Astt. Commissioner of Income Tax, Lucknow V. M/s Apurva R K Hotels Pvt. Ltd., Lucknow

ITA 46/LKW/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 2546 (ITAT-LUCKNOW)
• Duration Of Justice: 1 year(s) 9 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 26-06-2018
• Assessment Year: 2012-2013
• Appeal Filed On: 18-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C K SINGH
• Assessee Lawyers: YOGESH AGARWAL
• Keywords: Business income; Principle of natural justice; Transactions in derivatives; Speculative transactions

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A , LUCKNOW BEFORE SHRI. N .S. SAINI , ACCOUNTANT MEMBER AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER ITA NO. 46/LKW/2017 ASSESSMENT YEAR: 2012 - 13 ACIT RANGE 1 LUCKNOW V. M/S APURVA R. K. HOTEL S PVT. LTD. 101, HOTEL SHIMLA PALACE OLD RTO COMPOUND G.B. MARG, LUCKNOW T AN /PAN : AAICA7866R (APP ELLA NT) (RESPONDENT) APP ELL ANT BY: SHRI C. K. SINGH, D.R. RESPONDENT BY: SHRI YOGESH AGARWAL, ADVOCATE DATE OF HEARING: 10 10 201 8 DATE OF PRONOUNCEME NT: 31 10 201 8 O R D E R PER N.S. SAINI , A .M : THIS IS AN APPEAL PREFERRED BY THE REVENUE AGAINST THE ORDER THE ORDER OF LD. CIT(A) - 1, LUCKNOW DATED 15/9/2016. GROUNDS NO.1 & 2 OF THE APPEAL READ AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE ID. CIT(A) ERRED IN LAW WHILE HOLDING THE GAINS FROM TRADING OF SHARES OUT OF INVESTMENT AT RS. 2,24,147 , 841 / - AS SHORT TERM CAPITAL GAIN INSTEAD OF BUSINESS INCOME AS SIGNIFICANT SHARE TRADING ACTIVITIES HAVING SUBSTANTIAL PROFIT MOTIVE DETERMIN ED THE NATURE OF SUCH SHARE HOLDINGS AS STOCK IN TRADE UNDER THE HEAD CURRENT ASSETS. 2 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS SHOWN PROFIT FROM SALE AND PURCHASE OF SHARES OF RS.2,24,147,841/ - AS SHORT TERM CAP ITAL GAINS. THE DIVIDEND RECEIVED FROM THOSE SHARES IS ONLY RS.63,329/ - . THEREFORE, HE INFERRED THAT OBJECT OF THE COMPANY WAS TO EARN PROFIT BY WAY OF PURCHASE AND ITA NO.46/LKW/2017 PAGE 2 OF 9 SALE OF SHARES AND NOT TO DERIVE INCOME BY WAY OF EARNING DIVIDEND. HE OBSERVED THAT FRO M THE DETAILS PROVIDED BY THE ASSESSEE REGARDING SHARES, IT HAS BEEN FOUND THAT THERE IS FREQUENT PURCHASE AND SALE OF SHARES OF DIFFERENT COMPANIES ON DIFFERENT DATES. HENCE, HE TREATED RS.2,24,17,841/ - AS BUSINESS INCOME INSTEAD OF SHORT TERM CAPITAL GA IN SHOWN BY THE ASSESSEE. 3 . ON APPEAL, LD. CIT(A) ACCEPTED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER: - THE INCOME OF RS 6,17,665/ - WHICH WAS THE BUSINESS INCOME DISCLOSED BY THE APPLICANT I N ITS ITR AS BUSINESS INCOME. THE LD. AO IN HER ORDER DOUBLED TH E BUSINESS INCOME AMOUNTING RS. 617665.00 OF THE ASSESSEE COMPANY BY ADDING THE SAME IN THE INCOME FROM PURCHASE AND S ALE OF THE SHARES AMOUNTING RS. 22417841.00 WHICH WAS IN ACTUAL AMOUNTING RS. 20387679.00 AFTER THE NET OF EXPENSES. THIS ADDITION RESULTE D IN TH E ADDITION OF SAME INCOME TWICE. FROM THE ABOVE SET OF FACTS IT IS CLEAR THAT THE SHARE HELD BY THE ASSESSEE IS ONLY FOR INVESTMENT PURPOSE AND PROFIT FROM THE SAME ARE CAPITAL GAIN THEREFORE TREATMENT OF CAPITAL GAIN AS BUSINESS INCOME BY THE LD. A O IS AGAINST NATURAL JUSTICE AND FAIR LAY AND LIABLE TO BE DELETED. DECISION: - 5. I HAVE CONSIDERED THE SUBMISSION MADE BY THE APPELLANT AND ALSO GONE THROUGH ASSESSMENT ORDER. THE ASSESSING OFFICER RELIED ON THE CBDT CIRCULAR NO. 4/2007 DATED 15.06.2007 I N WHICH THE AO EMPHASIZES ONLY ON THE SUBSTANTIAL NATURE OF TRANSACTION, MANNER OF MAINTENANCE OF BOOKS OF ACCOUNTS AND MAGNITUDE OF FREQUENT PURCHASES AND SALES OF SHARES AND TREATED THE SHORT TERM CAPITAL GAIN AS BUSINESS INCOME. ITA NO.46/LKW/2017 PAGE 3 OF 9 THE APPELLANT COMPANY WA S INCORPORATED TO DO THE HOTEL BUSINESS, AS THE HOTEL WAS UNDER CONSTRUCTION THEREFORE, THE INVESTMENT MADE IN CONSTRUCTION OF HOTEL PR E MISES SHOWN AS WORK IN PROGRESS IN THE BALANCE SHEET. AS MENTIONED BY THE APPELLANT THE APPELLANT HAD SURPLUS FUNDS, THE REFORE, FOR BETTER UTILIZATION OF THE AVAILABLE FUNDS TRANSACTIONS WERE MADE IN SHARES AND SHORT TERM CAPITAL GAIN WERE ARISES OUT OF THESE TRANSACTIONS THE SHARES WHICH WERE SOLD WERE SHOWN YEAR TO YEAR IN ITS BALANCE SHEET AS INVESTMENT IN SHARES. THEREF ORE, ANY GAIN ARISES FROM SALE OF THESE SHARES/SCRIPTS OBVIOUSLY RESULTANT SHORT TERM OR LONG TERM CAPITAL GAIN. IN APPELLANT CASE THE APPELLANT HAS SHOWN SHORT TERM CAPITAL GAIN ON THESE SALE OF SHARES/SCRIPTS. APPELLANT SUBMITTED THE ABOVE CIRCULAR AND R ELIED UPON THE JUDGMENT MENTIONED IN THE SAID CIRCULAR I.E. COMMISSIONER OF INCOME TAX (CENTRAL), CALCUTTA V/S ASSOCIATED INDUSTRIAL DEVELOPMENT COMPANY (P) LTD (82 ITR 586), THE SUPREME COURT OBSERVED THAT: 'WHETHER A PARTICULAR HOLDING OF SHARES IS BY W AY OF INVESTMENT OR FORMS PART OF THE STOCK - IN - TRADE IS A MATTER WHICH IS WITHIN THE KNOWLEDGE OF THE ASSESSEE WHO HOLDS THE SHARES AND IT SHOULD, IN NORMAL CIRCUMSTANCES, BE IN A POSITION TO PRODUCE EVIDENCE FROM ITS RECORDS AS TO WHETHER IT HAS MAINTAINE D ANY DISTINCTION BETWEEN THOSE SHARES ARE ITS STOCK - IN - TRADE AND THOSE WHICH ARE HELD BY THE WAY OF INVESTMENT.' SINCE THE ASSESSEE APPELLANT HAS ALREADY CLASSIFIED THE SHARES AS ITS INVESTMENT AND DOES NOT KEEP THE SHARES IN STOCK - IN - TRADE AND COMPANY WA S ALSO NOT FORMED FOR THE BUSINESS .OF DEALING IN SHARES. THE APPELLANT STATED IN ITS WRITTEN SUBMISSION THAT THE SHARES ARE CLASSIFIED AS INVESTMENT OF A Y UNDER CONSIDERATION AS WELL AS EARLIER YEARS ALSO. THE APPELLANT HAS SHOWN THESE IN V ESTMENT IN ITS A UDITED BALANCE SHEET FOR RELEVANT ASSESSMENT YEARS. THE CHARTERED ACCO UN TANT HAS ALSO NOT MADE ANY QUALIFICATION FOR ITA NO.46/LKW/2017 PAGE 4 OF 9 CLASSIFICATION OF SHARES HELD AS INVESTMENT IN THE BALANCE SHEET YEAR ENDING 31.03.2.012 AND ALSO IN EARLIER RELEVANT YEARS. FURTHER, I FOU ND MUCH FORCE IN THE ARGUMENT OF THE APPELLANT THAT THE CONSIDERABLE HOLDING PERIOD WAS THERE IN ALL SCRIPT /STOCK /SHARES SOLD DURING THE YEAR. IN THE PRESENT CASE THE ASSESSEE COMPANY HAS HELD ALL SHARES AS INVESTMENT WHICH IS DULLY SHOWN IN AUDITED BALA NCE SHEET OF THE ASSESSEE AS INVESTMENT ( NOTE - 5 TO THE BALANCE SHEET). THIS IS FURTHER STRENGTHENED BY THE FACTS OF THE APPELLANT CASE THAT THE SHARES WHICH WERE DEALT DURING THE YEAR WERE HELD FOR A CONSIDERABLE PERIOD. THEREFORE, CHANGING OF HEADS OF I NCOME FROM SHORT TERM CAPITAL GAIN TO BUSINESS INCOME IS NOT JUSTIFIED. RELIANCE IS P LACED ON FOLLOWING JUDICIAL DECISIONS: - 1. CIT VS. NSS INVESTMENT PVT. LTD. (2005) 277 ITR 149(MAD.) 'A COMPANY CAN HOLD SHARES AS STOCK IN TRADE FOR PURPOSE OF DURING B USINESS OF BUYING AND SALE OF SUCH SHARES, W HILE AT THE SAME TIME IT CAN ALS O HOLD OTHER SHARES AS ITS CAPITAL FOR PURPOSE OF EARNING DIVIDEND INCOME. THUS, WHERE THE FINDING WAS THAT THE SHARES IN QUESTION WERE NEVER WERE TREATED BY THE ASSESSEE AS STOCK IN TRADE AND THE Y WERE HELD FOR EARNING DIVIDEND ONLY. IT WAS HELD THAT THE TRIBUNAL WAS RIGHT IN LAW IN HOLDING THAT THE PROFIT ON SALE OF SUCH SHARES WAS TO BE TREATED AS CAPITAL GAIN'. 2. FE LS PAR CREDIT AND INVESTMENT PVT. LTD. VS. CIT (2012) 346 ITR 121 (MAD.) 'WHERE ASSESSEE HELD SHARES IN QUESTION ONLY AS AN INVESTMENT AND NEVER INTENDED TO KEEP THEN AS STOCK IN TRADE PROFIT ON SALE OF SAID SHARES WAS ASSESSABLE AS CAPITAL GAIN AND NOT AS BUSINESS INCOME. (AY 1992 - 93 AND 1993 - 94 IN FAVOUR OF ASSESS EE). 3. A CIT VS. OM PRAKASH ARORA (2011) 146 TTJ 730 (DELHI) ITA NO.46/LKW/2017 PAGE 5 OF 9 IT WAS HELD THAT WHERE SHARES WERE TREATED AS INVESTMENTS WHICH WERE MADE OUT OF OWN FUNDS AND ASSESSEE DID NOT HAVE ITS OWN INFRASTRUCTURE TO CARRY ON SUCH BUSINESS SURPLUS REALIZED ON SALE O F SHARES WAS TAXABLE UNDER HEAD CAPITAL GAIN. 4. ITO VS. RV INVESTMENT AND DELUXE LTD. (2011) 49 SOT 17(URO) (KOL.) 'HELD THAT SUCH SHARES HAD BEEN HELD BY THE ASSESSEE FOR A CONSIDERABLE PERIOD OF TIME SAY THREE FOUR MONTHS, HENCE THE ASSESSEE'S TRANSA CTIONS OF SHARES WAS IN THE NATURE OF INVESTMENT IN SHARES AND ACCORDINGLY DELIVERY BASE TRANSACTIONS IN THE INSTANT CASE WERE TO BE TREATED AS THOSE IN THE NATURE OF INVESTMENT. PROFIT RECEIVED WAS TO BE TREATED EITHER AS SHORT TERM CAPITAL OR LONG TERM C APITAL GAIN DEPENDING UPON THE PERIOD OF HOLDING. 5. S.K. FINANCE VS. DCIT (2012) 13 ITR (TRIE) 236 (MUM.) 'THE ASSESSEE WAS ENGAGED IN BUSINESS OF FINANCING AND MONEY LANDING. IT HAD DECLARED CERTAIN SHORT TERM CAPITAL GAIN ON SALE OF SHARES WHICH ACCOR DINGLY TO THE ASSESSEE WERE HELD AS INVESTMENT. THE TREATED SAID GAIN AS TRADING GAIN OBSERVING THAT THE ENGAGEMENT OF PORT FOLIO MANAGER AND CLAIM OF EXPENSES SHOWN THE INTENTION OF THE ASSESSEE TO MAKE PROFIT BY DEALING IN SHARES. HELD THAT IT WAS NOT CA SE OF THE REVENUE THAT THE ASSESSEE WAS NOT SHOWN THE INVESTMENT IN SHARES AS INVESTMENT IN BALANCE SHEET FOR AY 2004 - 05 AND 2005 - 06 IT WAS ALSO NOT THE CASE OF THE REVENUE THAT THE SAID INVESTMENT IN SHARES AND MUTUAL FUND WAS FOUND TO BE FALSE AND UNTRUE . THE REVENUE HAD PLACED NO MATERIAL TO SHOW THAT THE ASSESSEE'S CASE DID NOT FALL WITHIN THE TEST LAID DOWN BY THE CBDT IN ITS CIRCULAR NO. 4 OF 2007 297 ITR (ST) 384 TO SHOW THAT SHARES WERE HELD BY THE ASSESSEE AS STOCK IN TRADE AND NOT AS INVESTMENT. T HEREFORE, THE SAID TRANSACTIONS WERE IN THE NATURE OF INVESTMENT AND THE PROFIT RECEIVED THEREFROM WAS ASSESSABLE AS SHORT TERM CAPITAL GAIN AS SHOWN BY THE ASSESSEE.' ITA NO.46/LKW/2017 PAGE 6 OF 9 6. ACIT VS. SMT. GARGI SHITAL KUMAR PATEL (2012) 13 ITR (TRIB.) 286 (AHD.) 'IT WAS HEL D THAT PROFIT ON SALE OF SHARES HELD AND INVESTMENT WOULD BE CHARGEABLE AS CAPITAL GAIN (AY 2006 - 07 IN FAVOUR OF ASSESSEE). 7. DEV ASHOK KARVAT VS. DCIT (2012) 50 SOT 167 (MUM.) 'HELD THAT INVESTMENT IN SHARES WAS MADE BY THE ASSESSEE OUT OF HIS OWN FUNDS AND FROM NON INTEREST BEARING FUNDS AND HE NEITHER PAID ANY INTEREST NOT CLAIMED ANY OTHER EXPENSES RELATING TO SALE TRANSACTION OF SUCH SHARES AND MUTUAL FUNDS. FURTHER THERE WAS NEITHER ANY INTRA DAY TRANSACTION MADE BY ASSESSEE IN SHARES NOR THERE WAS A TRADING IN SHARES &ON FUTURE AND OPTION BASIS AND PERCENTAGE OF CAPITAL GAIN OF LESS THAN 30 DAYS WAS ONLY 5.13% WHICH WAS VERY NEGLIGIBLE CONSIDERING TOTAL AMOUNT OF SHORT TERM CAPITAL GAIN. HENCE, ON FACTS, TRANSACTIONS IN SHARES AND MUTUAL FUNDS WERE MADE BY THE ASSESSEE AS INVESTOR AND NOT AS'A TRADER AND THEREFORE, PROFIT EARNED FROM SAID TRANSACTION WAS SHORT TERM CAPITAL GAI N AND NOT BUSINESS INCOME.' 8. D& M COMPONENTS PVT . LTD. VS. ACIT 49 SOT 224 (DELHI) 'WHERE ASSESSEE HAD NOT USED BORROWED FUNDS FOR PURCHASES OF SHARES AND SHARES WERE NOT TREATED AS STOCK IN TRADE, INCOME ARISING FROM SALE OF SHAVES SHOULD BE TAXED AS CAPITAL GAIN (AY 2006 - 07 IN FAVOUR OF ASSESSEE.)' CONSIDERING THE ABOVE FACTS AND CIRCUMSTANCES AND RESPECTFULLY FOLLOWING TH E JUDICIAL DECISIONS MENTIONED ABOVE I HOLD THAT THE AO WAS NOT JUSTIFIED IN TREATING THE SHORT TERM CAPITAL GAIN AS BUSINESS PROFIT IN THE HANDS OF THE APPELLANT, THE ASSESSING OFFICER DID NOT BRING ANY MATERIAL ON RECORD WHICH COULD JUSTIFY HIS ACTION FO R CHANGING OF HEADS OF INCOME FROM CAPITAL GAIN TO INCOME FROM BUSINESS, IN RESPECT OF CAPITAL GAIN EARNED BY THE APPELLANT BY SALE OF SHARES, SCRIPTS AND MUTUAL FUNDS. THEREF ORE AO IS DIRECTED TO TREAT RS. 2,03,87,679.00 AS DECL ARED AND SHOWN BY THE APPELL ANT SHORT TERM CAPITAL GAIN. ITA NO.46/LKW/2017 PAGE 7 OF 9 4 . THE LD. D.R. RELIED ON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD. A.R. OF THE ASSESSEE SUPPORTED THE ORDER OF LD. CIT(A). 5 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE MATERIALS ON RECORD, WE FIND THAT LD. D.R. COULD NOT POINT OUT ANY SPECIFIC ERROR IN THE ORDER OF THE LD. CIT(A). HE COULD NOT CITE ANY CONTRARY DECISION IN FAVOUR OF THE REVENUE. NO OTHER MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT PROFIT FROM SALE AND PURCHASE OF SHARES SHOWN BY THE ASSESS EE AS SHORT TERM CAPITAL GAIN WAS THE BUSINESS INCOME OF THE ASSESSEE. HENCE, WE FIND NO GOOD REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) WHICH IS CONFIRMED AND GROUND NO.2 OF THE APPEAL OF THE REVENUE IS DISMISSED. 6 . GROUND NO.3 READS AS UNDER: - 3. O N THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) ERRED IN LA W WHILE TREATING THE TRANSACTIONS IN F&O AS SAFEGUARD TO IN VESTMENTS AGAINST LOSS OF RS.12,89, 735/ - THROUGH PRICE FLUCTUATION WHICH ASSESSEE HAS FILED TO SUBSTANTIATE. 7 . BRIEF FACTS O F THE CASE ARE THAT ASSESSING OFFICER OBSERVED THAT ASSESSEE HAS CLAIMED LOSS OF RS.12,89,735/ - IN F&O TRANSACTION. ACCORDING TO THE ASSESSING OFFICER, ASSESSEE HAS NOT SUBMITTED ANY EVIDENCE TO SUBSTANTIATE THE CLAIM THAT F&O TRANSACTIONS WERE SAFEGUARD AGAINST LOSS THROUGH PRICE FLUCTUATION. HENCE HE TREATED THE LOSS AS SPECULATIVE IN NATURE AND DID NOT ALLOW ANY SET OFF FROM THE INCOME OF NORMAL BUSINESS. 8 . ON APPEAL THE LD. CIT(A) ACCEPTED THE APPEAL OF THE ASSESSEE BY OBSERVING AS UNDER: - ITA NO.46/LKW/2017 PAGE 8 OF 9 I HAVE CONSI DERED THE SUBMISSION OF APPELLANT AND GONE THROUGH ORDER OF AO. THE AUTHORIZED REPRESENTATIVE RELIED ON SEC 43(5B) OF THE INCOME TAX ACT 1961, IN WHICH IT WAS VERIFIED THAT AN ELIGIBLE TRANSACTIONS IN RESPECT OF TRADING AND DERIVATIVES TO REFERRED TO IN CL AUSE 31 (AC) OF 232 OF SECURITIES CONTRACTS (REGULATIO N) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NOT HE DEEMED TO BE SPECULATIVE TRANSACTION. CONSIDERING THE ABOVE FACTS I HOLD THAT THE AO WAS NOT JUSTIFIED IN T REATING F&O T RANSACTIONS OF RS. 12,89,735/ - AS SPECULATIVE TRANSACTIONS AND NOT ALLOWING THE LOSS INCURRED ON PURCHASES AND SALES OF F&O TRANSACTIONS. THE AO IS DI RECTED TO TREAT THE LOSS OF RS.12,89, 735/ - AS BUSINESS LOSS. THUS, THE GROUND NO. 2 RAISED BY APPELLANT IS ALLOWED. 9 . THE LD. D.R. RELIED ON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD. CIT(A) RELIED ON THE ORDER OF THE LD. CIT(A). 10 . AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE MATERIALS ON RECORD, WE FIND THAT LD. D.R. COULD NOT POINT OUT ANY SP ECIFIC ERROR IN THE ORDER OF THE LD. CIT(A). NO MATERIAL WAS BROUGHT ON RECORD TO SHOW THAT THE PROFIT FROM F&O TRANSACTION WAS A SPECULAT IVE LOSS AND NOT A BUSINESS LOSS. HENCE, WE FIND NO GOOD REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) WH ICH IS C ONFIRMED AND GROUND NO.3 OF THE APPEAL OF THE REVENUE IS DISMISSED. 11 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN ACCORDANCE WITH RULE 34(4) BY PUTTING ON NOTICE BOARD ON 31 ST OCTOBER, 2018. SD/ - SD/ - [PARTHA SARATHI CHAUDHURY] [ N.S. SAINI ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 31 ST OCTO BER , 201 8 JJ: 1010 ITA NO.46/LKW/2017 PAGE 9 OF 9 COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT(A) 4 . CIT 5 . DR