NIPUN FINVEST P. LTD, MUMBAI V. ACIT 10(3), MUMBAI

ITA 575/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8490 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 02-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 22-01-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: HARIGOVIND SINGH
• Keywords: Capital asset; Business income
• Section: 45(2); 143(3)

Judgement Text

I.T.A NO.575/ MUM/2010 NIPUN FINVEST P. LTD 1 IN THE INCOME TAX APPELLATE TRIBUNAL, B BENCH, MUMBAI. [ CORAM: D.MANMOHAN, V.P. AND PRAMOD KUMAR, AM ] I.T.A NO.575/ MUM/2010 ASSESSMENT YEAR: 2006-07 NIPUN FINVEST P. LTD. APPELLANT 217, RUNWAL COMM. COMPLEX, LBS MARG, MULUND (W), MUMBAI (PA NO.AAACN 3287 F) VS ACIT 10(3), ..RESPONDEN T MUMBAI. APPEARANCES: C.N. VAZE, FOR THE APPELLANT HARI GOVIND SINGH, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CHALLENGED C ORRECTNESS OF CIT(A)S ORDER DATED 9 TH NOVEMBER, 2009, IN THE MATTER OF ASSESSMENT UNDER SECTI ON 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2006 -07 ON THE FOLLOWING GROUND: ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT (A)HAS ERRED IN CONFIRMING THE ACTION OF AO BY TREATING TH E INCOME FROM INVESTMENTS AS BUSINESS INCOME INSTEAD OF CAPITAL GAINS. 2. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE LIK E THIS. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF INVESTMENT IN SHARES AND SECU RITIES, FINANCE, COMMISSION AND LIAISON SERVICE. DURING THE COURSE OF ASSE SSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS EARNED PROFIT ON SALE OF SALES AT I.T.A NO.575/ MUM/2010 NIPUN FINVEST P. LTD 2 ` .68,08,705. HOWEVER, IN THE COMPUTATION OF INCOME , THE ASSESSEE HAS SHOWN THIS INCOME AS SHORT TERM CAPITAL GAIN. WHEN THE AO REQUI RED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE SHORT TERM CAPITAL GAIN SO DISCLOSED, CONSISTENT WITH THE ACCEPTED PAST HISTORY OF THE CASE, NOT BE TREATED AS B USINESS PROFITS CHARGEABLE TO TAX UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION , THE ASSESSEE, INTER ALIA, SUBMITTED THAT STOCK IN TRADE OF SHARES HELD BY THE ASSE SSE HAS BEEN CONVERTED INTO INVESTMENT BY A BOARD RESOLUTION DATED 15.3.2005 AND RELIANCE WAS PLACED ON THE DECISION OF A CO-ORDINATE BENCH OF THIS TRIBUNAL IN T HE CASE OF ACIT V. BRIGHT STAR INVESTMENT (P)LTD.[24 SOT 288]. IN OTHER WORDS, ASSESSEE S CONTENTION WAS THAT NOW THAT THE ASSESSEE HAS TREATED THIS STOCK IN TRADE AS IN VESTMENT, THE PROFITS AND GAINS ON SALE OF SUCH INVESTMENTS CAN ONLY BE TAXED AS CA PITAL GAINS. THIS SUBMISSION OF THE ASSESSEE, HOWEVER, DID NOT IMPRESS THE ASSE SSING OFFICER. HE WAS OF THE VIEW THAT SO FAR AS THE TRIBUNALS DECISION IN THE CASE OF BRIGHT STAR INVESTMENT (SUPRA) IS CONCERNED, THE SAID DECISION IS NOT APPLICABLE ON THE FACTS OF THIS CASE AS MUCH AS THE ISSUE INVOLVED IN BRIGHT STAR IN VESTMENT (SUPRA) WAS WITH REGARD TO APPLICABILITY OF PROVISIONS OF SECTION 45(2) TO SIMILAR TYPES OF TRANSACTION WHEREAS THE ISSUE IN THE PRESENT CASE WHETHER OR NOT THE PROFITS ON SALE OF SHARES SHOULD BE TREATED AS BUSINESS INCOME. IT WAS NOTED THAT IN THE CASE OF BRIGHT STAR INVESTMENT (SUPRA), THE SHARES WERE HELD FOR 23 MONTHS B EFORE CONVERTING THEM INTO CAPITAL ASSETS AND THEREAFTER, THE SHARES WERE DISPO SED OF. THESE FACTS, ACCORDING TO THE AO, WERE NOT PRESENT IN ASSESSEES CASE. THE ASSESSING OFFICER WAS ALSO OF THE CONSIDERED VIEW THAT THE ASSESSEE WAS NOT INTE RESTED IN KEEPING SHARES AS INVESTMENT BUT HAD CONTINUED THE SAME ACTIVITIES AS IN EARLIER YEARS, I.E. TO EARN PROFITS BY SELLING THE SHARES AND THAT THE ASSESSEE HAS ME RELY TRIED TO MAKE THE BENEFIT OF THE PROVISIONS OF THE INCOME TAX ACT FOR E VADING THE TAX BY GIVING COLOURABLE DEVICE TO SUCH TRANSACTIONS. ACCORDINGL Y, THE AO PROCEEDED TO TREAT THE PROFITS ON SALE OF SHARES AS BUSINESS PROFITS AND BROUGHT TH E SAME TO TAX AS SUCH. AGGRIEVED BY THE STAND SO TAKEN BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (A) BUT WITHOUT ANY SUCCESS. THE CIT(A) NOTED THAT THOUGH THE ASSESSEE COMPANY DID PASS A BOARD RESOLUTION CO NVERTING THE STOCK IN TRADE INTO INVESTMENT, THE ASSESSEE DID NOT FULFILL THE CONDITIONS PLACED IN THAT VERY RESOLUTION PASSED BY THE BOARD OF DIRECTORS. IT WAS NOT ED THAT THERE WAS LARGE I.T.A NO.575/ MUM/2010 NIPUN FINVEST P. LTD 3 NUMBER OF TRANSACTIONS AND THE ACTIVITIES OF SALE AND PURCHASES WAS NOT CONFINED TO A PARTICULAR PERIOD DURING THE PREVIOUS YEAR BUT WER E SPREAD OVER ENTIRE PREVIOUS YEAR. THE CIT (A) WAS OF THE VIEW THAT THE ASSESSEE CO NTINUED TO CONDUCT FULL FLEDGED BUSINESS THAT THERE WERE LARGE NUMBER OF TRANSACTIONS TH AT THE INTENTION OF ENTERING INTO THESE TRANSACTIONS WAS TO EARN PROFIT THAT THE ASSE SSEE HAD BORROWED FUNDS WHICH WERE USED WHAT WAS TERMED AS, INVESTMENT IN SHARE S, AND THAT ALL THESE FACTORS PUT TOGETHER CLEARLY SHOW THAT THE ACTIVITIES OF THE ASSESSEE WAS NOT MAKING INVESTMENT. THE CIT (A) ALSO REFERRED TO, AND RELIED UPON, BOARD CIRCULAR NO.4 DATED 15.6.32007 AND JUDGMENT OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF ESTATE INVESTMENT CO. LTD. V CIT, 121 ITR 580. ON THE BASIS OF THIS ANALYSIS, AND APPROVING THE ACTION OF THE ASSESSING OFFICER, THE CIT (A) CONCL UDED THAT THE GAIN ON SALE OF SHARES WAS INDEED REQUIRED TO BE TREATED AS BUSINESS PROFI TS. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 3. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 4. WE HAVE NOTED THAT THERE IS NO DISPUTE THAT THE ASSE SSEE WAS ALL ALONG A TRADER IN SHARES AND IT IS ONLY ON THE STRENGTH OF BOA RD RESOLUTION DATED 15 TH MARCH 2005 THAT THE ASSESSEES CLAIM OF BEING INVESTOR RESTS. TH E SAID ONE SENTENCE RESOLUTION STATES THAT (R)ESOLVED THAT THE AMOUNT OF I NVESTMENT MADE IN EQUITY SHARES OF THE QUOTED AND LISTED COMPANIES TILL 31.3.200 5 BE DETERMINED AND TREATED AS INVESTMENTS IN THE BALANCE SHEET OF THE COMPANY A ND NOT STOCK IN TRADE AND BE MADE EFFECTIVE FROM 1.4.2005 RELEVANT TO THE ACCOUN TING YEAR ENDING 31.3.2006. HOWEVER, THIS RESOLUTION PER SE CANNOT ENTITLE THE ASSESSEE TO TREAT PROFITS ON SALE OF SHARES AS CAPITAL GAINS, PARTICULARLY AS THERE IS NO CHAN GE IN THE ACTIVITIES OF THE ASSESSEE. ALL THAT THE RESOLUTION DOES IS TO DETERMINE TH E ACCOUNTING TREATMENT TO BE GIVEN TO SHARES HELD AS STOCK IN TRADE, BUT, AS IS THE EL EMENTARY LEGAL POSITION, ACCOUNTING TREATMENT PER SE DOES NOT GOVERN THE ACTUAL CHARACTER OF AN ASSET. ME RELY BECAUSE SHARES ARE TREATED AS INVESTMENTS IN THE BOOKS OF ACCOUNT, IT CANNOT BE HELD THAT THESE ARE INVESTMENTS IN CHARACTER. LEARNED COUN SEL FAIRLY ADMITS THAT THERE ARE LARGE NUMBERS OF TRANSACTIONS DURING THE YEAR AND THER E IS NO MATERIAL CHANGE IN THE I.T.A NO.575/ MUM/2010 NIPUN FINVEST P. LTD 4 ACTIVITY LEVEL OF THE ASSESSEE. HIS DEFENSE BASICALLY C ONSIST JUDICIAL PRECEDENTS IN THE CASES OF BRIGHT STAR INVESTMENT (SUPRA), WHICH WAS ALSO H EAVILY RELIED UPON DURING THE ASSESSMENT PROCEEDINGS AND SUGAMCHAND C SHAH VS ACIT (37 DTR 345). AS FAR AS DECISION OF CO-ORDINATE BENCH IN THE CASE OF BRIGHT STAR INVESTMENTS (SUPRA) IS CONCERNED, IT DEALS WITH A SITUATION IN WHICH A TRADE R IN SHARES CONVERTED PART OF ITS STOCK IN TRADE INTO INVESTMENTS AND THE QUESTION AROSE A BOUT THE MANNER IN WHICH GAINS ON SALE OF SUCH INVESTMENTS ARE TO BE TAXED. THE SHARES WERE ACQUIRED FOR SALE, BUT TRADER DECIDED TO KEEP PART OF THESE SHARES WHICH WERE SOLD ALMOST TWO YEARS AFTER CONVERSION INTO INVESTMENTS. THIS SITUATION IS IN SHARP CONTRAST WITH THE FACTS OF THE PRESENT CASE IN WHICH EVEN AS ASSESSEE CONTINUES WIT H THE SAME ACTIVITY LEVEL, HE CONVERTS ENTIRE SHAREHOLDINGS AS A TRADER INTO SHARES HELD AS INVESTMENTS. WE ARE UNABLE TO SEE MATERIAL SIMILARITY IN THESE TWO SITU ATIONS. IN ANY EVENT, THE ISSUE WHICH HAS BEEN REALLY DECIDED IN THE SAID CASE IS THE MANNER IN WHICH CAPITAL GAINS ARE TO BE COMPUTED, I.E. WHETHER OR NOT SECTION 45( 2) WILL BE APPLICABLE, AND NOT WHETHER A BOARD RESOLUTION PER SE CAN RESULT IN CHARACTER OF SHAREHOLDINGS BEING TRANSFORMED INTO INVESTMENTS. LEARNED COUNSELS RELIANC E ON BRIGHT STAR INVESTMENTS (SUPRA) IS, THEREFORE, OF NO AVAIL TO HIS CA USE. 5. LEARNED COUNSELS SUBMISSION IS THAT IN VIEW OF SUGAMC HAND C SHAH DECISION (SUPRA), WHERE SHARES ARE HELD FOR MORE THAN ONE MOTH , THE SAME SHOULD BE TREATED AS INVESTMENTS AND PROFITS ON SALE OF THE SAME SHOULD BE C HARGED AS CAPITAL GAIN. THAT WAS A CASE IN WHICH ASSESSEE WAS, AS NOTED BY THE CO- ORDINATE BENCH, NEITHER FULLY ACTING AS TRADER, NOR AS AN INVESTOR AND, THERE FORE, CONSIDERING THE TOTALITY AND PECULIARITY OF THE FACTS OF THIS (SUGAMCHANDS) CA SE, SOME CRITERION HAD TO BE DRAWN UP. SUCH A CRITERION, AS HAS BEEN DRAWN BY THE BENCH CANNOT BE OF GENERAL APPLICATION. WE ARE NOT PERSUADED BY THE ARGUMENT T HAT WE MUST ADOPT THE SAME CRITERION, ON WHICH WE HAVE OUR RESERVATIONS ABOUT B EING OF UNIVERSAL APPLICATION ANYWAY,, IN THE PRESENT CASE. RIGHT NOW WE ARE DEA LING WITH A SITUATION IN WHICH ASSESSEE HAS ALL ALONG BEEN A TRADER, THERE IS NO CHANGE IN ACTIVITY LEVEL AND THE ONLY DIFFERENCE IS BOARD RESOLUTION NOW REQUIRING ENTIRE O PENING STOCK BEING TREATED AS INVESTMENT. IN OUR CONSIDERED VIEW, ON THESE FACTS, TH ERE IS NO REASON TO HOLD THAT THE ASSESSEE CEASES TO BE A TRADER IN SHARES IN THE CURREN T YEAR. I.T.A NO.575/ MUM/2010 NIPUN FINVEST P. LTD 5 6. LEARNED COUNSEL HAS ALSO LAID GREAT EMPHASIS ON THE F ACT THAT THERE HAS BEEN A REDUCTION IN QUANTUM OF BORROWINGS WHICH SHOWS THAT THE ASSESSEE IS NOW INVESTOR IN SHARES. WHAT IS IMPORTANT, HOWEVER, IS THE FACT THAT ADMITTEDLY THERE HAS BEEN USE OF BORROWED FUNDS IN ACQUIRING AND HOLDING SH ARES WHICH ARE NOW CLAIMED TO BE INVESTMENTS. EVEN AS THIS FACTOR OF BORROWING B Y ITSELF, CANNOT BE WHOLLY CONCLUSIVE TO DECIDE THE TRUE NATURE OF HOLDINGS, I.E . STOCK IN TRADE VS INVESTMENTS, THERE IS AN INHERENT CONTRADICTION IN INVESTMENTS BEIN G MADE OUT OF BORROWED FUNDS. MERELY BECAUSE THERE IS A REDUCTION IN BORROW INGS, ONE CANNOT CONCLUDE THAT THE ASSESSEE IS NO LONGER IN BUSINESS. IN VIEW OF ALL THESE FACTORS, WE ARE UNABLE TO SEE ANY MERIT IN LEARNED COUNSELS THIS CONTENTION EIT HER. 7. IN VIEW OF THE ABOVE DISCUSSIONS, AND HAVING NOTED T HAT THERE IS NO CHANGE IN ACTIVITY LEVEL OR CHARACTER IN THE PRESENT YEAR AND THAT THE ASSESSEE HAS BEEN A TRADER IN SHARES ALL ALONG, WE UPHOLD THE ORDERS OF THE AUTH ORITIES BELOW. GAINS ON SALE OF SHARES, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE , HAVE BEEN RIGHTLY TAXED AS BUSINESS INCOME. WE DECLINE TO INTERFERE IN THE MATTE R. 8. IN THE RESULT, APPEAL IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 15 TH FEBRUARY, 2011 SD/- (D.MANMOHAN ) (VICE PRESIDENT) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 15 TH FEBRUARY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),22, MUMBAI 4. COMMISSIONER OF INCOME TAX, 10 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH B, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO.575/ MUM/2010 NIPUN FINVEST P. LTD 6 DATE INITIALS 1. DRAFT DICTATED ON 3.2 .2011 PS 2. DRAFT PLACED BEFORE AUTHOR 4.2.2011 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM/JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/J M 5. APPROVED DRAFT COMES TO THE SR. PS PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE ON WHICH FILE GOES TO A.R. 10. DATE OF DISPATCH OF ORDER