SWAN RIVER FINANCIAL SERVICES LTD, MUMBAI V. ITO 7(2)(4), MUMBAI

CO 75/MUM/2011

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7692 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 7 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 14-09-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 06-09-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 06-06-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B V JHAVERI
• Assessee Lawyers: RAJASHRI DWIVEDI
• Keywords: Capital asset; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH J BENCH BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND SHRI RAJENDRA (ACCOUNTANT MEMBER) ITA NO.3588/MUM/2010 ASSESSMENT YEAR: 2005-06 INCOME TAX OFFICER 7(2)(4), MUMBAI. M/S. SWAIN RIVER FINANCIAL SERVICES LTD., KALYAN BHAVAN, 1 ST FLOOR, 183, J.S.S.ROAD, OPP: GAIWADI, GIRGAON, MUMBAI-004 PA NO.AAACS 9228 B (APPELLANT) VS. (RESPONDENT) C.O.NO.75/MUM/2011 (ARISING OUT OF ITA NO.3588/MUM/2010) ASSESSMENT YEAR: 2005-06 M/S. SWAIN RIVER FINANCIAL SERVICES LTD., KALYAN BHAVAN, 1 ST FLOOR, 183, J.S.S.ROAD, OPP: GAIWADI, GIRGAON, MUMBAI-004 PA NO.AAACS 9228 B INCOME TAX OFFICER 7(2)(4), MUMBAI. (APPELLANT) VS. (RESPONDENT) REVENUE BY : RAJASHRI DWIVEDI RESPONDENT BY: SHRI B.V.JHAVERI DATE OF HEARING: 6.9.2012 DATE OF PRONOUNCEMENT: 14 .9.2012 ORDER PER B.R.MITTAL, JM: THE DEPARTMENT HAS FILED THIS APPEAL FOR ASSESSMEN T YEAR 2005-06 AGAINST ORDER DATED 4.1.2010 OF LD CIT(A)-13, MUMBAI ON THE FOLLO WING GROUNDS: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE CIT(A) ERRED IN LAW IN HOLDING THAT THE INCOME FROM SALE OF SHAR ES WAS IN THE NATURE OF SHORT TERM CAPITAL GAINS WHEN THE SHARES WERE BEING HELD AS STOCK-IN- TRADE EVER SINCE 31 .03.2002 AS SHOWN IN THE BALANC E SHEET OF THE EARLIER YEARS? ITA NO.3588/MUM/2010 C.O.NO.75/M/2011 ASSESSMENT YEAR: 2005-06 2 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN LAW IN NOT APPRECIATING THE FACT THAT THERE WAS NO PROVISION IN THE INCOME TAX ACT TO CONVERT STOCK INTO INVESTMENTS AN D AN ITEM IF ONCE SHOWN AS STOCK HAS TO CONTINUE AS STOCK? 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE THE CIT(A) ERRED IN LAW IN NOT APPRECIATING FACT THAT THE SHARES SOL D WERE TREATED AS INVESTMENTS ONLY TO AVOID TAX BY RESORTING TO COLOU RFUL DEVICES WHICH ACCORDING TO THE SUPREME COURT CANNOT BE PART OF TA X PLANNING? 2. THE ASSESSEE HAS FILED CROSS OBJECTION ON THE FO LLOWING GROUND: THE CIT(A) ERRED IN HOLDING THAT THE PROFITS ON SA LE OF SHARES AMOUNTING TO RS.14,75,063 IS TO BE TAXED AS SHORT TERM CAPIT AL GAINS AND NOT AS LONG TERM CAPITAL GAINS EVEN THOUGH THE FACTS ON RECORD CLEARLY SHOW THAT THE SHARES SOLD BY THE ASSESSEE COMPANY IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2005-06 WERE HELD PRIOR TO 31.3.2002. 3. THE RELEVANT FACTS ARE THAT ASSESSEE IS A PRIVAT E LIMITED COMPANY ENGAGED IN THE BUSINESS OF GRANTING AND ARRANGING LOANS & ADVANCES AND CARRYING OUT ACTIVITIES IN SHARES. ASSESSEE IS A NON-BANKING FINANCE COMPANY (NBFC) REGISTERED WITH RESERVE BANK OF INDIA. 4. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, ASSESSEE COMPANY HAS CONVERTED STOCK-IN-TRADE AS ON 1.4.2004 OF 59 SCR IPS OUT OF 60 SCRIPS INTO INVESTMENT BY PASSING A RESOLUTION, COPY PLACED AT PAGES 12 AN D 13 OF PB AND CREDITED THE DIFFERENCE BETWEEN THE COST AND MARKET PRICE OF RS. 38,974 TO PROFIT AND LOSS ACCOUNT AS UNDER: :A: SHARES STATED AT LOWER OF COST OR MARKET VALUE : RS.1930251 LESS: ADJUSTED FOR SHARES OF RUSHABH PRECISION CONTINUING AS STOCK-IN-TRADE : RS. 7920 RS.1922331 B: ACTUAL COST OF THE ABOVE SHARES(NEW HELD AS INVESTMENTS) : RS.1969225 LESS: ADJUSTED FOR SHARES OF RUSHABH PRECISION AMOUNTING AS STOCK-IN-TRADE : RS. 7920 RS.1961305 C: DIFFERENCE OF A&B CREDITED TO P&L A/C UNDER SHARES STOCK ADJUSTMENT ACCOUNT FOR THE Y.R. 31.3.05. RS . 38974 ITA NO.3588/MUM/2010 C.O.NO.75/M/2011 ASSESSMENT YEAR: 2005-06 3 5. 29 SCRIPS OUT OF THE SAID 59 SCRIPS WERE SUBSEQU ENTLY SOLD BY THE ASSESSEE DURING THE YEAR ON 29.1.2.2004 AND THE PROFIT ARISING THER EFROM OF RS.14,75,053 WAS SHOWN AS LONG TERM CAPITAL GAIN AND CLAIMED EXEMPT UNDER SEC TION 10(38) OF THE ACT. AO HELD THAT SAID SCHEME ADOPTED BY THE ASSESSEE WAS TO AV OID TAX AND CANNOT BE ACCEPTED AT FACE VALUE. THE FORM OF THE TRANSACTION AS ADOPTED BY THE ASSESSEE IS NOT BINDING ON REVENUE AUTHORITIES AND THE SUBSTANCE HAS TO BE SEE N. AO DID NOT ACCEPT THE CONTENTION OF ASSESSEE THAT THE TAXING AUTHORITIES CANNOT GO B EYOND THE FORM OF TRANSACTION, LOOK INTO THE SUBSTANCE AND REVEAL THE REAL INTENTION. ACCORDINGLY, AO CONSIDERED THE SAID PROFIT ARISING OUT OF SUCH SALE OF SHARES OF RS.14, 75,053 AS BUSINESS INCOME BEING SHARE TRADING PROFIT. ACCORDINGLY, CLAIM OF THE ASSESSEE THAT SAID PROFIT IS ARISING OUT OF SALE OF SHARES AS LONG TERM CAPITAL GAIN AND REDUCED THE SA ME FROM NET PROFIT FOR COMPUTING THE BOOK PROFIT U/S.115JB OF THE ACT WAS ALSO REJECTED BECAUSE THE SAID PROFIT WAS CONSIDERED BY THE AO AS SHARE TRADING PROFIT. BEIN G AGGRIEVED, ASSESSEE FILED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 6. LD CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF A SSESSEE HAS HELD THAT SHARES WERE HELD BY THE ASSESSEE FOR A PERIOD LESS THAN 12 MONTHS FROM THE DATE THEY WERE CONVERTED INTO INVESTMENTS AND, ACCORDINGLY, CONSID ERED PROFIT/GAIN ON SALE OF SHARES AS SHORT TERM CAPITAL GAIN. HENCE, THIS APPEAL BY THE DEPARTMENT DISPUTING THE ORDER OF LD CIT(A) TO TREAT AS SHORT TERM CAPITAL GAIN AS AGAIN ST BUSINESS PROFIT CONSIDERED BY THE AO. 7. ASSESSEE HAS ALSO FILED CROSS OBJECTION DISPUTIN G THE ORDER OF LD CIT(A) TO TREAT THE PROFIT ON SALE OF SHARES AS SHORT TERM CAPITAL GAIN INSTEAD OF LONG TERM CAPITAL GAIN. 8. DURING THE COURSE OF HEARING, LD D.R. SUPPORTED THE ACTION OF AO AND SUBMITTED THAT ASSESSEE IS A NBFC AND IS DEALING IN BUSINESS OF SHARES. HE SUBMITTED THAT ASSESSEE PASSED A RESOLUTION ON 1.4.2004 TO SEGREG ATE ITS STOCK IN TRADE OF SHARES INTO INVESTMENT AND SOME OF THE SHARES WERE KEPT AS STOC K IN TRADE. HE REFERRED PAGES 12 & 13 OF PB, WHICH IS A COPY OF RESOLUTION PASSED BY T HE BOARD OF DIRECTORS OF ASSESSEE COMPANY TO TREAT THE STOCK-IN-TRADE OF SHARES AS IN VESTMENT W.E.F. 1.4.2004 AND SUBMITTED THAT NO REASONS OR SCIENTIFIC METHOD HAS BEEN ADOPTED BY THE ASSESSEE WHILE CONVERTING FEW OF THE SHARES HELD IN STOCK-IN-TRAD E AS INVESTMENT. HE SUBMITTED THAT A ITA NO.3588/MUM/2010 C.O.NO.75/M/2011 ASSESSMENT YEAR: 2005-06 4 COLOURABLE DEVICE HAS BEEN ADOPTED TO VOID TAX. HE SUBMITTED THAT ASSESSEE HELD SHARES ONLY FOR A PERIOD OF NINE MONTHS AND, WITHOU T PREJUDICE TO ABOVE, EVEN IF SCHEME OF THE ASSESSEE IS ACCEPTED TO TREAT THE CON VERSION OF STOCK-IN-TRADE INTO INVESTMENT, THE PROFIT COULD BE CONSIDERED ONLY AS SHORT TERM CAPITAL GAIN AND NOT LONG TERM CAPITAL GAIN. 9. ON THE OTHER HAND, LD A.R. MADE HIS SUBMISSIONS STATING THAT THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY TOOK A CONSCIOUS DECISION TO COVERT ITS STOCK-IN-TRADE AS ON 31.3.2004 AS INVESTMENT BY CONSIDERING THE VA LUE OF SHARES AT LOWER OF COST OR MARKET VALUE AND THE DIFFERENCE BETWEEN THE COST OF SHARES HELD AS STOCK-IN-TRADE AND DIFFERENCE OF RS.38,974 WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT. HE SUBMITTED THAT THERE WAS NO TAX AVOIDANCE SCHEME ADOPTED BY THE AS SESSEE. HE SUBMITTED THAT SAID SHARES WERE PURCHASED PRIOR TO 31.3.2002 THOUGH SHO WN UNDER THE HEAD STOCK-IN- TRADE BUT HAD NOT BEEN TRADED AND CONTINUED TO BE HELD AS INVESTMENT ONLY. HE SUBMITTED THAT SAID SHARES WERE SOLD BY THE ASSESSE E COMPANY, CONSIDERING MARKET CONDITION. HE SUBMITTED THAT THE PERIOD OF HOLDING PRIOR TO CONVERSION OF STOCK-IN-TRADE TO INVESTMENT HAS TO BE CONSIDERED WHILE COMPUTING THE PERIOD OF HOLDING AND PLACED RELIANCE OF ITAT IN THE CASE OF ACIT VS. BRIGHT STA R INVESTMENT PVT LTD., 24 SOT 288(MUM). HE SUBMITTED THAT HONBLE BOMBAY HIGH CO URT HAS ALSO CONSIDERED IN THE CASE OF KESHAVJI KARSANJI VS CIT, 207 ITR 737(BOM) AND HONBLE MADRAS HIGH COURT IN THE CASE OF NACHIAPPAN M VS. CIT, 230 ITR 98(MAD) T HAT THE PERIOD OF TOTAL HOLDING HAS TO BE CONSIDERED IRRESPECTIVE TO THE FACT AS TO WHE THER THE SAID ASSET IS HELD AS STOCK-IN- TRADE OR AS INVESTMENT AND THE DATE OF ACQUISITION AT THE TIME OF SALE IS TO BE CONSIDERED. HE SUBMITTED THAT SIMILAR ISSUE WAS ALS O CONSIDERED IN THE CASE OF CIT VS. JANHAVI INVESTMENTS PVT LTD, 304 ITR 276, WHEREIN, IT WAS HELD THAT COSTS OF ACQUISITION CAN ONLY BE THE COST ON THE DATE OF THE ACTUAL ACQU ISITION AND, THEREFORE IS NO ACQUISITION OF SHARES WHEN THE SAME WERE CONVERTED FROM STOCK-I N-TRADE TO A CAPITAL ASSET. LD A.R. SUBMITTED THAT THE ENTIRE PROFIT HAS TO BE CONSIDER ED AS LONG TERM CAPITAL GAIN AND, ACCORDINGLY, CROSS OBJECTION FILED BY THE ASSESSEE SHOULD BE ALLOWED. 10 WE HAVE CONSIDERED SUBMISSIONS OF LD REPRESENTAT IVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO CONSIDERED THE REL IANCE PLACED BY LD A.R. ITA NO.3588/MUM/2010 C.O.NO.75/M/2011 ASSESSMENT YEAR: 2005-06 5 11. WE OBSERVE THAT SHARES OF 59 SCRIPS WERE HELD B Y THE ASSESSEE AS STOCK-IN-TRADE AS ON 31.3.2004. ASSESSEE IS A NBFC AND IS CARRYIN G ON TRADING IN SHARES. ON PERUSAL OF BOARD RESOLUTION, COPY PLACED AT PAGES 12 & 13 O F PB, WE OBSERVE THAT ASSESSEE HAS PASSED A RESOLUTION STATING THAT THE AMOUNT OF RS.1 9,22,313 BEING THE VALUE OF VARIOUS SHARES AS PER DETAILS GIVEN THEREIN IS CONSIDERED A S STOCK-IN-TRADE AS ON 31.3.2004 BE TRANSFERRED TO INVESTMENT ACCOUNT, WHEREIN, THE NAM E OF THE COMPANY AND VALUE AS ON 31.3.2004 HAS BEEN STATED. WE OBSERVE THAT IN THE SAID RESOLUTION, THERE IS NO SUCH MENTION AS TO WHY THE SAID STOCK-IN-TRADE IS CONVER TED INTO INVESTMENT. THE SAID RESOLUTION DOES NOT INDICATE INTENTION OF THE ASSES SEE THAT IT WAS DONE WITH THE MOTIVE TO HOLD THE SAID SHARES AS AN INVESTMENT. 12. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HO LCK LARSEN VS CIT, 85 ITR 285 (BOM), WHICH WAS AFFIRMED BY HONBLE SUPREME COURT, REPORTED IN 160 ITR 67((SC) HELD THAT WHETHER TRANSACTION OF SALE AND PURCHASE OF S HARES WERE TRADING TRANSACTIONS OR THEY WERE IN THE NATURE OF INVESTMENT IS A MIXED QU ESTION OF LAW AND FACTS. FURTHER, HONBLE SUPREME COURT HAS HELD IN THE CASE OF RAMNARAIN SONS (P) LTD. V. COMMISSIONER OF INCOME-TAX, 41 ITR 534(SC) HELD THAT THE INTENTION OF THE ASSESSEE AT THE TIME OF ACQUISITION OF THE ASSET, W HETHER THE PURCHASE IS FOR THE PURPOSES OF LONG TERM INVESTMENT OR FOR THE PURPOSE S OF DEALING IN SHARES IS THE DOMINANT FACTOR FOR DETERMINING THE NATURE OF ASSET . AS MENTIONED HEREINABOVE, FROM THE SAID RESOLUTION PASSED BY THE BOARD OF DIRECTOR S OF ASSESSEE COMPANY AS ON 1.4.2004, THERE IS NO SUCH PURPOSE, WHICH COULD BE REVEALED AS TO WHY ASSESSEE HAS TRANSFERRED SHARES KEPT IN STOCK-IN-TRADE TO INVEST MENT. EVEN IF WE GO INTO THE AVERMENTS OF THE ASSESSEE THAT ASSESSEE DECIDED TO HOLD THE SAID SHARES AS AN INVESTMENT, THE SAID INTENTION OF THE ASSESSEE IS N OT FORTIFIED BY THE SUBSEQUENT ACT OF THE ASSESSEE AS ASSESSEE SOLD THE SHARES WITHIN A P ERIOD OF 9 MONTHS FROM THE DATE THEY WERE CONVERTED FROM STOCK IN TRADE TO INVESTMENT. CONSIDERING THE FACTS OF THE CASE IN ENTIRETY, WE ARE OF THE CONSIDERED VIEW THAT AO IS JUSTIFIED TO TREAT THE CONVERSION OF SHARES BY THE ASSESSEE FROM STOCK-IN-TRADE TO INVES TMENT AS A SCHEME TO AVOID PAYMENT OF TAX. IN VIEW OF ABOVE, THE CASES CITED BY LD A.R. DO NOT REQUIRE ANY CONSIDERATION. HENCE, WE REVERSE THE ORDER OF LD CIT(A) AND CONFIR M THE ACTION OF AO THAT THE SAID PROFIT TO THE ASSESSEE COMPANY IS THE SHARE TRADING PROFIT FROM ITS SHARE TRADING ACTIVITIES ITA NO.3588/MUM/2010 C.O.NO.75/M/2011 ASSESSMENT YEAR: 2005-06 6 AND NOT OUT OF ITS INVESTMENT. IN VIEW OF OUR SAID FINDING, CROSS OBJECTION OF THE ASSESSEE IS DISMISSED AND GROUNDS OF APPEAL TAKEN B Y DEPARTMENT ARE ALLOWED. 13. IN THE RESULT, APPEAL FILED BY DEPARTMENT IS AL LOWED AND CROSS OBJECTION OF ASSESSEE IS REJECTED. PRONOUNCED IN THE OPEN COURT ON 14 TH SEPTEMBER, 2012 SD/- (RAJENDRA ) ACCOUNTANT MEMBER SD/- (B.R. MITTAL) JUDICIAL MEMBER MUMBAI, DATED 14 TH SEPTEMBER, 2012 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),13, MUMBAI 4. COMMISSIONER OF INCOME TAX, 7 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH J MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI