M/s. DBS Cholamandalam Securities Ltd., CHENNAI V. ACIT, CHENNAI

ITA 242/CHNY/2010

• Counselvise Citation: 24221714 RSA 2010
• Duration Of Justice: 1 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 15-11-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 01-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A C JOSEPH JT
• Assessee Lawyers: VIKARAM VIJAYARAGHAVAN
• Keywords: Capital asset; Business income; Depreciation
• Section: 143(3); 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NO. 242/MDS/2010 (ASSESSMENT YEAR : 2005-06 ) M/S DBS CHOLAMANDALAM SECURITIES LTD DARE HOUSE, 2 NSC BOSE ROAD CHENNAI 600 001 VS THE ASST. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE I(3) CHENNAI [PAN AABCC 5958R ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VIKARAM VIJAYARAGHAVAN, ADVOCATE RESPONDENT BY : SHRI A.C.JOSEPH, JT. CIT DATE OF HEARING : 15-11-2011 DATE OF PRONOUNCEMENT : 12-12-2011 O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE, FOR ASSESSMENT YEAR 2005-06, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) III, CHENNAI, DATED 27-11-2009. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF STOCK BROKING AND DEPOSITORY ITA 242/10 :- 2 -: SERVICES. THE COMPANY FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2005-06 ON 30.10.2005 DECLARING TOTAL INCOME OF ` 1,18,32,240/-. REGULAR ASSESSMENT WAS COMPLETED U/S 143(3) IN WHI CH FOLLOWING TWO ADDITIONS WERE MADE: (I) A SUM OF ` 18,78,662/- BEING DEPRECIATION CLAIMED BY THE ASSESSEE @ 25% ON STOCK EXCHANGE MEMBERSHIP CARD. (II) A SUM OF ` 8,78,834/- BEING THE DIFFERENCE IN SHORT TERM CAPITAL GAIN WHICH HAS BEEN ASSESSED AS INCOME FROM BUSINESS. 3. THE DISALLOWANCE OF THE ABOVE CLAIMS LED TO CONSEQU ENTIAL CHARGING OF INTEREST U/S 234B OF THE ACT AS WELL. BEFORE US, THE ONLY ISSUE OF ADDITION OF ` 8,78,834/- AS ABOVE, HAS BEEN RAISED THROUGH THE FOLLOWING GROUNDS: 1. THE ORDER OF THE COMMISSIONER OF INCOME TAX (APP EALS) IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CA SE. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THAT PROFIT ARISING FROM SALE OF SHARES SHOULD BE ASSESSED AS INCOME FROM BUSINESS AGAINST THE CLAIM OF THE APPELLANT AS SHORT TERM CAPITAL GAIN. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGH T TO HAVE APPRECIATED THAT THE MAIN BUSINESS ACTIVITY OF THE APPELLANT COMPANY IS STOCK BROKING, DEALING IN SECURITIES, BU YING AND SELLING SHARES ON BEHALF OF CLIENTS, APPELLANT'S MA IN SOURCE OF INCOME ARE GENERATED FROM BROKERAGE ON BUYING AN D SELLING TRANSACTIONS. ITA 242/10 :- 3 -: 4. THE COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT EVERY INVESTMENT MADE DURING THE ASSESSMENT YEAR, THE PROPOSAL HAD BEEN PLACED BEFOR E THE BOARD AND AUTHENTICATED BY A PROPER BOARD RESOLUTIO N AND ALSO RELEVANT ENTRIES HAVE BEEN MADE IN THE BOOKS O F ACCOUNTS AS INVESTMENT, HENCE THE PROFIT ARISING FR OM SALE OF SHARES SHOULD BE ASSESSED AS SHORT TERM CAPITAL GAI N. 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, TH E CIT(A) SHOULD HAVE HELD THAT PROFIT ON SALE OF INVESTMENTS HELD FOR LESS THAN A YEAR SHOULD BE ASSESSED AS SHORT TERM C APITAL GAINS. 6. THE APPELLANT CRAVES LEAVE TO FILE ADDITIONAL GROUNDS AT THE TIME OF HEARING. 4. THE ASSESSEE-COMPANY HAS DECLARED A SUM OF ` 16,45,908/- AS SHORT TERM CAPITAL GAIN AFTER SETTING OFF THE BR OUGHT FORWARD SHORT TERM CAPITAL LOSS TO THE EXTENT OF ` 8,78,834/-. HOWEVER, THE ASSESSING OFFICER HAS TREATED THE ENTIRE SHORT TERM CAPITAL GAIN OF ` 25,24,742/- AS INCOME FROM BUSINESS BY ADDING BACK A SUM OF ` 8,78,834/-. THE ASSESSEE OBJECTED TO THIS DISALLOW ANCE AND CONSEQUENTIAL LEVY OF INTEREST U/S 234B OF THE ACT. IT WAS ARGUED BY THE LD.AR THAT PROFIT ARISING FROM THE SALE OF SHA RES, IN THE GIVEN FACTS OF THE CASE, CANNOT BE ASSESSED AS INCOME FROM BUSI NESS AGAINST CLAIMED AS SHORT TERM CAPITAL GAIN. IT WAS FURTHE R ARGUED THAT THE MAIN BUSINESS ACTIVITY OF THE ASSESSEE-COMPANY IS S TOCK BROKING, DEALING IN SECURITIES, BUYING AND SELLING SHARES ON BEHALF OF THE CLIENTS ITA 242/10 :- 4 -: AND BROKERAGE ON BUYING AND SELLING TRANSACTIONS. IT WAS ARGUED THAT FOR EVERY INVESTMENT MADE DURING THE YEAR, THE PROP OSAL HAD BEEN PLACED BEFORE THE BOARD OF DIRECTORS AND AUTHENTICA TED BY A BOARD RESOLUTION AND RELEVANT ENTRIES HAD BEEN MADE IN TH E BOOKS OF ACCOUNT AS INVESTMENT. THEREFORE, THE PROFIT ARISING FROM THE SALE OF SHARES SHOULD BE ASSESSED AS SHORT TERM CAPITAL GAIN AS TH E INVESTMENT WAS HELD MORE THAN A YEAR. PER CONTRA, THE LD.DR SUP PORTED THE ACTION OF THE AUTHORITIES BELOW. 5. AFTER CONSIDERING THE RIVAL SUBMISSIONS IN THE LIGH T OF THE GIVEN FACTS, CIRCUMSTANCES AND THE MATERIAL ON R ECORD, WE ARE BOUND TO REFUSE AS IT USUALLY HAPPENS IN THE CASE OF SUCH ASSESSEES WHO ARE DOING THE BUSINESS OF STOCK BROKING SIMULTANEOUSLY DOING ALLIED ACTIVITIES LIKE DEALING IN SECURITIES, BUYING AND S ELLING SHARES ON BEHALF OF CLIENTS ETC. SINCE THE ASSESSEE IS THE MASTER O F ITS ACTIVITIES AND IT IS HE WHO CAN CLEARLY SPELL OUT THE NATURE OF A PARTIC ULAR RECEIPT WHETHER A PARTICULAR HOLDING OF SHARES IS BY WAY OF INVESTM ENT OR FORM PART OF STOCK-IN-TRADE, IS A MATTER WHICH IS OUT OF THE KNO WLEDGE OF THE ASSESSEE, WHO HOLDS SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINED ANY DESCRIPTION BETWEEN THOSE WHICH ARE ITS STOCK-IN-TRADE ITA 242/10 :- 5 -: AND THOSE WHICH ARE HELD BY WAY OF INVESTMENTS AT THE TIME OF PURCHASE AND SALE OF SHARES. THE ASSESSEE MUST SHO W THE STATUS OF SHARES WITH REFERENCE TO ITS MEMORANDUM OF ASSOCIAT ION AS THE LATTER IS NOT ONLY THE DECISIVE FACTOR. THE CUMULATIVE EFFEC T OF THE NATURE OF TRANSACTION AND THE MANNER IN WHICH THE BOOKS ARE M AINTAINED, THE MAGNITUDE OF PURCHASE AND SALE OF SHARES ALONGWITH THE RATIO BETWEEN THE PURCHASES AND SALES AND HOLDING, COULD BE A REA SONABLE DETERMINANT OF THE NATURE OF TRANSACTIONS. WHEN THE ASSESSEE PURCHASES AND SELLS THE SHARES WITH THE INTENTION O F EARNING A PROFIT, THE TRANSACTION WOULD BE IN THE NATURE OF TRADE/ADV ENTURE IN THE NATURE OF TRADE. WHEN THE INVESTMENT IN SHARES OF A COMPANY IS MADE WITH THE OBJECT OF DERIVING INCOME BY WAY OF DIVIDE ND ETC., THEN THE PROFITS ACCRUING BY WAY OF CHANGES IN SUCH INVESTME NT, WOULD RESULT IN CAPITAL GAINS. IT IS TRUE AND WE ARE IN AGREEMENT WITH THE SUBMISSION OF THE LD.AR THAT THE ASSESSEE-COMPANY CAN HAVE TWO PORTFOLIOS VIZ. (I) INVESTMENT PORTFOLIO COMPRISING OF SECURITIES WHICH ARE TO BE TREATED AS CAPITAL ASSETS AND (II) TRADING PORTFOLIO COMPRISIN G OF STOCK-IN-TRADE WHICH ARE BE TREATED AS TRADING ASSETS. THE CBDT H AS TRIED TO SPELL OUT THIS DIFFERENCE AND ITS CIRCULAR ALONGWITH THE EARLIER DECISIONS OF HON'BLE SUPREME COURT ARE SUCCESSFULLY AND APTLY CO NSIDERED BY THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GOPAL P UROHIT VS JCIT ITA 242/10 :- 6 -: (2009) 122 TTJ 87 (MUM) WHEREIN IT HAS HELD THAT AN ASSESSEE CAN BE AN INVESTOR AND TRADER SIMULTANEOUSLY AND HENCE INC OME EARNED ON THE SAME SHOULD BE CLASSIFIED ACCORDINGLY. IT FURTHER CLARIFIED THAT DELIVERY BASED TRANSACTION SHOULD BE TREATED AS OF THE NATUR E OF INVESTMENT AND BE TAXED AS LONG TERM CAPITAL GAIN OR SHORT TERM CA PITAL GAIN, AS THE CASE MAY BE. IT IS FOUND FROM RECORDS THAT THE ASS ESSEE-COMPANY HAS HELD THE SHARES IN QUESTION FOR A SHORT PERIOD OF 9 0 DAYS. WE HAVE SENT HE BOARD RESOLUTION A COPY OF WHICH IS ENCLOSE D AT PAGE 1 OF THE LD.ARS COMPILATION SHOWING AUTHORITY TO INVEST IN PUBLIC ISSUE OF M/S NATIONAL THERMAL POWER CORPORATION LTD. AT PAGE 2 EXTRACT OF THE MINUTES OF THE MEETING OF THE BOARD WHICH ARE RELEV ANT FOR THE PURPOSE HAS BEEN ENCLOSED. AT PAGE 3 CONTRACT NOTES DEPICT ING TRANSACTIONS OF INVESTMENT ARE ENCLOSED. AT PAGE 10, A VERY IMPORT ANT DOCUMENT SHOWING NATURE OF INVESTMENT, THEIR QUANTITY, THEIR DATE OF SALE ALONGWITH SALE VALUE AND DATE OF PURCHASE ALONGWITH COST OF PURCHASE AND RESULTANT GAIN/LOSS HAVE BEEN SHOWN FOR THE YEA R ENDED 31.3.2005. IF ALL THESE EVIDENCE ARE EXAMINED IN O NE GO, THE TEST LAID BY VARIOUS COURTS INCLUDING THAT OF HON'BLE APEX CO URT IN THE CASE OF RAJA BAHADUR KAMAKHYA NARAIN SINGH VS CIT, 77 ITR 2 53, WE ARE OF THE CONSIDERED OPINION THAT THE ASSESSEE HAS BOTH T YPES OF PORTFOLIOS I.E TRADING AS WELL AS INVESTMENT PORTFOLIOS AS PER ITS MEMORANDUM OF ITA 242/10 :- 7 -: ASSOCIATION. THE ASSESSEE HAS TRANSACTION IN THE IMPUGNED SHARES BY DELIVERING THE INSTRUMENTS AND IT HAS BEEN CONSISTE NTLY FOLLOWING THE SIMILAR MODE AND METHOD OF BUSINESS AS WELL AS TRAD ING IN EARLIER YEARS, SIMILAR SALES WERE HELD AS SHORT TERM CAPITA L GIN BUT ON SIMILAR FACTS, THE ASSESSING OFFICER HAS TREATED THE ENTIRE SALE OF SHARES AS ASSESSEES BUSINESS INCOME. THEREBY HE HAS REFUSED THE BENEFIT OF SET OFF OF ` 25 LAKHS PLUS OF SHORT TERM CAPITAL GAIN AGAINST S HORT TERM CAPITAL LOSS. THE DECISIONS RELIED ON BY THE LD.AR SUPPORT THE CASE OF THE ASSESSEE AND AS WE HAVE ALREADY MENTIONED, THE CUMULATIVE EFFECT ARISING FROM THE NATURE OF BUSINESS, THE MAINTENANC E OF BOOKS OF ACCOUNT AND CLEAR INTENTION DEPICTED FROM THE DEAL ING WITH THE SUBJECT MATTER OF TRANSACTION AND THE MANNER IN WHICH THE I NCOME HAS BEEN RETURNED, COUPLED WITH THE FACT THAT MEMORANDUM OF ASSOCIATION THE ASSESSEE HAS GOT BOTH THE ACTIVITIES AS ITS OBJECTS , GOES TO SUGGEST THAT THE INCOME WHICH HAS BEEN HELD AS INCOME FROM BUSINESS BY THE ASSESSING OFFICER, IS IN FACT, A CAPITAL GAIN ARISI NG FROM THE SALE OF SHARES. ACCORDINGLY, WE ALLOW THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE IN THIS REGARD. OUR THIS FINDING RESULTS IN ALLOWING THE APPEAL OF THE ASSESSEE-COMPANY, ITSELF. ITA 242/10 :- 8 -: 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT O N 12.12.2011. SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 12 TH DECEMBER, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR