CS Holdings Private Limited, CHENNAI V. ACIT, CHENNAI

ITA 1699/CHNY/2013

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68837 (ITAT-CHENNAI)
• Duration Of Justice: 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 14-10-2013
• Assessment Year: 2010-2011
• Appeal Filed On: 05-09-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAJI P JACOB ADL
• Assessee Lawyers: R SIVARAMAN
• Keywords: Capital asset; Business income; Date of conversion; Revised return
• Section: 45(2); 115JB; 10

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI BEFORE DR. O.K. NARAYANAN, VICE PRESIDENT & SHRI VIKAS AWASTHY, JUDICIAL MEMBER I.T.A. NO. 1699/MDS/2013 ASSESSMENT YEAR : 2010-11 CS HOLDINGS PRIVATE LIMITED, SAI SURAKSHA SECOND FLOOR, OLD NO.14, NEW NO.7, NANDANAM EXTENSION 11 TH STREET, NANDANAM, CHENNAI 600 035. [PAN: AACCC 8370 Q] (APPELLANT) VS ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE - I(3) CHENNAI. (RESPONDENT) APPELLANT BY : SHRI R. SIVARAMAN, ADVOCATE RESPONDENT BY : SHRI SHAJI P. JACOB, ADL.CIT DATE OF HEARING : 14-10-2013 DATE OF PRONOUNCEMENT : 20-11-2013 O R D E R PER VIKAS AWASTHY, JUDICIAL MEMBER: THE APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS)-I, CHENN AI DATED 27-08-2013 RELEVANT TO THE ASSESSMENT YEAR (AY) 201 0-11. I.T.A. NO. 1699/MDS/2013 2 2. THE ASSESSEE-COMPANY FILED ITS ORIGINAL RETURN OF INCOME FOR THE AY.2010-11 ON 23-09-2010 DECLARING NIL INCOME . THEREAFTER, ASSESSEE FILED ITS REVISED RETURN OF INCOME ON 11-1 0-2010 DECLARING NIL INCOME UNDER NORMAL PROVISIONS AND BOOK PROFIT ` 52,27,71,157/- UNDER THE PROVISIONS OF SECTION 115J B OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT). LATER ON, THE ASSESSEE FILED ANOTHER REVISED RETURN ON 24 -01-2012 DECLARING NIL INCOME UNDER NORMAL PROVISIONS AND BOOK PROFIT U/S. 115JB AS ` 52,34,23,763/-. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND NOTICE U/S.143(2) WAS ISS UED TO THE ASSESSEE ON 25-08-2011. IN ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE-COMPAN Y WAS INCORPORATED IN THE YEAR 2007. THE ASSESSEE HAD BO RROWED FUNDS FROM M/S. S & M ASSOCIATES FOR PURCHASE OF SHARES. DURING THE AY.2007-08, THE ASSESSEE PURCHASED SHARES OF SHRIRA M TRANSPORT AND FINANCE CO. LTD., TO THE TUNE OF ` 2,73,64,742/- AND HELD THE SAME AS INVESTMENT. IN THE AY. 2008-09, THE ASSESS EE CONVERTED THE ENTIRE SHARES HELD AS INVESTMENT TO STOCK IN TR ADE. THE ASSESSEE FURTHER PURCHASED SHARES TO THE TUNE OF ` 13,87,729/-. THEREFORE, AS ON 31-03-2008, THE CLOSING STOCK OF S HARES WAS ` 2,87,52,471/-. THE ASSESSEE CLAIMED INTEREST ON BO RROWED CAPITAL AND THUS DECLARED BUSINESS LOSS OF ` 63,74,720/- IN ITS I.T.A. NO. 1699/MDS/2013 3 RETURN OF INCOME FOR THE AY.2008-09. IN THE AY. 20 09-10, THE ASSESSEE CONTINUED TO HOLD THE SHARES AS STOCK IN T RADE. DURING THE AY.2009-10, THE ASSESSEE SOLD CERTAIN SHARES. THE PROFIT ON SALE OF SHARES WAS SHOWN AS BUSINESS INCOME IN TH E PROFIT & LOSS A/C. AFTER NETTING OF THE INTEREST PAYMENT ON BORROWED CAPITAL, THE ASSESSEE DECLARED A BUSINESS LOSS OF ` 9,06,38,717/- IN THE RETURN OF INCOME FOR THE PERIOD RELEVANT TO THE AY. 2009-10. FOR THE AY. 2010-11, THE ASSESSEE VIDE BOARDS RESO LUTION DATED 01-04-2009, CONVERTED THE SHARES HELD AS STOCK IN T RADE TO INVESTMENT. DURING THE PERIOD RELEVANT TO AY. 2010 -11, THE ASSESSEE SOLD SHARES AND INCOME FROM SALE OF SHARES ` 53,06,73,819/- WAS SHOWN AS LONG TERM CAPITAL GAIN. THE ASSESSEE CLAIMED EXEMPTION OF THE DIVIDEND EARNED D URING RELEVANT PERIOD AS WELL AS LONG TERM CAPITAL GAIN A ND DIS-ALLOWED INTEREST EXPENSES TO THE TUNE OF ` 12,84,50,420/- U/S.14A THEREBY DECLARING NET LOSS OF ` 6,847/-. THE BOOK PROFIT U/S.115JB WAS ASSESSED AS ` 52,34,23,763/-. THE ASSESSING OFFICER WAS OF THE OPINION THAT THE SOLE MOTIVE OF CONVERTING STOCK IN TRADE INTO INVESTMENT DURING THE AY. 2010-11 WAS EVASION OF TA X. THE ASSESSING OFFICER HELD THAT TRADING IN SHARES IS NO T INCIDENTAL ACTIVITY BUT MAIN BUSINESS ACTIVITY OF THE ASSESSEE . HENCE, IT IS I.T.A. NO. 1699/MDS/2013 4 NOTHING BUT AN ADVENTURE IN NATURE OF TRADE, THE PROFIT OUT OF WHICH IS TO BE ASSESSEE UNDER THE HEAD BUSINESS INCOME. AGGRIEVED AGAINST THE ASSESSMENT ORDER DATED 15- 02-2013, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(APP EALS). THE CIT(APPEALS) VIDE ORDER DATED 27-08-2013, CONFIRMED THE FINDINGS OF THE ASSESSING OFFICER ON THIS ISSUE AND DISMISSE D THIS GROUND OF APPEAL OF THE ASSESSEE. THE ASSESSEE HAS COME IN SECOND APPEAL BEFORE THE TRIBUNAL ASSAILING THE ORDER OF THE CIT(APPEALS). 3. SHRI R. SIVARAMAN, ADVOCATE APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT IN THE AY.2007-08 AFTER THE INCORPORATION OF THE ASSESSEE-COMPANY, THE SHARES WERE HELD BY TH E ASSESSEE AS INVESTMENTS. SUBSEQUENTLY, IN THE AY.2008-09, TH E INVESTMENTS WERE CONVERTED INTO STOCK IN TRADE. HOWEVER. THE D ESIRED RESULTS WERE NOT ACHIEVED BY THE ASSESSEE. THEREFORE, THE BOARD OF DIRECTORS VIDE RESOLUTION DATED 01-04-2009 AGAIN CO NVERTED THE SHARES HELD AS STOCK IN TRADE TO INVESTMENT. THE S HARES WERE SOLD IN THE MONTH OF NOVEMBER 2009 I.E., MORE THAN SEVEN MONTHS FROM THE DATE OF CONVERSION OF SHARES FROM STOCK IN TRAD E TO INVESTMENT. THE TREATMENT OF SHARES FROM INVESTMENT TO STOCK IN TRADE AND AGAIN BACK TO INVESTMENTS WAS THE POLICY DECISION O F THE COMPANY I.T.A. NO. 1699/MDS/2013 5 WHICH WAS DULY APPROVED BY THE BOARD OF DIRECTORS. THE INCOME FROM SALE OF SHARES WAS OFFERED TO TAX AS LONG TERM CAPITAL GAINS ALTHOUGH EXEMPT UNDER THE PROVISIONS OF SECTION 10 OF THE ACT. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT IT IS THE PREROGATIVE OF THE ASSESSEE TO DECIDE WHETHER TO TR EAT THE SHARES AS INVESTMENT OR STOCK IN TRADE. FOR TREATING THE SHARES AS INVESTMENT OR STOCK IN TRADE THE ASSESSEE IS NOT RE QUIRED TO SEEK APPROVAL OR SANCTION FROM ANY AUTHORITY UNDER THE A CT. IN ORDER TO SUPPORT HIS CONTENTIONS, THE LD. COUNSEL FOR THE AS SESSEE RELIED ON THE JUDGMENT OF THE HONBLE MADRAS HIGH COURT IN TH E CASE OF CIT VS. N.S.S. INVESTMENTS P. LTD., REPORTED AS 277 ITR 149 (MAD) AND FELSPAR CREDIT AND INVESTMENT P. LTD. VS. CIT REPORTED AS 346 ITR 121 (MAD) AND THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. VINAY MITTAL REPORTED AS 208 TAXMAN 106 (DELHI) . 4. PER CONTRA, SHRI SHAJI P. JACOB, APPEARING ON BE HALF OF THE REVENUE VEHEMENTLY SUPPORTING THE ORDER OF THE CIT( APPEALS) PRAYED FOR THE DISMISSAL OF THE APPEAL OF THE ASSES SEE. THE LD. DR SUBMITTED THAT THE ASSESSEE HAS BEEN TAKING INCONSI STENT STAND. THE SHARES WERE PURCHASED BY THE ASSESSEE WITH BORR OWED FUNDS AND CLAIMED INTEREST PAID ON BORROWINGS AS EXPENDIT URE. WHEN I.T.A. NO. 1699/MDS/2013 6 THE ASSESSEE INTENDED TO SELL SHARES, THE SAME WERE CONVERTED FROM STOCK IN TRADE TO INVESTMENT TO EVADE TAX LIAB ILITY. AS LONG AS THE ASSESSEE HAD TO PAY HUGE INTEREST ON THE BORROW INGS, THE ASSESSEE TREATED THE SHARES AS STOCK IN TRADE AND C LAIMED THE INTEREST AS EXPENDITURE. WHEN THE ASSESSEE ANTICIP ATED HUGE PROFIT FROM SALE OF SHARES, THE STOCK IN TRADE WAS CONVERTED INTO INVESTMENTS. THE LD. DR CONTENDED THAT EVEN IF THE SHARES ARE HELD TO BE INVESTMENT AND PROFIT ON SALE IS CONSIDE RED AS CAPITAL GAINS, THE HOLDING PERIOD OF THE SHARES AS INVESTME NTS IS LESS THAN TWELVE MONTHS. THEREFORE, THE ASSESSEE IS NOT ENTI TLED TO CLAIM BENEFIT OF LONG TERM CAPITAL GAINS. IN ORDER TO SU PPORT HIS CONTENTIONS, THE DR RELIED ON THE ORDER OF THE DELH I BENCH OF THE TRIBUNAL IN THE CASE OF SPLENDOR CONSTRUCTIONS P. LTD., VS. ITO REPORTED AS 27 SOT 39 . 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW, AS WELL AS THE DECISIONS REL IED ON BY THE REPRESENTATIVES OF BOTH THE SIDES. IT IS AN UN-DIS PUTED FACT THAT THE ASSESSEE-COMPANY WAS INCORPORATED IN THE YEAR 2007 WITH THE OBJECT OF MAKING INVESTMENT IN SHARES. IT IS ALSO NOT IN DISPUTE THAT WHEN THE INVESTMENT WAS INITIALLY MADE IN THE AY.20 07-08, THE I.T.A. NO. 1699/MDS/2013 7 SHARES WERE HELD BY THE ASSESSEE AS INVESTMENT. IN THE PERIOD RELEVANT TO THE AY.2008-09, THE ENTIRE SHAREHOLDING OF THE ASSESSEE WAS CONVERTED FROM INVESTMENT TO STOCK IN TRADE ON 01-04-2008. IN THE AY.2009-10, THE ASSESSEE CONTI NUED TO HOLD THE SHARES AS STOCK IN TRADE. AGAIN IN AY.2010-11, VIDE BOARDS RESOLUTION DATED 01-04-2009 THE ASSESSEE CONVERTED THE SHARES HELD AS STOCK IN TRADE INTO INVESTMENT. IT IS EVID ENT FROM RECORDS THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES FRO M BORROWED CAPITAL AND HAS BEEN CLAIMING INTEREST PAID THEREON AS EXPENDITURE DURING THE PERIOD, THE SHARES WERE HELD AS STOCK IN TRADE. 6. THE PROVISIONS OF SECTION 45(2) PROVIDES THAT TH E PROFIT OR GAIN ARISING FROM THE TRANSFER BY WAY OF CONVERSION OF A CAPITAL ASSET TO STOCK IN TRADE ON A BUSINESS CARRIED ON BY HIM SHALL BE CHARGEABLE TO INCOME TAX AS HIS INCOME OF THE PREVI OUS YEAR IN WHICH SUCH STOCK IN TRADE IS SOLD OR OTHERWISE TRAN SFERRED BY HIM. FOR THE PURPOSE OF SECTION 48, THE FAIR MARKET VALU E OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT SHALL BE D EEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACC RUING AS A RESULT OF THE TRANSFER OF CAPITAL ASSET. HOWEVER, THE PRO VISIONS OF SECTION 45 DOES NOT PROVIDE FOR THE TREATMENT OF ASSETS IF CONVERTED FROM STOCK IN TRADE TO INVESTMENT. I.T.A. NO. 1699/MDS/2013 8 SECTION 2(47) DEFINES TRANSFER IN RELATION TO THE C APITAL ASSET. SUB-CLAUSE (IV) STATES THAT IN CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS STO CK IN TRADE OF A BUSINESS CARRIED ON BY HIM, SUCH CONVERSION OR TREA TMENT SHALL BE TREATED AS TRANSFER IN RELATION TO THE CAPITAL ASSE T. SECTION 2(47) ALSO DOES NOT PROVIDE FOR THE VICE-VERSA SITUATION WHERE THE STOCK IN TRADE IS CONVERTED INTO CAPITAL ASSET. 7. UNDOUBTEDLY, IT IS THE PREROGATIVE OF THE ASSESS EE TO MANAGE THE AFFAIRS OF HIS BUSINESS. HOWEVER, THE ASSESSEE HAS TO FOLLOW CONSISTENT METHOD IN ACCOUNTING POLICIES AND TREATM ENT OF HIS ASSETS. THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT VS. N.S.S. INVESTMENTS P. LTD., (SUPRA), HAS HELD THAT THE PROFIT ON SALE OF SHARES HELD AS INVESTMENT IS TO BE TREATED AS CA PITAL GAINS INSTEAD OF BUSINESS INCOME AND THAT THE ASSESSEE CAN HOLD SOME SHARES AS CAPITAL FOR THE PURPOSE OF EARNING DIVIDE ND AND SOME SHARES AS STOCK IN TRADE FOR THE PURPOSE OF DOING B USINESS OF BUYING AND SELLING. IN CASE OF FELSPAR CREDIT AND INVESTMENT P. LTD. VS. CIT (SUPRA), THE HONBLE HIGH COURT HAS HELD THAT WHERE THE SHARES HAVE BEEN HELD AS INVESTMENT, THE PROFIT ON SALE OF SHARES RESULTS IN CAPITAL GAINS. THERE IS NO DISPUTE ABOUT THE LA W LAID DOWN BY I.T.A. NO. 1699/MDS/2013 9 THE HONBLE JURISDICTIONAL HIGH COURT IN THE AFORES AID DECISIONS. HOWEVER, THE AFORESAID DECISIONS DO NOT APPLY IN TH E FACTS AND CIRCUMSTANCES OF THE PRESENT CASE. IN THE INSTANT CASE, THE ASSESSEE HAS CONVERTED THE SHARES INITIALLY HELD AS INVESTMENT INTO STOCK IN TRADE AND AFTER TWO AYS, AGAIN CONVERTED T HE STOCK IN TRADE INTO INVESTMENT. THE PERIOD DURING WHICH THE SHARES WERE HELD AS STOCK IN TRADE, THE ASSESSEE CLAIMED THE IN TEREST ON BORROWINGS AS EXPENDITURE. THE ASSESSEE AGAIN IN T HE YEAR OF SALE OF SHARES CONVERTED THE SHARES HELD AS STOCK I N TRADE INTO INVESTMENT AND CLAIMED THE BENEFIT OF SECTION 10. 8. IT IS NOT IN DISPUTE THAT WHEN SHARES WERE SOLD BY THE ASSESSEE, THEY WERE CONVERTED INTO CAPITAL ASSET. THUS, THE GAIN ARISING THERE FROM ON SALE WOULD BE ASSESSABLE AS C APITAL GAIN. NOW, WHAT IS TO BE ASCERTAINED IS WHETHER THE SHARE S AT THE TIME OF SALE WERE SHORT TERM CAPITAL ASSET OR A LONG TER M CAPITAL ASSET FOR WHICH PERIOD OF HOLDING THE SHARES HAS T O BE DETERMINED. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SPLENDOR CONSTRUCTIONS P. LTD., VS. ITO (SUPRA) WHILE DEALING WITH A SIMILAR ISSUE HAS HELD THAT WHERE THE PROPERTY-IN-QUESTION IS HELD BY THE ASSESSEE AS STOCK IN TRADE FOR THE PURPOSE OF ITS B USINESS AND THE I.T.A. NO. 1699/MDS/2013 10 SAME HAD BEEN CONVERTED BY THE ASSESSEE INTO INVEST MENT, THE PERIOD FOR WHICH THE SAID PROPERTY WAS HELD AS STOC K IN TRADE CANNOT BE RECKONED FOR ASCERTAINING AS TO WHETHER IT WAS A LONG TERM CAPITAL ASSET OR A SHORT TERM CAPITAL ASSET WITHIN THE MEANING GIVEN IN SECTION 2(29A) AND 2(42A) OF THE A CT. THE TRIBUNAL CONCLUDED THAT IN CASE WHERE THE PROPERTY HELD AS STOCK IN TRADE IS CONVERTED INTO INVESTMENT, FOR ASCERTAININ G AS TO WHETHER PROPERTY IS A SHORT TERM CAPITAL ASSET OR A LONG TE RM CAPITAL ASSET, PERIOD FOR WHICH SAID ASSET IS HELD BY THE A SSESSEES AS CAPITAL ASSET (INVESTMENT) ALONE HAS TO BE RECKONED . APPLYING THE SAME PRINCIPLE IN THE PRESENT CASE, TH E PERIOD FOR WHICH THE SHARES WERE HELD AS STOCK IN TRADE BY THE ASSESSEE IS TO BE EXCLUDED FROM THE TOTAL PERIOD FOR WHICH THE SHARES WERE HELD BY THE ASSESSEE. SINCE, THE DATE OF ACQUISITION OF SHARES IS NOT FORTH COMING FROM THE RECORDS, WE REMIT THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO DETERMINE THE TOTAL PER IOD OF HOLDING OF SHARES AS CAPITAL ASSET. THE PERIOD DURING WHICH T HE SHARES WERE HELD AS STOCK IN TRADE IS TO BE EXCLUDED. I.T.A. NO. 1699/MDS/2013 11 THE APPEAL OF THE ASSESSEE IS THUS ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED ON WEDNESDAY, THE 20 TH NOVEMBER, 2013 AT CHENNAI. SD/- SD/- (DR. O.K. NARAYANAN) (VIK AS AWASTHY) VICE PRESIDENT JUDICIAL MEMBER DATED: 20 TH NOVEMBER, 2013 TNMM COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR