ASST. C.I.T. 5(2), MUMBAI V. M/S. PENTAGON BUILDERS PVT.LTD., MUMBAI

ITA 4384/MUM/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4114 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-10-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 22-04-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 25-06-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: HARGOVIND SINGH
• Assessee Lawyers: DAGAR
• Keywords: Business income; Advance ruling; Reassessment proceedings; Futures and options

Judgement Text

ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI C BENCH, MUMBAI BEFORE SHRI R V EASWAR (HONBLE PRESIDENT) AND SHRI PRAMOD KUMAR ( ACCOUNTANT MEMBER) ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 ASSTT COMMISSIONER OF INCOME TAX CIRCLE 5(2), MUMBAI ...APPELLANT VS. PENTAGON BUILDERS PVT LTD . RESPONDENT MUMBAI (PAN : AABCP8971F) APPELLANT BY : SHRI HAR GOVIND SINGH RESPONDENT BY : SHRI M S DAGAR O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSING OFFICER HAS CHALLENGED CORRECTNESS OF CIT(A)S ORDER DATED 16 TH APRIL 2008, FOR THE ASSESSMENT YEAR 2005-06, ON TH E FOLLOWING GROUND : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND AS P ER LAW, THE CIT(A) ERRED IN DIRECTING TO TREAT THE PROFIT OUT O F TRANSACTIONS IN SHARES AS BUSINESS INCOME AND TO RECOMPUTED THE CAPITAL GAIN ON THE IMPUGNED SHARES THEREBY IGNORING THE FI NDINGS OF THE ASSESSING OFFICER IN REASSESSMENT PROCEEDINGS. 2. THE MATERIAL FACTS LEADING TO THIS LITIGATION BE FORE US ARE AS FOLLOWS. THE ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 2 OF 7 ASSESSEE, A PRIVATE LIMITED COMPANY, CLAIMS TO BE E NGAGED, INTER ALIA, IN THE BUSINESS OF EXPORTS OF READYMADE GARMENTS, MADE UPS AND FANCY FABRICS, IN TRADING IN FUTURES AND OPTIONS, AND IN HOLDING INVE STMENTS. WHILE THE ASSESSING OFFICER HAS NOTED THAT THE ASSESSEE WAS ALSO ENGAGE D IN THE BUSINESS OF TRADING IN SHARES AND SECURITIES, THE CASE OF THE ASSESSEE IS THAT THE SHARES AND SECURITIES WERE HELD BY THE ASSESSEE AS AN INVESTOR . IN THE INCOME TAX RETURN FILED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005- 06, THE ASSESSEE CLAIMED BUSINESS LOSS TO BE CARRIED FORWARD AMOUNTING TO RS 9,27,266 AND DISCLOSED AN AMOUNT OF RS 16,53,683 AS LONG TERM CAPITAL GAINS, AND AN AMOUNT OF RS 35,55,875 AS SHORT TERM CAPITAL GAINS. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, AND IN RESPONSE TO ASSESSING OFFICERS REQUISITION TO SHOW CAUSE AS TO WHY THE CAPITAL GAINS ON SALE OF SHARES SHOULD N OT BE TREATED AS BUSINESS PROFITS, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE WAS IN RECEIPT OF ADVANCES TOWARDS EXPORTS OF GARMENTS, AND SINCE THE SE AMOUNTS WERE NOT LIKELY TO BE IMMEDIATELY REQUIRED FOR BUSINESS PURPOSES, T HE INVESTMENTS WERE MADE IN SHARES TO EARN DIVIDEND. IT WAS ALSO POINTED OUT THAT THESE INVESTMENTS IN SHARES WERE SHOWN AS INVESTMENTS IN THE BOOKS OF ACCOUNTS, AND NOT AS TRADING ASSETS, SINCE INTENTION OF THE ASSESSEE WAS NOT TO DO BUSINESS IN SHARES. THE ASSESSEE ALSO SUBMITTED THAT DURING THE YEAR, THE A SSESSEE HAD DONE TRADING IN FUTURES AND OPTIONS, AND OFFERED TO TAX, PROFITS EA RNED ON THE SAID TRADING. IT WAS THUS SUBMITTED THAT WHATEVER WERE THE GAINS REALIZE D IN TRADING OPERATIONS WERE SHOWN AS TRADING INCOME AND WHATEVER WERE THE GAINS ON SALE OF INVESTMENTS WERE SHOWN AS CAPITAL GAINS SHORT TER M OR THE LONG TERM, WHICHEVER CATEGORY THESE GAINS FELL IN. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE WAS IN RECEIPT OF ADVANCE TOWARDS EXPORTS OF GARMENTS, AND AS THIS RECEIPT OF ADVANCE FUNDS WAS NOT IMMEDIATELY R EQUIRED BY THE ASSESSEE, THE ASSESSEE DECIDED TO INVEST THE FUNDS IN SHARES SO A S THE ASSESSEE CAN EARN DIVIDENDS. IT WAS ALSO POINTED OUT THAT THE SHARES WERE HELD AS INVESTMENTS IN THE BOOKS OF ACCOUNTS, AND NOT AS STOCK IN TRADE. IT WAS FURTHER SUBMITTED THAT AS AND WHEN THE REQUIREMENT EXISTS, THE ASSESSEE C AN REALIZE THE INVESTMENTS MADE AND FULFILL THE REQUIREMENTS OF EXPORT BUSINES S BUT WHILE REALIZING THE INVESTMENTS, THERE WILL BE EITHER GAIN OR LOSS (AND ) ALSO COMPANY CAN EARN ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 3 OF 7 DIVIDENDS BY HOLDING THE INVESTMENTS. IT WAS SUBMI TTED THAT A PERSON WHO MERELY INVESTS IN SHARES FOR THE PURPOSE OF HOLDING INVESTMENTS, DOES NOT CARRY ON BUSINESS. IT WAS ALSO SUBMITTED THAT DISTINCT ION OF HOLDING SHARES AS INVESTMENTS OR STOCK IN TRADE IS THE DISCRETION OF THE ASSESSEE AND, IN SUPPORT OF THIS PROPOSITION, RELIANCE WAS PLACED ON HONBLE SU PREME COURTS JUDGMENT IN THE CASE OF CIT VS ASSOCIATED INDUSTRIAL DEVELOPMEN T CO PVT LTD (82 ITR 586). A REFERENCE WAS ALSO MADE TO THE RULING GIVEN BY TH E AUTHORITY OF ADVANCE RULING IN THE CASE OF FIDELITY NORTHSTAR FUNDS & OR S (288 ITR 641) IN SUPPORT OF THE PROPOSITION THAT WHERE THE OBJECT OF INVESTMEN T IN SHARES OF A COMPANY IS TO DERIVE INCOME BY WAY OF DIVIDEND ETC, THEN THE P ROFITS ACCRUING BY CHANGE IN INVESTMENTS ( BY SALE OF SHARES) WILL YIELD CAPITAL GAIN, AND NOT REVENUE RECEIPT. A REFERENCE WAS ALSO MADE TO THE CBDT CIRCULAR NO. 4/2007 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES WHICH CLARIFIES THAT A PERSON CAN INDEED HAVE INVESTMENTS IN SHARES AS ALSO HOLDINGS IN SHARES WH ICH ARE IN THE NATURE OF STOCK IN TRADE. THE ASSESSEE ALSO FILED THE BALANCE SHEE T WHICH DISCLOSED UNSECURED LOANS OF RS 1,45,16,812 AS AGAINST INVESTMENTS OF R S 3,89,24,520 AT THE END OF THE RELEVANT PREVIOUS YEAR. THE ASSESSING OFFICER, HOWEVER, DID NOT ACCEPT THE STAND OF THE ASSESSEE. HE NOTED THAT THE ASSESSEE H AS USED BORROWED FUNDS IN INVESTMENTS WHICH INDICATE THAT THE SHARES WERE HEL D IN THE COURSE OF TRADING BUSINESS. IT WAS ALSO NOTED THAT THE FREQUENCY OF T RANSACTIONS WAS VERY HIGH. RELYING UPON DECISION OF THIS TRIBUNAL IN THE CASE OF NEERJA BIRLA VS ACIT (66 ITD 148), THE ASSESSING OFFICER HELD THAT WHEN BORR OWED FUNDS ARE USED IN INVESTMENTS IN SHARES AND PARTICULARLY WHEN NUMBER OF TRANSACTIONS ARE SO HIGH, THE GAINS ON SALE OF SHARES IS REQUIRED TO BE TREAT ED AS PROFITS AND GAINS OF DEALING IN SHARES. THE ASSESSING OFFICER ALSO NOTE D THAT, EVEN BY APPLYING THE TESTS LAID DOWN IN THE CBDT CIRCULAR 4/2007, IT CAN BE SAFELY INFERRED THAT THE ASSESSEE WAS A DEALER IN SHARES, AND NOT AN INVESTO R IN SHARES. A REFERENCE WAS ALSO MADE TO OFT QUOTED SUPREME COURT JUDGMENT IN T HE CASE OF MC DOWELL & CO LTD VS CTO (154 ITR 148). WITH THIS ANALYSIS, THE ASSESSING OFFICER HELD THAT THE GAINS ON SALE OF SHARES CAN ONLY BE TREATED AS BUSINESS INCOME AS THE ASSESSEE WAS HOLDING THE SHARES WITH A MOTIVE TO BO OK PROFITS ON TRADING, AND THUS REJECTED THE ASSESSEES CLAIM THAT THE SHARES WERE HELD AS INVESTMENTS AND ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 4 OF 7 TO EARN DIVIDENDS. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CI T(A). AFTER ELABORATELY REPRODUCING CONTENTIONS OF THE ASSESSEE, THE CIT(A) , IN HIS RATHER BRIEF OPERATIVE PORTION OF THE ORDER, MAINLY HELD AS FOLL OWS : I HAVE GONE THROUGH THE ARGUMENTS AND SUBMISSIONS O F THE LEARNED AR OF THE APPELLANT AS WELL AS THE CONTENTS OF THE IMPUGNED ASSESSMENT ORDER. I HAVE ALSO GONE THROUGH THE STAT EMENT SHOWING SHORT TERM CAPITAL GAIN, AS WELL AS COPIES OF THE F INAL ACCOUNTS. I FIND THAT IN THE BALANCE SHEET AS ON 31.3.2004, THE IMPUGNED SHARES HAVE BEEN SHOWN AS INVESTMENTS WHEREIN TOTAL INVESTMENTS AS ON 31.3.2004 ARE SHOWN AT RS 3,89,24,520. THE IN VESTMENTS AS ON 31.03.2005 HAD GONE DOWN MARGINALLY AND REMAINED AT RS 3,56,25,482. PRIOR TO 31.3.2004 ALSO, THE IMPUGNED SHARES HAVE BEEN SHOWN AS INVESTMENTS ONLY AND THE IMPUGNED SHA RES WERE HELD BY THE ASSESSEE FOR SUFFICIENTLY LONG PERIOD. NOWHERE THE APPELLANT INTENDED TO INVOLVE IN TRADING OF SHARES. IT IS WELL SETTLED LAW THAT ONLY THE INTENTION OF THE APPELLANT WILL B E DECISIVE AS TO WHETHER ANY ASSET IS AN INVESTMENT OF THE APPELLANT OR THE STOCK IN TRADE. ONCE THE INTENTION IS WITHOUT ANY DOUBT ESTA BLISHED TO HOLD THE IMPUGNED SHARES AS INVESTMENTS ONLY, AND NOT AS STOCK IN TRADE, I FIND NO JUSTIFICATION IN TREATING THE SAME TO BE PART OF STOCK IN TRADE GENERATING INCOME TO BE TAXED UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND PROFESSION INSTEAD OF CAPIT AL GAINS. NO DISCREPANCIES IN THE BOOKS OF ACCOUNTS HAVE BEEN FO UND BY THE LEARNED AO SO AS TO HAVE EVEN AN IOTA OF DOUBT TO I NVITE THE RATION OF HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF MCDOWELL & CO LTD VS CTO (154 ITR 148). THE LEARNED AO HAS SIMPLY TREATED CAPITAL GAINS AS BUSINESS INCOME ON SURMISES AND CO NJECTURES AND ON THE ASSUMPTION THAT SUBSTANTIAL PORTION OF THE A SSESSEES INVESTMENTS HAVE BEEN MADE OUT OF BORROWED FUNDS, W ITHOUT EXAMINING THE ISSUE PROPERLY. IN PARAGRAPH 7 OF THE IMPUGNED ASSESSMENT ORDER, HE HIMSELF HAS REPRODUCED THE PAR T OF BALANCE SHEET WHICH MAKES IT CLEAR THAT APPELLANT HAD RESER VES AND SURPLUS OF ITS OWN TO THE TUNE OF RS 2,22,68,182 AS ON 31.3 .2005, AND RS 1,81,93,467 AS ON 31.3.2004, WHICH TANTAMOUNT TO MO RE THAN 50% OF INVESTMENTS IN SHARES. MOREOVER, THE FUNDS BELON GING TO OTHERS INVESTED IN THESE SHARES ARE TRADE ADVANCES RECEIVE D FROM THE CUSTOMERS AND NOT CAPITAL BORROWINGS. THUS, IN THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ACTION OF THE AO CAN NOT BE UPHELD. 3. AGGRIEVED BY THE STAND SO TAKEN BY THE CIT(A), T HE ASSESSING OFFICER IS IN APPEAL BEFORE US. ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 5 OF 7 4. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 5. WE HAVE NOTED THAT AS REGARDS ASSESSEES CONTENT ION THAT INVESTMENTS WERE MADE TO EARN DIVIDENDS, A FACTUAL PROPOSITION ON WH ICH ALMOST ENTIRE WEB OF ARGUMENT RESTS, THE ACTUAL DIVIDEND EARNING DURING ENTIRE YEAR WAS RS 3,28,981 ON AN INVESTMENT OF RS 3,89,24,520. THIS WORKS OUT TO LESS THAN 1% YIELD ON INVESTMENTS, AND IT IS THUS DIFFICULT TO ACCEPT ASS ESSEES CONTENTION TO THE EFFECT THAT THE INVESTMENTS WERE MADE TO EARN DIVIDEND. WE HAVE ALSO NOTED THAT THE ASSESSEE HAS CONTENDED THAT TO EARN THESE DIVIDENDS , THE ASSESSEE HAD USED THE ADVANCES RECEIVED FROM THE CUSTOMERS. IN OUR UNDERS TANDING, IT IS CONTRARY TO NORMAL PRACTICES THAT THE COMMITTED FUNDS, IN THE N ATURE OF CUSTOMER ADVANCES, CAN BE USED FOR INVESTMENTS IN SHARES TO EARN DIVID ENDS. IT IS ALSO IMPORTANT TO BEAR IN MIND THE FACT THAT THE ENTIRE GARMENT EXPOR TS DURING THE RELEVANT PREVIOUS YEAR WAS ONLY TO THE TUNE OF RS 10.97 LAKH S, AND INVESTMENT IN SHARES, WHICH IS SAID TO HAVE BEEN MADE OUT OF ADVANCES REC EIVED FOR THESE EXPORTS, WAS RS 389.24 LAKHS. THE INVESTMENTS THUS WORK OUT TO O VER 35 TIMES THE ANNUAL EXPORT TURNOVER, AND YET IT IS FUNDED OUT OF ADVANC ES RECEIVED FOR EXPORTS. IN THIS BACKDROP, THE FACTUAL CONTENTIONS OF THE ASSES SEE DONOT INSPIRE MUCH CONFIDENCE. THE ASSESSEE HAS CLAIMED THAT SINCE SH ARES ARE HELD AS INVESTMENTS IN THE BOOKS OF ACCOUNTS, IT IS BEYOND DOUBT OR DIS PUTE THAT THE SHARES ARE NOT HELD AS STOCK IN TRADE. A LOT OF EMPHASIS IS PLACED ON THE FACT THAT THE SHARES ARE VALUED AT COST IN THE BALANCE SHEET WHICH IS DONE O NLY FOR INVESTMENTS AND NOT FOR STOCK IN TRADE, AS ALSO THE FACT THAT THE BALAN CE SHEET SCHEDULES SHOW THESE SHARE HOLDINGS AS INVESTMENTS. UNDOUBTEDLY, THE ACC OUNTING TREATMENT IS IN IMPORTANT FACTOR BUT THIS FACTOR PER SE CANNOT BE DECISIVE OF THE QUESTION WHETHER SHARES ARE HELD AS STOCK IN TRADE OR INVEST MENT. IT IS ALSO USEFUL TO NOTE THAT THE AUDIT REPORT, AT PAGE 88 OF THE PAPER BOOK , STATES THAT THE ASSESSEE IS DEALING IN SHARES AND FUTURES ETC. IT IS ONLY ELE MENTARY THAT IF A RECEIPT IS TRADING RECEIPT THE FACT THAT IT IS NOT SHOWN IN TH E ACCOUNT OF THE ASSESSEE DOES ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 6 OF 7 NOT PREVENT THE ASSESSING OFFICER IN TREATING IT A S TRADING RECEIPT - CHOWRINGHEE SALES BUREAU P. LTD. 87 ITR 548 . ALL T HE SURROUNDING FACTORS ARE ALSO TO BE OBJECTIVELY CONSIDERED WHETHER OR NOT TH E SHARES WERE HELD AS INVESTMENTS OR AS STOCK IN TRADE AND THE ACCOUNTING TREATMENT IS NOT CONCLUSIVE FACTOR TO DETERMINE THIS QUESTION. AS A MATTER OF F ACT, APPLYING THE TESTS SUGGESTED BY THE ASSESSEE AT THE ASSESSMENT STAGE, IT IS CLEARLY NOT A CASE OF INVESTMENT SINCE THE PURPOSE OF THESE INVESTMENTS C ANNOT BE TO SIMPLY EARN DIVIDEND INCOME. WE HAVE ALSO NOTED, AS EVIDENT FR OM A PERUSAL OF STATEMENTS OF LONG TERM AND SHORT TERM CAPITAL GAINS AT PAGES 14 TO 17 OF THE PAPERBOOK, THAT THERE ARE SEVERAL TRANSACTIONS OF SALE AND PURCHASE IN RESPECT OF THE SAME SCRIP, WHICH REFLECTS THE SYSTEMATIC ACTIVITY OF SALE AND PURCHASE FOR THE PURPOSE OF REALIZING GAINS ON PROFITS. IN SOME OF THE CASES, H OLDING PERIOD OF SHARES IS JUST A FEW DAYS (SUCH AS 1, 5,6,8, AND 9 DAYS). THERE CAN NOT BE INVESTMENTS FOR SUCH SHORT PERIOD, AND THESE TRANSACTIONS CAN ONLY BE IN THE NATURE OF SHARE TRADING TRANSACTIONS. THE ASSESSEE HAS ALSO USED BORROWED FUNDS, EVEN IF NOT ENTIRELY, FOR INVESTMENTS IN SHARES. THE ASSESSEE IS ALSO EN GAGED IN TRADING IN FUTURES AND OPTIONS WHICH SHOWS THAT THE ASSESSEE WAS ENGAGED I N THE KIND OF ACTIVITIES WHICH BELONG TO THE SAME GENUS AS THE TRADING IN SH ARES AND SECURITIES. THE PURCHASE OF SHARES OUT OF COMMITTED FUNDS RECEIVED AS CUSTOMER ADVANCES CAN ORDINARILY BE ONLY IN THE NATURE OF DEPLOYMENT OF FUNDS TO MAKE PROFITS BY DEALING IN SHARES RATHER THAN INVESTING IN SHARES. ALL THESE FACTORS TAKEN TOGETHER CLEARLY SHOW THAT THE CLAIM OF THE ASSESSE E TO THE EFFECT THAT THESE SHARES WERE HELD AS INVESTMENTS , FOR THE PURPOSES OF EARNING DIVIDENDS, CANNOT BE ACCEPTED. ON THE CONTRARY, THESE TRANSACTIONS AR E CLEARLY IN THE NATURE OF TRANSACTIONS AIMED AT EARNING FROM TRADING IN SHARE S. THE CIT(A) HAS THUS CLEARLY ERRED IN BEING GUIDED BY THE ACCOUNTING TRE ATMENT ALONE, AND DISREGARDING ALL THE RELEVANT AND SURROUNDING FACTS SET OF THE CASE. WE, THEREFORE, SEE MERITS IN THE GRIEVANCE OF THE ASSES SING OFFICER AND UPHOLD THE SAME. 6. FOR THE REASONS SET OUT ABOVE, WE DEEM IT FIT AN D PROPER TO VACATE THE ITA NO. 4384/MUM/2008 ASSESSMENT YEAR 2005-06 PAGE 7 OF 7 RELIEF GRANTED BY THE CIT(A) AND RESTORE THE ORDER OF THE ASSESSING OFFICER. 7. IN THE RESULT, THE APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT TODAY ON 29TH DAY OF OCTOBER, 2010. SD/- SD/- (R V EASWAR) (PRAMOD KUMAR) PRESIDENT ACCOUNTANT MEMBER MUMBAI; 29 TH DAY OF OCTOBER, 2010. COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT , MUMBAI 4. THE COMMISSIONER (APPEALS) , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE - C BENCH, MUM BAI 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, MUMBAI