ACIT, CHENNAI V. M/s. Indbank Merchant Banking Services Ltd., CHENNAI

ITA 73/CHNY/2012

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61017 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2008-2009
• Appeal Filed On: 12-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Capital asset; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ITA NOS. 72 & 73/(MDS)/2012 ASSESSMENT YEARS : 2007-08 & 2008-09 THE ASSISTANT COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-II(3), 121, UTHAMAR GANDHI SALAI, CHENNAI -600 031. VS. M/S. INDBANK MERCHANT BANKING SERVICES LTD., 1 ST FLOOR, KHIVRAJ COMPLEX-1 NO.480, ANNA SALAI, CHENNAI 600 035. PAN AAACI 2107 B (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI S. MOHARANA, IRS, COMMISSIONER OF INCOME-TAX RESPONDENT BY : SHRI SAROJ KUMAR PARIDA, AD VOCATE DATE OF HEARING : 3 RD APRIL, 2012 DATE OF PRONOUNCEMENT : 17 TH APRIL, 2012 O R D E R PER DR. O.K. NARAYANAN, VICE-PRESIDENT THESE TWO APPEALS ARE FILED BY THE REVENUE. THE RE LEVANT ASSESSMENT YEARS ARE 2007-08 AND 2008-09. THE APPE ALS ARE ITA 72 & 73/1 2 :- 2 -: DIRECTED AGAINST THE ORDERS OF THE COMMISSIONER OF INCOME- TAX(APPEALS)-III AT CHENNAI, BOTH DATED 27.10.2011. 2. THE ASSESSEE IS A FULLY OWNED SUBSIDIARY OF IN DIAN BANK. IT IS ENGAGED IN THE BUSINESS OF MERCHANT BANKING, STOCK BROKING, DEPOSITORY PARTICIPANT SERVICES, INVESTMENTS AND OT HER FINANCIAL SERVICES. 3. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASS ESSING OFFICER HAD TO ADDRESS AN ISSUE WHETHER THE CLAIM O F EXEMPTION MADE BY THE ASSESSEE UNDER SEC.10(38) WAS PROPER O R NOT. 4. SEC.10(38) PROVIDES THAT ANY INCOME ARISING FROM THE TRANSFER OF A LONG-TERM CAPITAL ASSET, BEING AN EQU ITY SHARE IN A COMPANY OR A UNIT OF AN EQUITY ORIENTED FUND, WOULD NOT FORM PART OF TOTAL INCOME, IF THE SALE OF SUCH SHARES OR UNIT S WAS MADE AFTER THE DATE ON WHICH CHAPTER VII OF THE FINANCE (NO.2) ACT, 2004 COMES INTO FORCE AND SUCH TRANSACTION IS CHARGEABLE TO SECURITIES TRANSACTION TAX(STT). 5. THE CASE OF THE ASSESSEE IS THAT FOR THESE TWO A SSESSMENT YEARS, THE ASSESSEE HAS SOLD SHARES OF M/S. PUNJ LL OYD LTD. AND NUMERIC POWER SYSTEMS LTD., HELD BY IT, THROUGH THE IMPUGNED PREVIOUS YEAR AND THOSE SHARES WERE HELD BY THE ASS ESSEE AS ITA 72 & 73/1 2 :- 3 -: LONG TERM INVESTMENTS AND, THEREFORE, THE SURPLUS A RISING OUT OF THE SALE OF THOSE SHARES AMOUNTS TO LONG TERM CAPIT AL GAINS AND THEY HAVE PAID STT AND, THEREFORE, THE LONG TERM CA PITAL GAINS ARISING OUT OF THE SALE OF THOSE SHARES DO NOT ATTR ACT CAPITAL GAINS TAXATION. 6. THESE CONTENTIONS OF THE ASSESSEE HAVE BEEN REJE CTED BY THE ASSESSING OFFICER ON THE GROUND THAT THERE IS N OTHING ON RECORD TO SUPPORT THE CLAIM OF THE ASSESSEE THAT TH E SHARES OF THOSE COMPANIES WERE HELD BY THE ASSESSEE AS LONG T ERM INVESTMENTS. ON THE OTHER HAND, BY READING AND REL YING ON THE ANNUAL STATEMENT OF THE ACCOUNTS OF THE ASSESSEE, T HE ASSESSING OFFICER HELD THAT THOSE SHARES WERE HELD BY THE ASS ESSEE AS STOCK-IN-TRADE AND AS SUCH ANY INCOME ARISING OUT O F THE SALE OF THOSE SHARES WOULD BE IN THE NATURE OF BUSINESS INC OME. HE ACCORDINGLY, DENIED THE EXEMPTION CLAIMED BY THE AS SESSEE AND BROUGHT THE SURPLUS TO TAXATION. HE HELD THAT ONLY FOR THE REASON THAT THE ASSESSEE HAD PAID STT, IT IS NOT POSSIBLE TO HOLD THAT THE GAINS GENERATED IN THE TRANSACTION WAS IN THE NATUR E OF LONG TERM CAPITAL GAINS. 7. WHEN THESE ISSUES WERE TAKEN IN FIRST APPEAL, TH E COMMISSIONER OF INCOME-TAX(APPEALS) ACCEPTED THE CO NTENTIONS ITA 72 & 73/1 2 :- 4 -: OF THE ASSESSEE AND REMITTED THE ISSUE BACK TO THE ASSESSING OFFICER FOR RECONSIDERATION IN THE LIGHT OF THE DIR ECTION GIVEN BY HIM. THE DIRECTION GIVEN BY THE COMMISSIONER OF IN COME- TAX(APPEALS) IS THAT IF THE ASSESSEE HAD NOT VALUED THESE SHARES ON YEARLY BASIS AND DEPLETION IN VALUE OF THOSE SHA RES WAS NOT CLAIMED AS DEDUCTION, IN ANY OF THE EARLIER ASSESSM ENT YEARS, THOSE SHARES CANNOT BE TREATED AS TRADING STOCK. B UT, ON THE OTHER HAND, THEY SHOULD BE TREATED AS LONG TERM INV ESTMENTS. HE DIRECTED THAT ON ARRIVING AT A FINDING ON THE ABOVE , THE ASSESSING AUTHORITY MAY DECIDE THE ISSUE SO ALSO TAKING INTO CONSIDERATION THE FACT THAT THE ASSESSEE HAD PAID STT. 8. IT IS AGAINST THE ABOVE, THE REVENUE HAS COME IN APPEALS BEFORE US. 9. SHRI S.MOHARANA, THE LEARNED COMMISSIONER OF IN COME-TAX APPEARING FOR THE REVENUE ARGUED THAT THERE IS NOTH ING AVAILABLE ON RECORD TO SUPPORT THE CONTENTION OF THE ASSESSEE THAT THE SHARES OF PUNJ LLOYD LTD. AND NUMERIC POWER SYSTEMS LTD. WERE HELD BY THE ASSESSEE AS LONG TERM INVESTMENTS. HE INVITED OUR ATTENTION TO THE LETTER OF THE ASSESSEE DATED 12.12 .2009 WHEREIN THE ASSESSEE ITSELF HAD ADMITTED THAT THE INVESTMEN TS MADE BY THE ASSESSEE COMPANY ARE IN THE COURSE OF ITS BUSI NESS. HE ITA 72 & 73/1 2 :- 5 -: CONTENDED THAT IT IS NOT POSSIBLE TO BRING OUT A PR OPOSITION THAT THE PROFIT ON SALE OF SHARES MAY BE EXEMPTED UNDER SEC. 10(38) ONLY ON THE GROUND THAT THE ASSESSEE HAD PAID STT. 10. SHRI SAROJ KUMAR PARIDA, THE COUNSEL APPEARING FOR THE ASSESSEE, ON THE OTHER HAND, CONTENDED THAT THE COM MISSIONER OF INCOME-TAX(APPEALS) HAS GIVEN A PROPER DIRECTION TO THE ASSESSING OFFICER TO DETERMINE THE NATURE OF SHARES SOLD BY THE ASSESSEE. HE CONTENDED THAT THE ASSESSEE HAS BEEN HOLDING SHARES BOTH AS LONG TERM INVESTMENTS SO ALSO AS BUS INESS STOCK. WHEREVER, THE ASSESSEE HAS SOLD THE SHARES HELD AS BUSINESS STOCK AND EARNED SURPLUS, THE SURPLUS HAS BEEN OFFE RED AS BUSINESS INCOME. IT IS ONLY IN THE CASE OF LONG TE RM INVESTMENTS THAT THE ASSESSEE HAS PAID STT AND MADE CLAIM FOR E XEMPTING THE SURPLUS UNDER SEC.10(38). THE COUNSEL FURTHER CONTENDED THAT THE ASSESSING OFFICER WOULD BE IN A POSITION TO COM E TO A PROPER CONCLUSION IF THE DIRECTION OF THE COMMISSIONER OF INCOME- TAX(APPEALS) IS CARRIED OUT TO EXAMINE, WHETHER THE SHARES SOLD BY THE ASSESSEE WERE SUBJECT MATTER OF ANY VALUATIO N BY DEPLETION IN THE VALUE OF SHARES IN THE PAST. HE, THEREFORE , SUBMITTED THAT THERE IS NO MERIT IN THE ARGUMENT RAISED BY THE REV ENUE. THEREFORE, THE APPEALS MAY BE DISMISSED. ITA 72 & 73/1 2 :- 6 -: 11. WE CONSIDERED THE MATTER IN DETAIL. WE ALSO CO NSIDERED THE DECISION RELIED ON BY THE COUNSEL APPEARING FOR THE ASSESSEE IN THE CASE OF ACIT V. STARGATE INVESTMENTS (P) LTD. ( 10 ITR (TRIB) 211) (CHENNAI). THE COMMISSIONER OF INCOME-TAX(APP EALS) IN HIS ORDER HAS GIVEN A DIRECTION TO THE ASSESSING OFFICE R TO EXAMINE WHETHER THE SHARES SOLD BY THE ASSESSEE WERE SUBJE CT MATTER OF REVALUATION ON ACCOUNT OF DEPLETION IN THE VALUE OF THOSE SHARES AND TO DECIDE THE EXACT NATURE OF SHARES HELD BY TH E ASSESSEE, TO FIND OUT WHETHER THE SHARES WERE HELD AS INVESTMENT S OR STOCK-IN- TRADE. AMONG OTHER THINGS, IT IS NECESSARY FOR THE ASSESSING OFFICER TO LOOK INTO THE LENGTH OF PERIOD THE ASSES SEE HAS HELD THE SHARES, THE FREQUENCY OF TRANSACTIONS IN SHARES CAR RIED OUT BY THE ASSESSEE, THE NATURE OF FUNDS UTILIZED BY THE ASSE SSEE TO ACQUIRE THE SHARES, WHETHER THE FUND IS OWN FUNDS OR INTERE ST BEARING BORROWED FUNDS, THE MARKET TENDENCY OF THE SHARES H ELD BY THE ASSESSEE, ETC. THEREFORE, IT IS NOT FAIR TO SUGGE ST THAT THE NATURE OF THE SHARES HELD BY THE ASSESSEE COMPANY SHOULD BE DECIDED ON A SINGULAR TEST. 12. APART FROM THE ABOVE, WHAT ARE THE FACTS AVAILA BLE IN THE PRESENT CASE? AS STATED BY THE ASSESSING OFFICER, THE ASSESSEE ITSELF HAS SUBMITTED BEFORE THE ASSESSING AUTHORITY IN ONE OF ITS ITA 72 & 73/1 2 :- 7 -: LETTERS THAT THE SHARES ARE HELD BY THE ASSESSEE CO MPANY AS PART OF ITS BUSINESS STOCK AND, THEREFORE, ANY SURPLUS A RISING ON SALE OF THOSE SHARES WOULD BE IN THE NATURE OF BUSINESS INC OME. THIS SUBMISSION MADE BY THE ASSESSEE COMPANY IS MORE EXP LICITLY REFLECTED IN SCHEDULE K. SCHEDULE K CONTAINS NOTES ON ACCOUNTS. ITEM E OF SCHEDULE K READS AS UNDER : E INVESTMENTS THE INVESTMENTS HELD BY THE COMPANY ARE ALL LONG- TERM INVESTMENTS. LONG TERMS INVESTMENTS ARE CARRIED AT COST LESS PROVISION FOR DIMINUTION, OTHE R THAN TEMPORARY IN NATURE. THE COMPANY HAS RECKONED DIMINUTION IN VALUE OF SHARES/DEBENTURES A S PERMANENT IN NATURE BY RELYING ON MARKET VALUE OF QUOTED SHARES AND BOOK VALUE/FAIR VALUE WHICHEVER I S HIGHER IN RESPECT OF UNQUOTED SHARES. 13. THIS DISCLOSURE MAKES IT CLEAR THAT EVEN LONG T ERM CAPITAL INVESTMENTS HELD BY THE ASSESSEE ARE VALUED AT THE END OF EVERY PREVIOUS YEAR SO AS TO PROVIDE FOR THE DIMINUTION I N VALUE WHEN COMPARED TO THE MARKET VALUE OF THE SHARES AS ON TH AT DATE. IT MEANS THAT EVEN IN THE CASE OF LONG TERM INVESTMENT S, THE ASSESSEE HAS CLAIMED THE DEPLETION IN VALUE OF SHAR ES AS LOSS IN ITA 72 & 73/1 2 :- 8 -: THOSE CONCERNED ASSESSMENT YEARS. IT MEANS EVEN IN THE CASE OF SHARES HELD BY THE ASSESSEE FOR A LONG TIME AND CH ARACTERIZED AS LONG TERM INVESTMENTS, ANNUAL VALUATION OF STOCK HA S BEEN DONE AND FUNCTIONALLY THE ASSESSEE HAS TREATED ALL THOSE INVESTMENTS AS STOCK-IN-TRADE, PARTICULARLY FOR THE PURPOSE OF COMPUTING ITS INCOME AND THEREBY FOR THE PURPOSE OF TAXATION AS W ELL. IT IS, THEREFORE, TO BE SEEN THAT WHAT IS LONG TERM INVEST MENT AND WHAT IS SHORT TERM INVESTMENT, WHAT IS STOCK-IN-TRADE IN THE HANDS OF THE ASSESSEE ARE ALL MATTERS OF ITS OWN BUSINESS PRUDEN CE. THE ASSESSEE MIGHT CLASSIFY THE SHARES AS LONG TERM INV ESTMENTS ON THE BASIS OF LENGTH OF PERIOD FOR WHICH THOSE SHARE S WERE HELD BY THE ASSESSEE. BUT THAT IS NOT THE MATTER TO BE CON SIDERED FOR COMPUTING THE INCOME FOR INCOME-TAX PURPOSE. FOR I NCOME-TAX PURPOSE, THE QUESTION IS WHETHER SURPLUS IS CAPITAL GAINS OR BUSINESS INCOME. THE SURPLUS CAN BE TREATED AS CAP ITAL GAINS ONLY IF THE ASSESSEE HAS NOT VALUED THE SHARES YEA R AFTER YEAR TO ACCOUNT FOR THE DEPLETION IN THE VALUE OF THOSE SHA RES. WHEREVER THE ASSESSEE PROVIDES FOR SUCH DEPLETION IN THE VA LUE OF SHARES IN THE ASSESSMENT AFTER ASSESSMENT, THOSE SHARES HAVE TO BE TREATED AS STOCK-IN-TRADE FOR THE PURPOSE OF INCOME -TAX. THERE IS NOTHING ON RECORD TO SHOW THAT THE SHARES OF PUNJ L LOYD LTD. AND ITA 72 & 73/1 2 :- 9 -: NUMERIC POWER SYSTEMS LTD. WAS DIFFERENT FROM THE A BOVE STATED POSITION. THEREFORE, IN THE FACTS AND CIRCUMSTANCE S OF THE CASE, WE FIND THAT THE ASSESSING OFFICER HAS RIGHTLY TREA TED THE SURPLUS AS BUSINESS INCOME. THE ORDERS OF THE COMMISSIONER OF INCOME- TAX(APPEALS) ON THIS ISSUE ARE SET ASIDE. 14. THE ASSESSEE HAS ALREADY PAID STT ON SALE OF SH ARES INVOLVED IN THESE YEARS. THE ASSESSING AUTHORITY S HALL TREAT SUCH STT PAYMENT AS PAYMENT OF INCOME-TAX. ACCORDINGLY, HE IS DIRECTED TO CREDIT SUCH PAYMENTS WHILE CALCULATING THE DEMAND ARISING OUT OF THE ASSESSMENT ORDERS. 15. IN RESULT, THESE TWO APPEALS FILED BY THE REVEN UE ARE ALLOWED. ORDERS PRONOUNCED ON TUESDAY, THE 17 TH OF APRIL , 2012 AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) (DR.O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 17 TH APRIL, 2012 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR