAPITAL GA IN INSTEAD OF BUSINESS INCOME ASSESSED BY THE ASSESSING OFFICER. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE HAS FILED ITS RETURN OF INCOME ON 4.2.2006 DECLARING AN INCOME OF RS.31,95, 100. THE MAIN OBJECT OF THE ASSESSEE COMPANY IS TO MANAGE, ADMINISTER GU EST HOUSE, RESTAURANT/CANTEEN OR ANY OTHER SIMILAR CONNECTED B USINESS. ON AN ANALYSIS OF THE ASSESSEES BUSINESS ACTIVITY, ASSESSING OFFICER FOUND THAT SHORT TERM CAPITAL GAIN OF RS.33,67,323 SHOWN BY THE ASSESSEE ON SALE OF SHARES DESERVES TO BE ASSESSED AS A BUSINESS INCOME. HE MA DE A REFERENCE TO THE BOARDS CIRCULAR BEARING NO.4/2007 DATED 15.1.2007. HE ALSO RELIED UPON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CA SE OF CIT VS. ASSOCIATED INDUSTRIAL DEV. CO. REPORTED IN 82 ITR 3 56 AND OTHER HOST OF DECISIONS. 4. ON APPEAL, LEARNED FIRST APPELLATE AUTHORITY TOO K INTO CONSIDERATION THE TRANSACTION MADE BY THE ASSESSEE IN THE DIFFERE NT SCRIPTS AND THEIR HOLDING PERIOD. LEARNED FIRST APPELLATE AUTHORITY FURTHER F OUND THAT ASSESSING OFFICER HAS ADOPTED A CONTRADICTORY REASONING. ON T HE ONE HAND, ASSESSING OFFICER HAS OBSERVED THAT ASSESSEE IS NOT DOING ANY BUSINESS ACTIVITY AND 3 THEREFORE, EXPENSES CLAIMED BY IT DESERVE TO BE DIS ALLOWED. WHEREAS ON THE OTHER HAND, HE ASSESSED CAPITAL GAIN SHOWN BY THE A SSESSEE FROM INVESTMENT AS AN INCOME FROM SHARE TRADING BUSINESS. LEARNED C IT(APPEALS) ON AN ANALYSIS OF DIFFERENT CASE LAWS FOUND THAT THE ITAT , LUCKNOW BENCH HAD CONSIDERED A LARGE NUMBER OF CASE LAWS AND THEREAFT ER CULLED OUT FOLLOWING BROAD PRINCIPLES TO TEST NATURE OF SHARE TRANSACTIO N, WHETHER BUSINESS OR AN INVESTMENT: 1)WHAT IS THE INTENTION OF THE ASSESSEE AT THE TIME OF PURCHASE OF THE SHARES (OR ANY OTHER ITEM). THIS CAN BE FOUND OUT FROM THE TREATME NT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER IT IS TREATED AS STOCK-IN -TRADE OR INVESTMENT. WHETHER SHOWN IN OPENING/CLOSING STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET. (2)WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREON ? NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR T HE PURPOSES OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. (3)WHAT IS THE FREQUENCY OF SUCH PURCHASES AND DISP OSAL IN THAT PARTICULAR ITEM ? IF PURCHASE AND SALE ARE FREQUENT, OR THERE ARE SUBSTA NTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PART ICULAR ITEM IS INDICATIVE OF INTENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PU RCHASES AND SALES AND THE HOLDINGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTI NG (HIGH TRANSACTIONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AN D HIGH HOLDINGS INDICATE INVESTMENT). 4 (4)WHETHER PURCHASE AND SALE IS FOR REALIZING PROFI T OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION IN ITS VALUE ? FORMER WI LL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTMENT. IN THE CASE OF SHARES WHETHE R INTENTION WAS TO ENJOY DIVIDEND AND NOT MERELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN ESSENTIAL INGREDIENT OF TRADE. (5)HOW THE VALUE OF THE ITEMS HAS BEEN TAKEN IN THE BALANCE SHEET ? IF THE ITEMS IN QUESTION ARE VALUED AT COST, IT WOULD INDICATE THAT THEY ARE INVESTMENTS OR WHERE THEY ARE VALUED AT COST OR MARKET VALUE OR NET REALIZABL E VALUE (WHICHEVER IS LESS), IT WILL INDICATE THAT ITEMS IN QUESTION ARE TREATED AS STOC K-IN-TRADE. (6)HOW THE COMPANY (ASSESSEE) IS AUTHORIZED IN MEMO RANDUM OF ASSOCIATION/ARTICLES OF ASSOCIATION ? WHETHER FOR TRADE OR FOR INVESTMEN T ? IF AUTHORIZED ONLY FOR TRADE, THEN WHETHER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY ? AND VICE VERSA. (7)IT IS FOR THE ASSESSEE TO ADDUCE EVIDENCE TO SHO W 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. IF THE ASSESSEE IS ABLE TO D ISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT (OR SAY, STOCK-IN-TRADE) THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPA RENT IS NOT REAL. (8)THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHAR ES (OR FOR THAT MATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FREQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY T HAT ASSESSEE WAS HOLDING THE SHARES (OR THE ITEMS IN QUESTION) FOR INVESTMENT. (9)ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITE S FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPL YING WITH THEM. WHETHER IT IS THE 5 ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUIREMENTS, IF IT IS CLAIMED THAT IT IS DEALING AS A TRADER IN THAT ITEM ? WHETH ER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM) SINCE BEGINNING O R WHEN PURCHASES WERE MADE ? (10)IT IS PERMISSIBLE AS PER CBDTS CIRCULAR NO. 4 O F 2007 OF 15TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLIOS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT IS MAINTAINING SEPARATE ACCOUNT FOR EACH TYPE, T HERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE IS NO INTERMINGLING OF HOLDINGS IN THE TW O PORTFOLIOS. (11)NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONCLUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FAC TORS HAS TO BE SEEN. 5. LEARNED CIT(APPEALS) ANALYZED THE APPLICATION OF THESE TESTS DECISIONS ON THE FACTS OF THE ASSESSEES CASE AND A RRIVED AT A CONCLUSION THAT SHORT TERM CAPITAL GAIN SHOWN BY THE ASSESSEE DESER VES TO BE ACCEPTED. LEARNED DR RELIED UPON THE ORDER OF THE ASSESSING O FFICER, WHEREAS LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE ORDER OF T HE LEARNED CIT(APPEALS). HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NO OBJEC TION IF IT IS TO BE ASSESSED AS A BUSINESS INCOME. HE POINTED OUT THAT THIS FACT WAS HIGHLIGHTED BEFORE THE LEARNED CIT(APPEALS) ALSO. THE LEARNED COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TOWARDS PAGE NO.8 OF THE PAPER BOOK, WHERE PROFIT AND LOSS ACCOUNT FOR THE PERIOD ENDED ON 31.3.2006 HAS BEEN PLACED ON RECORD. ON THE STRENGTH OF THESE DETAILS, HE SUBMITTED THAT THERE IS DIMINUTION IN THE VALUE OF INVESTMENT AT RS.1,46,87,183. IF IT IS ASSESSED AS A BUSINESS INCOME THEN ON 6 DIMINUTION ON THE VALUE OF STOCK, A SET OFF OF IS T O BE ALLOWED TO THE ASSESSEE. REALIZING THIS FACTOR, LEARNED FIRST APPELLATE AUTH ORITY HAS HELD IT AS AN INVESTMENT ONLY. THUS, IN SUCH SITUATION, THE BENEF IT WILL GO TO THE ASSESSEE ONLY. LEARNED DR ON THIS PROPOSITION WAS UNABLE TO GIVE ANY EXPLANATION. 6. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTAN CES, THE BROAD TESTS CONSIDERED BY THE LEARNED CIT(APPEALS) AND APPLIED ON THE DETAILS OF THE SHARE TRANSACTIONS. WE ARE OF THE VIEW THAT LEARNE D FIRST APPELLATE AUTHORITY HAD ARRIVED AT A RIGHT CONCLUSION. LEARNE D FIRST APPELLATE AUTHORITY HAS OBSERVED THAT FREQUENCY IS NOT TOO MU CH. THE ASSESSEE WAS NOT HABITUALLY DEALING IN THE SHARES. IT HAS A SEPARATE INVESTMENT ACCOUNT. THUS, TAKING INTO CONSIDERATION ALL THESE ASPECTS, WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. 7. IN THE CROSS-OBJECTION, ASSESSEE HAS PLEADED THA T ASSESSING OFFICER HAS ERRED IN DISALLOWING THE EXPENSES CLAIMED BY THE AS SESSEE. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HAS DEBITED A TOTAL EXPE NDITURE OF RS.13,64,820. THE DETAILS OF SUCH EXPENDITURE HAVE BEEN NOTICED B Y THE ASSESSING OFFICER ON PAGE 3 OF THE ASSESSMENT ORDER. ASSESSING OFFICE R HAS DISALLOWED THE CLAIM OF ASSESSEE ON THE GROUND THAT ASSESSEE HAS N OT BEEN CARRYING OUT ANY BUSINESS ACTIVITY. 7 8. APPEAL TO THE LEARNED CIT(APPEALS) DID NOT BRING ANY RELIEF TO THE ASSESSEE. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED B EFORE US THAT HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. RAMPUR TIMBER & TURNERY CO. LTD. REPORTED IN 129 ITR 58 HAS HELD THAT EXPENSES INCURRED FOR RETAINING THE STATUS OF ASSESSEE COMPANY, DESERVES TO BE ALLOWED. ON THE STRENGTH OF THIS DECISION, HE POINTED OUT THAT MISCELLANEOUS EXPENSE S, NAMELY, SALARY AND LEGAL EXPENSES OUGHT NOT TO BE DISALLOWED. HE FURTH ER POINTED OUT THAT THERE IS A DOUBLE DISALLOWANCES BY THE ASSESSING OFFICER. THE ASSESSEE ITSELF DISALLOWED CERTAIN EXPENSES WHICH HAVE BEEN FURTHER DISALLOWED BY THE ASSESSING OFFICER. THE LEARNED COUNSEL FOR THE ASSE SSEE FURTHER POINTED OUT THAT ASSESSEE HAS A INTEREST INCOME ON FDRS AT RS.1 0,91,095. IT HAS CLAIMED EXPENSES PERTAINING TO SALARIES AT RS.1,64,000, ACC OUNTANCY CHARGES AT RS.45,000. OUT OF THESE EXPENSES, ASSESSING OFFICER OUGHT TO HAVE ALLOWED SOME AMOUNT TO THE ASSESSEE. SIMILARLY, IT INCURRED EXPENSES TOWARDS INTEREST ON OVER DRAFT AND AGAINST INTEREST INCOME SUCH EXPE NSES OUGHT TO BE ALLOWED. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER POINTE D OUT THAT ASSESSEE ITSELF DISALLOWED PRELIMINARY EXPENSES, PROFESSIONAL FEE/A UDIT FEES AND DONATIONS. 8 IT HAS ALSO DISALLOWED RS.79,473 UNDER SEC. 14A. TH US, CREDIT OF RS.1,80,973 OUGHT TO BE GRANTED AGAINST THE TOTAL EXPENSES. IN OTHER WORDS, ACCORDING TO THE LEARNED COUNSEL FOR THE ASSESSEE, THE EXPENSES TO THE EXTENT OF RS.1,80,973 HAS BEEN ALLOWED TWICE. LEARNED DR ON T HE OTHER HAND, RELIED UPON THE ORDER OF THE LEARNED CIT(APPEALS). 10. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS A ND GONE THROUGH THE RECORD CAREFULLY. ASSESSING OFFICER HAS DISALLOWED THE EXPENSES DEBITED BY THE ASSESSEE ON THE GROUND THAT NO BUSINESS ACTIVIT IES IS BEING CARRIED OUT BY THE ASSESSEE. THIS FINDING OF THE ASSESSING OFFICER WAS SELF-CONTRADICTORY BECAUSE ON THE ONE HAND ASSESSING OFFICER HAS ASSES SED THE PROFIT AROSE ON ACCOUNT OF SALE OF SHARES AS A BUSINESS INCOME, INS TEAD OF CAPITAL GAIN CLAIMED BY THE ASSESSEE. ON THE OTHER HAND, HE OBSE RVED THAT NO BUSINESS ACTIVITY WAS CARRIED OUT BY THE ASSESSEE. HOWEVER, THIS ISSUE DOES NOT CREATE ANY INFLUENCE ON THE ALLOWABILITY OF EXPENSES, BECA USE WE HAVE UPHELD THE FINDINGS OF THE LEARNED CIT(APPEALS) THAT PROFIT AR ISEN ON SALE OF SHARES IS TO BE ASSESSED AS A CAPITAL GAIN. THE ASSESSEE NO DOUB T HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY, IT HAS JUST EARNED INTEREST INCO ME AND CAPITAL GAIN ON SALE OF SHARES BUT CERTAIN EXPENSES WHICH ARE ESSENTIAL FOR MAINTAINING THE STATUS OF ASSESSEE AS A COMPANY DESERVES TO BE ALLOWED AS HELD BY THE HON'BLE 9 ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. RAMPUR TIMBER & TURNERY CO. (SUPRA). THEREFORE, WE REMIT THIS ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR FRESH EXAMINATION. HE SHALL VERIFY THE FACTS ABOUT THE DOUBLE DISALLOWANCES OF RS.1,80,973 AND ALSO CONSIDERED THE OTHER EXPENS ES WHICH CAN BE ALLOWED TO THE ASSESSEE OUT OF MISCELLANEOUS EXPENSES FOR M AINTAINING ITS STATUS. THE OBSERVATIONS MADE BY US WILL NOT IMPAIR OR INJURE T HE CASE OF THE ASSESSING OFFICER AND WILL NOT CAUSE ANY PREJUDICE TO THE DEF ENCE/EXPLANATION OF THE ASSESSEE. ASSESSING OFFICER SHALL DECIDE THIS ISSUE IN ACCORDANCE WITH LAW AFTER PROVIDING DUE OPPORTUNITY OF HEARING TO THE A SSESSEE. 11. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND THAT THE CROSS OBJECTION FILED BY THE ASSESSEE IS ALLOWED FOR STAT ISTICAL PURPOSES. DECISION PRONOUNCED IN THE OPEN COURT ON 14.10.2011 SD/- SD/- ( K.D. RANJAN ) ( RAJPAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 14 /10/2011 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR