ACIT, CHENNAI V. C.S.Holdings Pvt. Ltd., CHENNAI

ITA 367/CHNY/2015

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3823 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2016
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 31-10-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 16-02-2015
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R DURAI
• Assessee Lawyers: R SIVARAMAN
• Keywords: Capital asset; Business income; Bonafide belief; Earning of tax free income; Reasonable cause; Fair market value
• Section: 45(2); 14A; 154

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI , ! ' . # , $ %& BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ITA NOS.367 & 368 /MDS/2015 ASSESSMENT YEARS: 2008-09 & 2009-10 THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE I(3), CHENNAI 600 034. V. M/S.C.S.HOLDINGS PVT.LTD., NEW NO.6, OLD NO.21, I FLOOR, POSTAL COLONY, 4 TH STREET, WEST MAMBALAM, CHENNAI 600 035. PAN : AACCC 8370 Q ( /APPELLANT) ( /RESPONDENT) ./ ITA NO.369/MDS/2015 & CO NO.112/MDS/2015 /ASSESSMENT YEAR : 2011-12 THE ASSISTANT COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE I(3), CHENNAI 600 034. V. M/S.C.S.HOLDINGS PVT.LTD., NEW NO.6, OLD NO.21, I FLOOR, POSTAL COLONY, 4 TH STREET, WEST MAMBALAM, CHENNAI 600 035. PAN : AACCC 8370 Q ( /APPELLANT) ( /RESPONDENT/ CROSS OBJECTOR) ASSESSEE BY : SHRI R.SIVARAMAN, ADVOCATE DEPARTMENT BY : SHRI.R.DURAI PANDIAN, SR.AR ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 2 /DATE OF HEARING : 31.10.2016 /DATE OF PRONOUNCEMENT : 04.11.2016 ' /O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE APPEALS BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF CIT(A) CHALLENGING / SUPPORTING THE DELETION OF ADDITIONS MADE UNDER SECTION 14A OF THE ACT. 2. THE CROSS OBJECTION FILED BY THE ASSESSEE, WHERE IN THE ASSESSEE STATING THAT THE CIT(A) ERRED IN NOT EXPLICITLY STA TING IN THE CONCLUDING PART OF THE ORDER THAT THE INCOME ARISING ON SALE OF SHA RES IS LONG TERM CAPITAL GAIN, AFTER DISCUSSION AND FINDING REGARDING THE SA ME IN THE BODY OF THE ORDER. 2.1 THERE WAS A DELAY OF 190 DAYS IN FILING THE APP EAL FOR WHICH THE ASSESSEE FILED A CONDONATION PETITION STATING THAT THE DELAY WAS DUE TO BONAFIDE REASON. THE ASSESSEE WAS FORCED TO FILE TH IS CO ON THE RECEIPT OF THE ORDER UNDER SECTION 154 DATED 26.09.2015 FROM A O WHERE THE AO MISUNDERSTOOD THE ORDER OF THE CIT(A) WHILE PASSING THE CONSEQUENTIAL ORDER WENT FOR RECTIFICATION PROCEEDINGS UNDER SECT ION 154 (ASSESSEE HAD A BONAFIDE BELIEF THAT THE ASSESSING OFFICER CORRECT THE MISTAKE IN RECTIFICATION ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 3 PROCEEDINGS). STILL HE CONTINUED TO CARRY ON THE MI STAKE. HENCE, THE ASSESSEE FILED THAT THIS CO ON 05.10.2015 BY DELAY OF 190 DAYS. 3. WE HAVE CAREFULLY GONE THROUGH THE CONDONATION P ETITION AND IN OUR OPINION, THERE IS A REASONABLE CAUSE IN FILING CROSS OBJECTION BELATEDLY. ACCORDINGLY, THE CROSS OBJECTION IS ADMITTED FOR AD JUDICATION. 4. COMING TO THE MERIT OF REVENUE APPEALS IS WITH R EGARD TO DELETION OF ADDITION MADE UNDER SECTION 14A OF THE ACT. 5. WE HEARD BOTH THE PARTIES AND PERUSED THE MATERI AL AVAILABLE ON RECORD. THE SAME ISSUE CAME BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2010-11 IN ITA NO.1699/MDS/ 2013 VIDE ORDER DATED 20.11.2013 AND THE TRIBUNAL HELD AS FOLLOWS: 5. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRE SENTATIVES OF BOTH THE SIDES AND HAVE PERUSED THE ORDERS OF THE A UTHORITIES BELOW, AS WELL AS THE DECISIONS RELIED ON BY THE RE PRESENTATIVES OF BOTH THE SIDES. IT IS AN UN-DISPUTED FACT THAT THE ASSESSEE-COMPANY WAS INCORPORATED IN THE YEAR 2007 WITH THE OBJECT O F MAKING INVESTMENT IN SHARES. IT IS ALSO NOT IN DISPUTE THA T WHEN THE INVESTMENT WAS INITIALLY MADE IN THE AY.2007-08, TH E SHARES WERE HELD BY THE ASSESSEE AS INVESTMENT. IN THE PERIOD R ELEVANT TO THE AY.2008-09, THE ENTIRE SHAREHOLDING OF THE ASSESSEE WAS CONVERTED ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 4 FROM INVESTMENT TO STOCK IN TRADE ON 01-04-2008. IN THE AY.2009- 10, THE ASSESSEE CONTINUED TO HOLD THE SHARES AS ST OCK IN TRADE. AGAIN IN AY.2010-11, VIDE BOARD'S RESOLUTION DATED 01-04-2009 THE ASSESSEE CONVERTED THE SHARES HELD AS STOCK IN TRAD E INTO INVESTMENT. IT IS EVIDENT FROM RECORDS THAT THE ASS ESSEE HAS MADE INVESTMENT IN SHARES FROM BORROWED CAPITAL AND HAS BEEN CLAIMING INTEREST PAID THEREON AS EXPENDITURE DURING THE PER IOD, 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 SHAL L BE CHARGEABLE TO INCOME TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK IN TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM. FOR THE PURPOSE OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT SHALL BE DEEME D TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF CAPITAL ASSET. HOWEVER, THE PROVISIONS OF SECTION 45 DOES NOT PROVIDE FOR THE TREATMENT OF ASSETS IF CON VERTED FROM STOCK IN TRADE TO INVESTMENT. 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 STOCK I N 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 ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 5 AFFAIRS OF HIS BUSINESS. HOWEVER, THE ASSESSEE HAS TO FOLLOW CONSISTENT METHOD IN ACCOUNTING POLICIES AND TREATM ENT OF HIS ASSETS. THE HON'BLE MADRAS HIGH COURT IN THE CASE O F 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 HON'BLE HIGH COURT HAS HELD THAT WHERE THE SHAR ES HAVE BEEN HELD AS INVESTMENT, THE PROFIT ON SALE OF SHARES RE SULTS IN CAPITAL GAINS. THERE IS NO DISPUTE ABOUT THE LAW LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE AFORESAID DECISION S. HOWEVER, THE AFORESAID DECISIONS DO NOT APPLY IN THE FACTS AND C IRCUMSTANCES 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 THE STOCK IN TRADE INTO IN VESTMENT. THE PERIOD DURING WHICH THE SHARES WERE HELD AS STOCK I N TRADE, THE ASSESSEE CLAIMED THE INTEREST ON BORROWINGS AS EXPE NDITURE. THE ASSESSEE AGAIN IN THE YEAR OF SALE OF SHARES CONVER TED THE SHARES HELD AS STOCK IN 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 G AIN ARISING THERE FROM ON SALE WOULD BE ASSESSABLE AS CAPITAL GAIN. N OW, WHAT IS TO BE ASCERTAINED IS WHETHER THE SHARES AT THE TIME OF SALE WERE 'SHORT TERM CAPITAL ASSET' OR A 'LONG TERM CAPITAL ASSET' FOR WHICH ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 6 PERIOD OF HOLDING THE SHARES HAS TO BE DETERMINED. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SPLENDOR CONSTRUCTIO NS 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 BUSINESS AND THE SAME HAD BE EN CONVERTED BY THE ASSESSEE INTO INVESTMENT, THE PERIOD FOR WHI CH THE SAID PROPERTY WAS HELD AS STOCK IN TRADE CANNOT BE RECKO NED FOR ASCERTAINING AS TO WHETHER IT WAS A 'LONG TERM CAPI TAL ASSET' OR A 'SHORT TERM CAPITAL ASSET' WITHIN THE MEANING GIVEN IN SECTION 2(29A) AND 2(42A) OF THE ACT. THE TRIBUNAL CONCLUDE D THAT IN CASE WHERE THE PROPERTY HELD AS STOCK IN TRADE IS CONVER TED INTO INVESTMENT, FOR ASCERTAINING AS TO WHETHER PROPERTY IS A SHORT TERM CAPITAL ASSET OR A LONG TERM CAPITAL ASSET, PERIOD FOR WHICH SAID ASSET IS HELD BY THE ASSESSEE'S AS CAPITAL ASSET (I NVESTMENT) 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 SHA RES WERE HELD BY THE ASSESSEE. SINCE, THE DATE OF ACQUISITION OF SHARES IS NOT FORTH COMING FROM THE RECORDS, WE REMIT THIS ISSUE BACK T O THE FILE OF THE ASSESSING OFFICER TO DETERMINE THE TOTAL PERIOD OF HOLDING OF SHARES AS CAPITAL ASSET. THE PERIOD DURING WHICH THE SHARE S WERE HELD AS STOCK IN TRADE IS TO BE EXCLUDED. THE APPEAL OF THE ASSESSEE IS THUS ALLOWED FOR STAT ISTICAL PURPOSES. 6. IN VIEW OF THE ABOVE ORDER OF TRIBUNAL, THE CONT ENTION OF THE ASSESSEES IS THAT THE EXEMPT INCOME WAS INCIDENTA L TO ITS INVESTMENT IN ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 7 SHARES WHICH WOULD NOT ATTRACT SECTION 14A DISALLOW ANCE. IN OUR OPINION, IT IS NOW A SETTLED ISSUE THAT ONCE INVESTMENT OR RET URNS THEREFROM HAS BEEN TREATED AS CAPITAL GAINS, THE BASIS FOUNDATION OF T HE DISALLOWANCE BASED ON TREATMENT OF SHARES AS STOCK-IN-TRADE IS NOT LIABLE TO BE SUSTAINED. THE CO- ORDINATE BENCH HAS DIRECTED THE ASSESSING OFFICER T O COMPUTE CAPITAL GAINS AS PER LAW AND DETAILS PLACED ON RECORD. WE ARE INC LINED TO REMIT THE ISSUE IN DISPUTE TO THE FILE OF THE ASSESSING OFFICER ON SIMILAR DIRECTION FOR ALL THESE ASSESSMENT YEARS. 7. IN THE RESULT, ALL THE THREE APPEALS OF THE REVE NUE IN ITA NOS.367, 368 & 369/MDS/2015 ARE ALL ALLOWED FOR STATISTICAL PURPOSES AND CROSS OBJECTION FILED BY THE ASSESSEE IN CO NO.112/MDS/20 15 IS DISMISSED AS INFRUCTUOUS. ORDER PRONOUNCED ON 04 TH NOVEMBER, 2016 AT CHENNAI. SD/- SD/- ( . ! '#$ ) ( %& ' ( ) (DUVVURU RL REDDY) (CHANDRA POOJA RI) ) *+ /JUDICIAL MEMBER ' *+ /ACCOUNTANT MEMBER %') /CHENNAI, ,* /DATED, THE 04 TH NOVEMBER, 2016. SP. ITA NOS.367, 368 & 369/MDS/2015 CO NO.112/MDS/2015 8 *'- ./ 0'/ /COPY TO: 1. /APPELLANT 2. /RESPONDENT 3. 1 ( )/CIT(A) 4. 1 /CIT, 5. /23 4 /DR 6. 3$ 5 /GF.