ACIT, CHENNAI V. M/s. R.K.Investments, CHENNAI

ITA 1907/CHNY/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5406 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-02-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 10-02-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 11-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N MADHAVAN
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Business income; Cost of acquisition

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , C B ENCH, CHENNAI . , !' # , $ % BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 1907/MDS/2010 ( / ASSESSMENT YEAR : 2005-06) ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE XV, CHENNAI-600 034. VS. M/S.R.K.INVESTMENTS, 28/21, DE MONTE COLONY, ALWARPET, CHENNAI-18. PAN: AAAFR3413Q ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR.N.MADHAVAN, JCIT /RESPONDENT BY : MR.R.VIJAYARAGHAVAN, ADVOCATE / DATE OF HEARING : 10 TH FEBRUARY, 2014 ! /DATE OF PRONOUNCEMENT : 27 TH FEBRUARY, 2014 & / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-XII, C HENNAI, DATED 31.08.2010 FOR THE ASSESSMENT YEAR 2005-06. 2. THE FIRST ISSUE IN THE GROUNDS OF APPEAL OF THE REVENUE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING CLAIM OF LOSS ON SALE OF SHARES UNDER THE HEAD ITA NO.1907/MDS/2010 2 BUSINESS. THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT ASSESSED LOSS ON SALES OF SHARES AS INCO ME FROM CAPITAL GAINS AT ` 55,45,695/- AND ` 58,71,341/- AS INCOME ON ACCOUNT OF HOLDING COST. ON APPEAL, THE COMMISSIONE R OF INCOME TAX (APPEALS) DELETED THE ADDITIONS MADE AGA INST WHICH THE REVENUE IS IN APPEAL BEFORE US. 3. THE DEPARTMENTAL REPRESENTATIVE SUPPORTED THE OR DER OF THE ASSESSING OFFICER IN MAKING ADDITION IN COMP UTING LOSS ON SALE OF SHARES UNDER THE HEAD CAPITAL GAINS IN STEAD OF BUSINESS LOSS. 4. THE COUNSEL FOR THE ASSESSEE RELIED ON THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING TH E ADDITION MADE BY THE ASSESSING OFFICER. 5. HEARD BOTH SIDES. PERUSED THE ORDERS OF LOWER AUTHORITIES. THE COMMISSIONER OF INCOME TAX (APPEA LS) ELABORATELY CONSIDERED THE SUBMISSIONS OF THE ASSES SEE AND THE CONTENTIONS OF ASSESSING OFFICER AS TO WHY THE LOSS ON ITA NO.1907/MDS/2010 3 SALE OF SHARES ASSESSED AS BUSINESS INCOME AND HEL D THAT SALE OF SHARES IS TO BE TREATED AS INCOME FROM BUSI NESS OBSERVING AS UNDER:- THE APPELLANT CONTESTS THAT THE DISALLOWANCE OF BUSINESS LOSS ON SALES OF SHARES FOR ` 55,45,695/- BY THE ASSISTANT COMMISSIONER OF INCOME TAX OFFICER IS WRONG IN LAW AS THE ASSESSEE HAS BEEN TREATING THE SAME AS STOCK IN TRADE SINCE IT COMMENCED ITS ACTIVITIES IN THE BOOKS OF ACCOUNTS AND THE SAME HAS BEEN REFLECTED IN THE FORM 3 CD THE ASSESSEE AS STOCK IN TRADE YEAR ON YEAR. THE ASSESSING OFFICER IN HIS ORDER HAS STATED THAT THE ASSESSEE HAS NOT BEEN TRADING IN SHARES FOR THE PAST 2 3 YEARS AND THEREFORE THE LOSS ON SALE OF SHARES OF M/S . CITI CA R DIAC RESEARCH LIMITED BY THE APPELLANT AND THAT SOLITARY SALE/ PURCHASE OF TRANSACTIONS CAN NEVE R BE CONSIDERED AS BUSINESS TRANSACTION . DECISION:- ON CAREFU L C O NSIDERATION OF THE ASSESSMENT ORDER AND THE RECORDS MADE AVAILABLE DURING THE HEARING OF THE CASES, IT IS CLEAR THAT THE APPELLANT HAS BEEN CONSISTENTLY DISCLOSING THE SHARES AS STOCK IN TRADE EVER SINCE ITS ACQUISITION. THE INTENTION OF THE APPELLANT IS CLEAR FROM THE POINT THAT THEY HAVE BEEN TREATI N G THE SHARE AS STOCK IN TRADE . FROM THE DATE OF ACQUISITION OF THE SAME . THERE I S N O CHANGE IN THE CLASSIFICATION EITHER IN THE FINANCIAL YEAR CONCERNED OR IN THE P R EVI OUS YEARS . HENCE IN THE FIRST INSTANCE THE INTENTION TO HOLD IT AS STOCK IN TRADE OR A TRADING ASSET IS CLEAR . COURTS L TRIBUNALS HAVE BEEN TAKING A ITA NO.1907/MDS/2010 4 VIEW THAT THE MANNER OF ACCOUNTING ENTRIES OR TREATMENT IN THE ACCOUNTS THOUGH NOT CONCLUS I VE MAY HAVE P E RSUASIVE VALUE IN DECIDING THE CORRECT INCOME. THE SAID VIEW HAS BEEN EXPRESSED IN THE FOLLOWING CASES:- 1. CHALLAPALLI SUGARS LTD . VS. CIT (981TR 167) 2. CIT VS . NAGARJUNA STEELS (171 ITR 663) 3. MADRAS INDUSTRIAL LNVT. CORPJN. LTD. VS. CIT (2251TR 802) THE A S SESSING OFFICER HAD MENTIONED T HAT AS THERE IS ONLY ONE TRANSACTION DURING T H E YEAR THE SAM E CANNOT BE TREATED AS BUSINESS . COURTS HAVE HELD THAT THE PE RI ODICITY O F THE TRANSACTIONS ALONE CANNOT DECIDE THE NATURE OF ASSET . THOUGH IT MAY BE A FACTOR TO BE CONSIDERED, IT HAS TO BE FORTIFIED BY OTHER CIRCUMSTANCES AND E VI DENCES TO COME TO A DECISION . CIRCULA R NO . 4/2007 ISSUED BY CBDT ALSO MAKES IT CLEAR THAT NO SINGLE PRINCIPLE WOULD BE DE C ISIVE A N D THE TOTAL EFFECT OF ALL THE PRINCIPLES SHOULD BE CONSIDERED TO D E TERMINE WHETHER, IN 9 GIVEN CASE , THE SHARES ARE HELD BY THE TAX PAYER AS INVESTMENT OR STOCK-IN- TRADE. THE ASSESSING OFFICER HAD MENTIONED THAT IN THE TAX AUDIT REPORT THE APPELLANT HAS MENTIONED ONLY PROPERTY DEVELOPMENT IS ERRONEOUS AS IN THE SAME REPORT THE DETAILS OF INVENTORY CARRIED BY THE APPELLANT AND METHOD OF VALUATION IS MENTIONED. ITA NO.1907/MDS/2010 5 AS REGARDS VALUATION THE APPELLANT HAD VALUED THE SAME IN ACCORDANCE WITH THE GUIDELINES APPLICABLE TO A CLOSELY HELD NON- LISTED COMPANY AND HENCE IS IN ORDER. AS ONE OF THE BUSINESS OF THE FIRM IS DEALING IN SHARES AND SECURITIES AND PROPER DISCLOSURE HAVING BEEN SHOWN IN THE BOOKS OF ACCOUNT AND FINANCIAL STATEMENTS OF THE FIRM AND THERE IS NO MATERIAL TO DISPROVE THE SAME, THERE IS CONSIDERABLE MERIT IN THE CONTENTION OF THE APPELLANT. HENCE, THIS GROUND OF APPEAL IS ALLOWED AND THE TRANSACTION IN RELATION TO SALE OF SHARES IS TO BE TREATED AS INCOME FROM BUSINESS. 6. ON READING OF THE ABOVE ORDER OF THE COMMISSIONE R OF INCOME TAX (APPEALS), WE FIND THAT THE ASSESSEE HAS BEEN CONSISTENTLY DISCLOSING SHARES AS STOCK-IN-TRADE EV ER SINCE ITS ACQUISITION. THE INTENTION OF THE ASSESSEE IS ALWAY S TO TREAT SHARES AS STOCK-IN-TRADE AND NOT CAPITAL ASSET AND IT IS ALSO A FACT THAT ASSESSEE IS INTO BUSINESS OF DEVELOPMENT OF REAL ESTATE PROPERTY INCLUDING TECHNOLOGY PART AND DEALI NG IN SHARES AND SECURITIES. THEREFORE, IN SUCH CIRCUMST ANCES, THERE IS NO INFIRMITY IN THE DECISION OF THE COMMI SSIONER OF INCOME TAX (APPEALS) THAT TRANSACTION IN RELATION T O SALE OF SHARES HAS TO BE TREATED AS INCOME FROM BUSINESS. N OTHING ITA NO.1907/MDS/2010 6 HAS BEEN PLACED CONTRARY TO REBUT THE FINDINGS OF T HE COMMISSIONER OF INCOME TAX (APPEALS) BY THE REVENUE . THUS, WE SUSTAIN THE ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS) AND DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 7. THE NEXT ISSUE IN THE GROUNDS OF APPEAL OF THE R EVENUE IS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOWING THE CLAIM OF HOLDING CHARGES OF ` 58,71,341/- ON SALE OF LAND AT KALASHETRA COLONY. THE ASSESSING OFFICE R WHILE COMPLETING THE ASSESSMENT ASSESSED ` 1,03,50,000/- AS HOLDING COSTS IN RESPECT OF THE PROPERTY SITUATED AT KALASHETRA COLONY. HOWEVER, SINCE THE ASSESSEE HAS ALREADY ADM ITTED ` 44,78,659/- AS INCOME, HE HAS TREATED THE BALANCE AMOUNT OF ` 58,71,341/- AS INCOME OF THE ASSESSEE OBSERVING AS UNDER:- THE SUBMISSIONS M A DE ARE CONSIDERED . ANALYSIS OF THESE SUBMISSIONS WOULD D R I VE ANY ONE TO THE CONC L US I ON THAT THE FIN ANCE COST S CLAIM E D BY TH E ASSESSEE AGAINST THE HOLDI NG COST RECEIPTS A R E N O THING ELS E BUT THE INTEREST PAYMENT S M A DE BY ME ASSESSEE TO THESE RESP ECTIVE CREDITORS O V ER A N UMBE R O F YEARS. IF THIS IS THE P OS ITION, THEN SUCH INTEREST PAID WOULD HAVE BEEN C L AIMED BY THE ASSE S S EE IN THOSE RESP E CTIVE Y E A R S . EVEN IF IT IS NOT, THE I N T EREST ITA NO.1907/MDS/2010 7 RENTS WO U L D B E DED U CTIBLE EXPEN S ES FOR THOSE RESPE C TIVE YEARS AND CANNOT BE DEDUCTED AS FINANCE C OS T S' IN THIS YEAR. ALSO, WHETHER THOSE RES P ECTIVE LOANS HAD BEEN P A RT IC U LARLY UTILIZED FOR THE PUR C HAS E OF THE SAID LAN D IN QUES T ION, HAS NOT BEE N PROVED WI T H F ACTS & EVIDENCES. IN V IE W OF THE A B OVE DISCUSSION, IT CAN BE HELD THAT NO PART OF THE FINANCE COST S IS DEDUCTIBLE T H E I N COME O N ACCOUNT OF HOLDIN G COST S RECEIVED BY THE ASSESSEE, D UR I NG YEA R . H O W EVE R, I T I S EQUAL LY TRUE THAT THERE WOULD BE SOME COST TO THE ASSES S E E IN IO N TO T HE I NCO M E FROM HOL D I N G COSTS. A L T HOUGH IT H A S NOT BEEN RIGHTLY QUANTIFIED B Y THE ASSESSEE OR SUPPORTED WITH EVIDENCES, AL L OW A NCE FO R SUCH INCIDEN TAL COSTS @ 10% OF SUC H INCOME R E C E IV E D ON ACCOUNT OF HOLDING COSTS , WOULD BE ALLOWED TO THE ASSES S EE W H I LE WORKING O UT I TS I NCOME FROM BUSINESS. THUS, THE INCOME ON THIS ACCOUNT WOULD WORK OUT TO ` 1,15,00,000/- (-) ` 11,50,000/- ` 1,03,50,000/-. ON APPEAL, COMMISSIONER OF INCOME TAX (APPEALS) DEL ETED THE ADDITION. 8. THE DEPARTMENTAL REPRESENTATIVE SUPPORTS THE ORD ER OF THE ASSESSING OFFICER IN TREATING HOLDING COSTS OF ` 58,71,341/- AS ADDITION. ITA NO.1907/MDS/2010 8 9. COUNSEL FOR THE ASSESSEE RELIES ON THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS). 10. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHO RITIES. THE COMMISSIONER OF INCOME TAX (APPEALS) DELETED TH E ADDITION IN RESPECT OF HOLDING COSTS OBSERVING AS U NDER:- DECISION. - ON A PERUSAL OF THE ORDER, IT IS SEEN THAT THE ASSESSING OFFICER HAS NOT COME TO A CONCLUSION THAT THERE IS NO INTEREST PAYMENT OR THE IDENTITIES OF THE LOAN CREDITORS ARE SUSPICIOUS . IN FACT IN THE ORDER ITSELF HE HAD MENTIONED THAT THE HOLDING COST ARE NOTHING BUT INTEREST PAYMENTS MADE BY THE ASSESSEE TO THESE LOAN CREDITORS OVER A NUMBER OF YEARS . THE FACT THAT THE APPELLANT HAS NOT CLAIMED THE INTEREST PAYMENT OF ` 70,21,341 IN THE EARLIER YEARS IS NOT ONLY CONFIRMED BY THE APPELLANT BUT ALSO CORROBORATED BY THE ASSESSING OFFICER IN HIS ORDER . HENCE THE FACT REMAINS THAT I THE SAID AMOUNT OF ` 70,21,341 HAS BEEN INCURRED BY THE APPELLANT AND THE SAME HAS NOT BEEN CLAIMED AS DEDUCTION IN ANY OF THE PREVIOUS YEARS. , ITA NO.1907/MDS/2010 9 THE MADRAS HIGH COURT IN THE CASE OF CIT VS K RAJAGOPALA RAO (252 ITR 459) IN RESPECT OF COS T OF ACQUISITION OF AN ASSET HAD OPINED AS UNDER:- I I ' HERE, THERE CAN BE NO DOUBT THAT THE COST OF ACQUISITION TO THE ASSESSEE WAS NOT MERELY THE AMOUNT THAT HE HAD PAID TO THE VENDORS BUT ALSO THE COST OF THE BORROWING MADE BY HIM FOR THE PURPOSE OF PAYI N G THE VENDOR AND OBTAI N ING THE SALE DEED. THE FACT THAT THE MORTGAGE W A S EXECUTED AFTER THE SALE DEED WAS OBTAINED EVEN THOUGH BO T H TH E DO C UMEN TS WERE SIGNED AND REGISTERED ON THE SAME DAY, DOES N OT RENDER THE MOR T GAGE AN D TH E BORROWING MADE THEREUNDER IRRELEVANT TO T HE TASK O F DETERM I N I NG THE COST O F ACQUISITION. WITHOUT THE MONEY BORROWED THE ASSESSEE WOULD NOT HAVE BEEN IN A POSITION TO BUY THE PROPERTY. THE PURCHASE NOT HAVING BEEN MADE WITH HIS OWN FUNDS, HE WAS REQUIRED TO PAY INTEREST FOR THE BORROWED FUND AND SECURE THE BORROWING BY CREATING A MORTGAGE. SUCH MORTGAGE COULD NOT HAVE BEEN CREATED EARLIER AS HE HAD TO FIRST ACQUIRE TITLE BEFORE ENCUMBERING THE SAME. PAYMENT OF CONSIDERATION FOR THE SALE INDISPUTABLY HAVING BEEN MADE WITH THE BORROWED FUNDS, THE BORROWING DIRECTLY RELATED TO THE ACQUISITION AND, INTEREST PAID THEREON WOULD FORM PART OF THE COST OF ACQUISITION. ITA NO.1907/MDS/2010 10 THE FACTS OF THE CASE THEREFORE CLEARLY FALL WITHIN THE RATIO OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD. [1975] 98 ITR 167. THOUGH THE ABOVE DECISION WAS RENDERED IN CONNECTION WITH THE - CAP I TAL GAINS THE RATIO OF THE DECISION IN AS MUCH AS THE COST OF BORROWING SHOULD BE RECKONED TO ARRIVE AT THE PROFIT SQUARELY APPLIES TO THIS CASE. HENCE AS THE SAID HOLDING COST HAS NOT BEEN CLAIMED AS EXPENDITURE IN THE PREVIOUS YEARS, EXPENDITURE BEING GENUINE AND AS THE APPELLANT IS FOLLOWING COMPLETED CONTRACT METHOD, THE HOLDING COST IS TO BE ALLOWED AS DEDUCTION FROM THE REVENUE RECOGNIZED DURING THE FINANCIAL YEAR. THERE CANNOT BE AN AD-HOC DEDUCTION WHEN THE ACTUAL EXPENDITURE INCURRED IS AVAI L ABLE AS PER THE BOOKS OF ACCOUNT OF THE APPELLANT . HENCE THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED. 11. ON GOING THROUGH THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), WE DO NOT FIND ANY GOOD REASO N TO INTERFERE WITH THE SAME IN THE DELETING THE ADDITIO N. NOTHING HAS BEEN BROUGHT ON RECORD TO CONTROVERT THE FINDIN GS OF THE ITA NO.1907/MDS/2010 11 COMMISSIONER OF INCOME TAX (APPEALS). THUS, THE GR OUND OF APPEAL OF THE REVENUE IS REJECTED. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THURSDAY, TH E 27 TH DAY OF FEBRUARY, 2014 AT CHENNAI. SD/- SD/- (A.MOHAN ALANKAMONY) (CHALLA NAGENDRA PRASAD) ACCOUNTANT MEMBER JUDI CIAL MEMBER CHENNAI, DATED THE 27 TH FEBRUARY, 2014. SOMU COPY TO: (1) APPELLANT (4) CIT (A) (2) RESPONDENT (5) D.R. (3) CIT (6) G.F.