THE ACIT -18(2), Mumbai V. M/S. ASHWINI INVESTMENTS, Mumbai

ITA 3183/MUM/2004

• Counselvise Citation: 318319914 RSA 2004
• Duration Of Justice: 7 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 05-07-2011
• Assessment Year: 1998-1999
• Appeal Filed On: 30-04-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A G NAYAK
• Keywords: Business income; Cost of acquisition
• Section: 143(3); 54

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI R.S. PADVEKAR, JUDICIAL MEMBER. I.T.A. NO. 3183/MUM/2004. ASSESS MENT YEAR : 1998-99. AND I.T.A. NO. 5918/MUM/2005 ASSESS MENT YEAR : 1998-99. ASSTT. COMMISSIONER OF INCOME-TAX, M/S ASHWINI INVESTMENT, 18(2), MUMBAI. VS. FLAT NO. 703, 7 TH FLOOR, SALVATION APARTMENT, CH S LTD., PLOT NO. 857, N.M. KALE MARG, DADAR (WEST), MUMBAI 400 028. APPELLANT. RESPONDENT. APPELLANT BY : SHRI A.G. NAYAK RESPONDEN T BY : SHRI K. GOPAL. O R D E R. PER P.M. JAGTAP, A.M. : OUT OF THESE TWO APPEALS FILED BY THE REVENUE, ITA NO. 3183/MUM/2004 IS THE APPEAL FILED IN THE QUANTUM PROCEEDINGS AGAINST THE ORDER OF LEARNED CIT(APPEALS)-XVIII, MUMBAI DATED 23-02-2004 CHALLEN GING THE ACTION OF THE LEARNED CIT(APPEALS) IN TREATING THE PROFIT ARISING FROM SALE OF SHARES AS LONG TERM CAPITAL GAINS AS AGAINST BUSINESS INCOME HELD BY TH E AO WHEREAS ITA NO. 5918/MUM/2005 IS THE APPEAL FILED BY THE REVENUE AG AINST THE ORDER OF THE LEARNED 2 ITA NO. 3183/MUM/2004 & ITA NO. 5918/MUM/2005 CIT(APPEALS)-XVIII, MUMBAI DATED 26-07-2005 WHEREBY HE CANCELLED THE PENALTY OF RS.3,95,731/- IMPOSED BY THE AO U/S 271(1)(C). 2. FIRST WE SHALL TAKE UP THE APPEAL OF THE REVENUE FILED IN THE QUANTUM PROCEEDINGS BEING ITA NO. 3183/MUM/2004. THE RELEVA NT FACTS OF THE CASE GIVING RISE TO THIS APPEAL ARE THAT THE ASSESSEE IS A PART NERSHIP FIRM WHICH IS ENGAGED IN THE BUSINESS AS A SUB BROKER FOR SHARES AND SECURITIES. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 23 RD MARCH, 1999 DECLARING A TOTAL INCOME OF RS.2,75,746/-. IN THE SAID RETURN, PROFIT ON SALE O F SHARES WAS DECLARED BY THE ASSESSEE AS LONG TERM CAPITAL GAIN AMOUNTING TO RS. 8,23,091/- AND EXEMPTION IN RESPECT OF THE SAME WAS CLAIMED U/S 54EA ON ACCOUNT OF INVESTMENT MADE IN UTI BONDS EXCEEDING THE NET CONSIDERATION. DURING THE C OURSE OF ASSESSMENT PROCEEDINGS, IT WAS SUBMITTED ON BEHALF OF THE ASSE SSEE BEFORE THE AO THAT CERTAIN SHARES WERE HELD BY IT AS INVESTMENT FOR SUBSTANTIA LLY LONG PERIOD AND PROFIT ARISING FROM SALE THEREOF WAS RIGHTLY CLAIMED AS LONG TERM CAPITAL GAIN. THE AO, HOWEVER, FOUND FROM THE PROFIT AND LOSS ACCOUNTS OF THE EARL IER YEARS THAT SHARES WERE CONSISTENTLY HELD BY THE ASSESSEE AS STOCK IN TRADE . ACCORDING TO THE AO, PROFIT ARISING FROM SALE OF SUCH SHARES HELD AS STOCK IN T RADE THUS CONSTITUTED BUSINESS PROFIT OF THE ASSESSEE AND ACCORDINGLY HE BROUGHT S UCH PROFIT TO TAX IN THE HANDS OF THE ASSESSEE UNDER THE HEAD PROFIT AND GAINS OF BU SINESS OR PROFESSION THEREBY DENYING INDEXATION CLAIMED BY THE ASSESSEE IN RESPE CT OF COST OF ACQUISITION OF THE SAID SHARES AS WELL AS THE EXEMPTION CLAIMED U/S 54 EA. 3. AGAINST THE ORDER PASSED BY THE AO U/S 143(3) TR EATING THE PROFIT ARISING FROM SALE OF SHARES AS BUSINESS INCOME AND THEREBY DENYING ITS CLAIM FOR INDEXATION OF COST OF ACQUISITION AS WELL AS EXEMPT ION U/S 54EA, AN APPEAL WAS PREFERRED BY THE ASSESSEE BEFORE THE LEARNED CIT(AP PEALS) AND AFTER CONSIDERING THE SUBMISSIONS MADE ON BEHALF OF THE ASSESSEE BEFORE H IM AS WELL AS MATERIAL 3 ITA NO. 3183/MUM/2004 & ITA NO. 5918/MUM/2005 AVAILABLE ON RECORD, THE LEARNED CIT(APPEALS) ALLOW ED THE APPEAL OF THE ASSESSEE FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 3 OF HIS IMPUGNED ORDER : I HAVE CAREFULLY CONSIDERED THE ARGUMENTS OF THE LEARNED AR. I FIND THAT THE ONLY REASON WHY THE ASSESSING OFFICER CONS IDERED THE IMPUGNED SHARES AS STOCK IN TRADE WAS THAT THE APPELLANT HAD HIMSELF SHOWN THE SAME IN ITS ACCOUNTS AS CLOSING STOCK. ON THIS OBSERVATIO N ALONE, THE ASSESSING OFFICER SAID THAT THE SAID SHARES WERE OBVIOUSLY ST OCK IN TRADE. HOWEVER, I FIND THIS INFERENCE TO BE COMPLETELY MISCONCEIVED. FROM THE DETAILED FACTS BROUGHT ON RECORD BY THE APPELLANT AS ABOVE, I AM O F THE FIRM VIEW THAT THE SAID SHARES WERE HELD AS INVESTMENTS AND THEREFORE THE SURPLUS ARISING ON THIS SALE WOULD BE TAXABLE AS LONG TERM CAPITAL GAINS AN D NOT INCOME FROM BUSINESS. THUS, THEY WOULD BE ENTITLED TO THE BENEF IT OF EXEMPTION U/S 54EA. GROUNDS OF APPEAL NOS. I, II & III ARE ACCORDINGLY ALLOWED. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEALS) GIVING RELIEF TO THE ASSESSEE AS ABOVE, THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND ALS O PERUSED THE RELEVANT MATERIAL ON RECORD. THE ISSUE AS TO WHETHER THE PRO FIT ON SALE OF SHARES CONSTITUTES BUSINESS INCOME OF THE ASSESSEE OR CAPITAL GAINS DE PENDS ON WHETHER THE SAID SHARES WERE PURCHASED AND HELD BY THE ASSESSEE AS INVESTME NT OR STOCK IN TRADE. IN ORDER TO ASCERTAIN AS TO WHETHER THE SHARES WERE PURCHASED B Y THE ASSESSEE AS INVESTMENT OR STOCK-IN-TRADE, THE MOST RELEVANT ASPECT THAT IS TO BE SEEN IS THE INTENTION OF THE ASSESSEE TO PURCHASE AND HOLD THE SHARES AND SUCH INTENTION HAS TO BE GATHERED FROM THE FACTS OF THE CASE INCLUDING THE CONDUCT OF THE ASSESSEE. IN THE CASE OF SARNATH INFRASTRUCTURE (P).LTD. VS. ACIT REPORTED I N 120 TTJ (LUCKNOW) 216, THE COORDINATE BENCH OF THIS TRIBUNAL AFTER TAKING INTO CONSIDERATION THE VARIOUS JUDICIAL PRONOUNCEMENTS ON THIS ISSUE AS WELL AS TH E RELEVANT CIRCULAR ISSUED BY THE BOARD, HAS LAID DOWN THE FOLLOWING PRINCIPLES/CRITE RIAS WHICH CAN BE APPLIED TO THE FACTS OF THE CASE TO FIND OUT WHETHER THE TRANSACTI ONS IN SHARES ARE IN THE NATURE OF TRADE OR ARE MERELY FOR THE INVESTMENT PURPOSES : 4 ITA NO. 3183/MUM/2004 & ITA NO. 5918/MUM/2005 (1) WHAT IS THE INTENTION OF THE ASSESSEE AT THE T IME OF PURCHASE OF THE SHARES FOR ANY OTHER ITEM. THIS CAN BE FOUND OUT FR OM THE TREATMENT IT GIVES TO SUCH PURCHASE IN ITS BOOKS OF ACCOUNT. WHETHER I T IS TREATED AS STOCK-IN- TRADE OR INVESTMENT? WHETHER SHOWN IN OPENING/CLOSI NG STOCK OR SHOWN SEPARATELY AS INVESTMENT OR NON-TRADING ASSET? (2) WHETHER ASSESSEE HAS BORROWED MONEY TO PURCHASE AND PAID INTEREST THEREO N. NORMALLY, MONEY IS BORROWED TO PURCHASE GOODS FOR THE PURPOSE OF TRADE AND NOT FOR INVESTING IN AN ASSET FOR RETAINING. (3) WHAT IS THE FREQUENCY O F SUCH PURCHASES AND DISPOSAL IN THAT PARTICULAR ITEM? IF PURCHASE AND S ALE ARE FREQUENT, OR THERE ARE SUBSTANTIAL TRANSACTIONS IN THAT ITEM, IT WOULD INDICATE TRADE. HABITUAL DEALING IN THAT PARTICULAR ITEM IS INDICATIVE OF IN TENTION OF TRADE. SIMILARLY, RATIO BETWEEN THE PURCHASES AND SALES AND THE HOLDI NGS MAY SHOW WHETHER THE ASSESSEE IS TRADING OR INVESTING (HIGH TRANSACT IONS AND LOW HOLDINGS INDICATE TRADE WHEREAS LOW TRANSACTIONS AND HIGH HO LDINGS INDICATE INVESTMENT): (4) WHETHER PURCHASE AND SALE IS FOR R EALIZING PROFIT OR PURCHASES ARE MADE FOR RETENTION AND APPRECIATION I N ITS VALUE. FORMER WILL INDICATE INTENTION OF TRADE AND LATTER, AN INVESTME NT. IN THE CASE OF SHARES WHETHER INTENTION WAS TO ENJOY DIVIDEND AND NOT MER ELY EARN PROFIT ON SALE AND PURCHASE OF SHARES. A COMMERCIAL MOTIVE IS AN E SSENTIAL INGREDIENT OF TRADE. (5) HOW THE VALUE OF THE ITEMS HAS BEEN TAKE N 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 MAR KET VALUE OR NET REALIZABLE VALUE (WHICHEVER IS LESS), IT WILL INDIC ATE THAT ITEMS IN QUESTION ARE TREATED AS STOCK-IN-TRADE. (6) HOW THE COMPANY (ASS ESSEE) IS AUTHORIZED IN MEMORANDUM OF ASSOCIATION/ARTICLE OF ASSOCIATION? W HETHER FOR TRADE OR FOR INVESTMENT? IF AUTHORIZED ONLY FOR TRADE, THEN WHET HER THERE ARE SEPARATE RESOLUTIONS OF THE BOARD OF DIRECTORS TO CARRY OUT INVESTMENTS IN THAT COMMODITY? AND VICE VERSA. (7) IT IS FOR THE ASSESS EE TO ADDUCE EVIDENCE TO SHOW THAT HIS HOLDING IS FOR INVESTMENT OR FOR TRA DING AND WHAT DISTINCTION HE HAS KEPT IN THE RECORDS OR OTHERWISE, BETWEEN TW O TYPES OF HOLDINGS. IF THE ASSESSEE IS ABLE TO DISCHARGE THE PRIMARY ONUS AND COULD PRIMA FACIE SHOW THAT PARTICULAR ITEM IS HELD AS INVESTMENT FOR SAY, STOCK-IN-TRADE), THEN ONUS WOULD SHIFT TO REVENUE TO PROVE THAT APPARENT IS NO T REAL. (8) THE MERE FACT OF CREDIT OF SALE PROCEEDS OF SHARES (OR FOR THAT M ATTER ANY OTHER ITEM IN QUESTION) IN A PARTICULAR ACCOUNT OR NOT SO MUCH FR EQUENCY OF SALE AND PURCHASE WILL ALONE WILL NOT BE SUFFICIENT TO SAY T HAT ASSESSEE WAS HOLDING THE SHARES FOR THE ITEMS IN QUESTION) FOR INVESTMENT. ( 9) ONE HAS TO FIND OUT WHAT ARE THE LEGAL REQUISITES FOR DEALING AS A TRADER IN THE ITEMS IN QUESTION AND WHETHER THE ASSESSEE IS COMPLYING WITH THEM. WHETHE R IT IS THE ARGUMENT OF THE ASSESSEE THAT IT IS VIOLATING THOSE LEGAL REQUI REMENTS, IF IT IS CLAIMED THAT 5 ITA NO. 3183/MUM/2004 & ITA NO. 5918/MUM/2005 IT IS DEALING AS A TRADER IN THAT ITEM? WHETHER IT HAD SUCH AN INTENTION (TO CARRY ON ILLEGAL BUSINESS IN THAT ITEM SINCE BEGIN NING OR WHEN PURCHASES WERE MADE? (10) IT IS PERMISSIBLE AS PER CBDTS CIR CULAR NO. 4 OF 2007 OF 15 TH JUNE, 2007 THAT AN ASSESSEE CAN HAVE BOTH PORTFOLI OS, ONE FOR TRADING AND OTHER FOR INVESTMENT PROVIDED IT MAINTAINING SEPARA TE ACCOUNT FOR EACH TYPE, THERE ARE DISTINCTIVE FEATURES FOR BOTH AND THERE I S NO INTERMINGLING OF HOLDINGS IN THE TWO PORTFOLIOS. (11) NOT ONE OR TWO FACTORS OUT OF ABOVE ALONE WILL BE SUFFICIENT TO COME TO A DEFINITE CONC LUSION BUT THE CUMULATIVE EFFECT OF SEVERAL FACTORS HAS TO BE SEEN. 5. A PERUSAL OF THE ORDERS PASSED BY THE LOWER AUTH ORITIES IN THE PRESENT CASE SHOWS THAT NEITHER THE AO NOR THE LEARNED CIT(APPEA LS) HAS DONE THE EXERCISE TO FIND OUT THE EXACT NATURE OF SHARE TRANSACTIONS CAR RIED ON BY THE ASSESSEE IN A PROPER MANNER BY APPLYING THE RELEVANT CRITERIAS/PRINCIPLE S TO THE FACTS OF THE CASE. AS A MATTER OF FACT, THE LEARNED CIT(APPEALS) HAS PASSED A VERY CRYPTIC ORDER WITHOUT EVEN DISCUSSING THE RELEVANT FACTS OF THE CASE IN T HE OPERATIVE PORTION. WE, THEREFORE, DEEM IT FIT AND PROPER AND IN THE INTERE ST OF JUSTICE TO SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE SAME AFRESH AFTER AP PLYING THE PRINCIPLES/CRITERIAS LAID DOWN BY THE LUCKNOW BENCH OF THE TRIBUNAL IN THE CA SE OF SARNATH INFRASTRUCTURE (SUPRA) TO THE FACTS OF THE CASE. NEEDLESS TO OBSER VE THAT THE AO SHALL AFFORD PROPER AND SUFFICIENT OPPORTUNITY TO THE ASSESSEE OF BEING HEARD. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS TREA TED AS ALLOWED FOR STATISTICAL PURPOSES. 7. AS REGARDS THE PENALTY IMPOSED BY THE AO U/S 271 (1)(C) IN RESPECT OF ADDITION MADE TO THE TOTAL INCOME OF THE ASSESSEE B Y TREATING THE PROFIT ARISING FROM SALE OF SHARES AS BUSINESS INCOME THAT HAS BEEN CAN CELLED BY THE LEARNED CIT(APPEALS) BY HIS APPELLATE ORDER DATED 26-7-2005 WHICH IS IMPUGNED BY THE REVENUE IN ITA NO. 5918/MUM/2005, WE HAVE ALREADY S ET ASIDE THE ORDERS OF THE 6 ITA NO. 3183/MUM/2004 & ITA NO. 5918/MUM/2005 AUTHORITIES BELOW INCLUDING THE ASSESSMENT ORDER PA SSED BY THE AO ON THIS ISSUE IN THE FOREGOING PORTION OF THIS ORDER WITH A DIRECTIO N TO THE AO TO DECIDE THE SAME AFRESH. CONSEQUENTLY, THE VERY BASIS OF IMPOSITION OF PENALTY U/S 271(1)(C) NO MORE SURVIVES AND THE SAME IS LIABLE TO BE CANCELLED HAV ING NO LEGS TO STAND. WE ORDER ACCORDINGLY. THE AO, HOWEVER, WILL BE AT LIBERTY TO REINITIATE THE PENALTY PROCEEDINGS DEPENDING ON HIS DECISION IN THE SET ASIDE PROCEEDINGS. 8. IN THE RESULT, THE APPEAL IN ITA NO.3183/MUM/200 4 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES AND THE APPEAL IN ITA NO. 5918 /MUM/2005 IS DISMISSED. . ORDER PRONOUNCED ON THIS 15 TH DAY OF JULY, 2011. SD/- SD/- (R.S. PADVEKAR) (P.M. JAGTAP) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI, DATED: 15 TH JULY, 2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, H-BENCH. (TRUE COPY ) BY ORD ER ASSTT. R EGISTRAR, ITAT, MUMBAI BEN CHES, MUMBA I. WAKODE