ACIT, CHENNAI V. Swastik Business Consultants Pvt. Ltd., CHENNAI

ITA 775/CHNY/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2401 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-04-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 09-04-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 28-04-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ANIRUDH RAI
• Assessee Lawyers: DR ANITHA SUMANTH
• Keywords: Capital asset; Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER] I.T.A.NO.775/MDS/2012 ASSESSMENT YEAR : 2007-08 THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE VI(4) CHENNAI VS M/S SWASTIK BUSINESS CONSULTANTS PVT. LTD DRP-1, LOTUS COLONY CHAMIERS ROAD NANDANAM, CHENNAI 600 035 [PAN AAGCS 1035 A ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ANIRUDH RAI, CIT/DR RESPONDENT BY : DR. ANITHA SUMANTH, ADVOCATE DATE OF HEARING : 09-04-2013 DATE OF PRONOUNCEMENT : 11-04-2013 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE RE VENUE AGAINST THE ORDER OF THE LD. CIT(A)-V, CHENNAI, DATED 2.2.2011. 2. THE SOLE ISSUE INVOLVED IN THE APPEAL OF THE REVENU E IS THAT THE LD. CIT(A) ERRED IN HOLDING THE PROFITS ON SALE OF SHARES AS CAPITAL GAINS IN PLACE OF BUSINESS INCOME HELD BY THE ASSES SING OFFICER INSPITE I.T.A.NO.775/11 :- 2 -: OF THE FACT THAT THE SHARES WERE HELD AS STOCK-IN-T RADE TILL THE YEAR ENDED 31.3.2006 AND WERE CONVERTED INTO INVESTMENT IN THE FINANCIAL YEAR 2006-07 AND THEREAFTER SOLE WITHIN THE SAME FI NANCIAL YEAR. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME ADMITTING TOTAL INCOME OF ` 39,80,230/- COMPRISING OF LOSS OF ` 5,048/- FROM BUSINESS AND CAPITAL GAINS OF ` 39,80,230/-. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS S OLD SHARES OF ` 4,44,081/- HELD AS STOCK-IN-TRADE FOR A CONSIDERATI ON OF ` 40,80,025/-. IN THE PROFIT & LOSS ACCOUNT, THE ASSESSEE HAS SHO WN THE SAME AS PROFIT ON SALE OF INVESTMENTS. IN THE COMPUTATI ON OF INCOME STATEMENT ALSO THE ASSESSEE HAS TREATED THE TRANSA CTION AS TRANSFER AND SHOWN IT AS SHORT TERM CAPITAL PF ` 40,80,025/-. SINCE THE SALE CONSIDERATION OF SHARES HAD SUFFERED SECURITIES TRA NSACTION TAX, THE ASSESSEE COMPUTED TAX @ 10% ON THE ABOVE RECEIPTS A ND AS THE TAX ON NORMAL COMPUTATION WAS LESS THAN THE TAX UNDER S PECIAL PROVISIONS, ASSESSEE PAID TAX ON MAT U/S 115JB. THE ASSESSING OFFICER OBSERVED THAT THE NATURE OF BUSINESS OF THE ASSESSEE WAS CO NSULTANCY AND TRADING IN SECURITIES AND THEREFORE, CONSIDERATION RECEIVED ON THE SALE OF SHARES WAS BUSINESS RECEIPTS OF THE ASSESSEE. ACCORDINGLY, HE TREATED THE INCOME OF ` 40,80,025/- AS BUSINESS INCOME AND AFTER I.T.A.NO.775/11 :- 3 -: REDUCING THE LOSS OF ` 5,048/- SHOWN IN THE RETURN OF INCOME AND ALSO ALLOWING ADJUSTMENT FOR BROUGHT FORWARD LOSSES OF ` 2,30,034/-, ASSESSED THE INCOME OF THE ASSESSEE AT ` 38,44,943/- 4. ON APPEAL, BEFORE THE LD. CIT(A) THE ASSESSEE SUBM ITTED THAT THE COMPANY HAD NOT PURCHASED OR SOLD ANY SHAR ES DURING THE PAST TEN YEARS AND THEREFORE, THE COMPANY HAD CEASE D TO BE A DEALER IN SHARES. THE SHARES WERE SHOWN AS INVESTMENT IN ITS BOOKS FOR THE PERIOD 1.4.2006 TO 31.3.2007 AND AFTER CONVERSION O F THE SHARES AS INVESTMENTS, THEY WERE SOLD BY THE ASSESSEE DURING THE YEAR AND HENCE, THE GAINS ARISING ON THE SALE OF SHARES OUGH T TO BE TREATED AS CAPITAL GAINS AND NOT AS PROFITS FROM BUSINESS. TH E ASSESSEE PRODUCED BALANCE SHEETS FOR THE YEARS ENDED 31.3.20 01 TO 31.3.2006 SHOWING THAT THERE WAS NO PURCHASE OR SALE OF SHARE S AND THE ASSESSEE WAS SHOWING ONLY THE VALUE OF SHARES AS ON 31.3.2000 BEING THE COST OR MARKET VALUE WHICHEVER IS LOWER AS STOC K-IN-TRADE IN THE ACCOUNT. THE ASSESSEE RELIED ON THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF RAJA BAHADUR KAMAKHYA NARAIN S INGH VS CIT, 77 ITR 253(S.C) AND THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS ESS JAY ENTERPRISES (P) LTD., 165 TA XMANN 465 (DEL) FOR THE CONTENTION THAT THE TREATMENT GIVEN TO A TRANSA CTION IN THE BOOKS I.T.A.NO.775/11 :- 4 -: OF ACCOUNT OF THE ASSESSEE WAS OF IMPORTANCE TO DE CIDE WHETHER THE ASSETS SOLD WAS A CAPITAL ASSET OR STOCK-IN-TRADE A ND ACCORDINGLY, IT WAS CONTENDED BEFORE THE LD. CIT(A) THAT SINCE THE ASS ESSEE HAD TREATED THE SHARES AS INVESTMENT IN ITS BOOKS OF ACCOUNT DU RING THE YAR ENDED 31.3.2007, I.E BEFORE THE DATE ON WHICH THEY WERE S OLD, THE GAINS ARISING FROM THE TRANSFER OF THOSE SHARES HAD TO BE ASSESSED ONLY UNDER THE HEAD CAPITAL GAINS AND NOT UNDER THE HEAD BUSINESS INCOME. 5. THE LD. CIT(A), AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE, ALLOWED THE APPEAL OF THE ASSESSEE. 6. THE LD. CIT/DR VEHEMENTLY ARGUED AND SUPPORTED THE ORDER OF THE ASSESSING OFFICER. HE SUBMITTED THAT ALL A LONG TILL THE YEAR ENDED 31.3.2006, THE SHARES WERE SHOWN AS STOCK-IN- TRADE. ONLY DURING THE FINANCIAL YEAR 2006-07 RELEVANT TO ASSES SMENT YEAR 2007- 08, THE ASSESSEE HAS CONVERTED THE SHARES AS ITS I NVESTMENT IN ITS BOOKS OF ACCOUNT AND SOLD THEREAFTER. THIS WAS A C OLOURABLE DEVICE AND CANNOT BE PART OF TAX PLANNING AS IT WOULD BE W RONG TO ENCOURAGE OR ENTERTAIN THE PLEA THAT IT WAS HONOURABLE TO AVO ID THE PAYMENT OF TAX BY RESORTING TO DUBIOUS METHODS BY RELYING ON T HE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MCDOWELL COMPA NY LTD VS CTO, 154 ITR 148. THE LD. CIT/DR FURTHER RELIED ON THE DECISION OF HON'BLE I.T.A.NO.775/11 :- 5 -: SUPREME COURT IN THE CASE OF M/S INVESTMENT LTD VS CIT, 77 ITR 533, AND SUBMITTED THAT IT WAS HELD IN THAT CASE BY THE HON'BLE SUPREME COURT THAT NO FIRM CONCLUSION CAN BE DRAWN BY THE M ETHOD OF KEEPING ACCOUNTS AND THAT THE DESCRIPTION OF STOCK IN THE B ALANCE SHEET AS INVESTMENTS WAS NOT DECISIVE. 7. ON THE OTHER HAND, THE LD. A.R OF THE ASSESSEE VEHE MENTLY ARGUED AND SUPPORTED THE ORDER OF THE LD. CIT(A). 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED T HE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAIL ABLE ON RECORD. THE UNDISPUTED FACTS OF THE CASE ARE THAT THE ASSESSEE TRANSFERRED SHARES OF ` 4,44,081/- DURING THE FINANCIAL YEAR UNDER CONSIDE RATION AND CLAIMED THE PROFIT ARISING THEREFROM AS SHORT TERM CAPITAL GAINS. THE ASSESSING OFFICER OBSERVED THAT THE SAID SHARES WER E SHOWN CONTINUOUSLY SINCE 2001 TO 31.3.2006 IN THE AUDITED BALANCE SHEETS AS STOCK-IN-TRADE BY THE ASSESSEE. THE ASSESSEE CLA IMED TO HAVE BEEN CONVERTED THESE SHARES FROM STOCK-IN-TRADE TO INVES TMENT DURING THE YEAR UNDER CONSIDERATION AND SUCH AN ACTION OF THE ASSESSEE WAS MERELY A COLOURABLE DEVICE TO EVADE PAYMENT OF TAX AND THEREFORE, NOT ACCEPTABLE. HE, THEREFORE, TREATED THE ENTIRE PROF IT ON SALE OF THESE SHARES AS BUSINESS INCOME AND ACCORDINGLY, LEVIED TAX AT FULL RATE IN I.T.A.NO.775/11 :- 6 -: PLACE OF TAX @ 10% CLAIMED BY THE ASSESSEE ON THE GROUND OF SHORT TERM CAPITAL GAINS. 9. ON APPEAL, THE LD. CIT(A) ACCEPTED THE CONTENTION O F THE ASSESSEE FOR THE FOLLOWING REASONS: 6. I HAVE GONE THROUGH THE GROUNDS OF APPEAL, WRITTEN SUBMISSIONS AND THE JUDICIAL DECISIONS CITED BY THE APPELLANT . THE BALANCE SHEETS OF THE APPEL L ANT COMPANY FOR THE YEARS ENDED 31-3-2001 TO 31-3-2006 PRODUCED BEFORE ME ' SHOWS THAT THE ASSESSEE HAD NEITHER PURCHASED NOR SOLD ANY SHA RES . IT IS TRUE THAT ONE OF THE OBJECTS MENTIONED IN THE MEMOR ANDUM OF ASSOCIATION ' IS WITH RESPECT TO BUYING AND SELLING OF SHARES BUT THE ANNUAL ACCOUNTS OF THE APPELLANT DOES NOT SHOW THAT THE ASSESSEE WAS REGULARLY DEALING IN SHARES, EVEN THOU GH IN THE ACCOUNTS THE SHARES WERE SHOWN AS STOCK IN TRAD E. AS HELD BY THE HON'BLE APEX COURT AND THE DELHI HIGH COURT , WHAT IS RELEVANT FOR CONSIDERING ' WHETHER A PART I CULAR ASSET IS STOCK IN TRADE OR INVESTMENT IS THE TREATMENT GIVEN TO THE P ART I CULAR ITEM IN THE BOOKS OF THE APPELLANT . THE APPELLANT HAS MADE NECESSARY ENTRIES IN ITS BOOKS FOR THE CURRENT YEAR CONVERTIN G THE STOCK IN TRADE AS INVESTMENT AND IT IS ONLY THEREAFTER THAT THE ASSETS HAVE BEEN SOLD . I THEREFORE FIND AGREEMENT WITH THE APPELLANT'S CONTENTION THAT THE GAINS ARISING FROM THE TRANSFER I S TO BE TREATED AS CAPITAL GAINS AND NOT AS PROFITS FROM BUSINESS . 10. BEFORE US, THE LD. CIT/DR CONTENDED THAT THE ASSES SEE HAS SHOWN THE SHARES IN QUESTION AS ITS STOCK-IN-TRADE ALL ALONG AND THEREFORE, THE PROFIT THEREON SHOULD HAVE BEEN TREA TED AS BUSINESS PROFIT. 11. ON THE OTHER HAND, THE LD. A.R OF THE ASSESSEE ACCE PTED THAT THE SHARES IN QUESTION WERE TREATED AS BUSINESS ASS ETS BY THE I.T.A.NO.775/11 :- 7 -: ASSESSEE UPTO 31.3.2006, BUT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE TRANSFERRED SHARES AS INVESTMENT IN ITS BO OKS OF ACCOUNT AND THEREFORE, THE ENTIRE PROFIT EARNED WAS SHORT TERM CAPITAL GAINS. 12. WE FIND THAT IT IS ADMITTED BY THE ASSESSEE THAT T HE SHARES IN QUESTION WERE ITS BUSINESS ASSETS TILL THE DATE ON WHICH THE SAME WERE TRANSFERRED AS INVESTMENT IN ITS BOOKS OF ACCO UNT. IN THE ABOVE UNDISPUTED FACTS, IN OUR CONSIDERED OPINION, THE AP PRECIATION IN THE VALUE OF SHARES TILL THE DATE WHEN IT WAS TREATED B Y THE ASSESSEE AS ITS BUSINESS STOCK-IN-TRADE SHOULD BE ASSESSED AS BUSIN ESS PROFIT AND THE APPRECIATION IN THE VALUE OF SHARES DURING THE PERI OD IN WHICH IT WAS HELD AS INVESTMENT BY THE ASSESSEE SHOULD BE TREAT ED AS SHORT TERM CAPITAL GAINS. OUR ABOVE VIEW FINDS SUPPORT FROM T HE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF A.L.A. FIRM VS CIT [1991] 189 ITR 285(SC) WHEREIN THE DECISION OF THE HON'BLE SUP REME COURT IS TO THE EFFECT THAT THE PRINCIPLE OF VALUING STOCK AT C OST OR MARKET VALUE WHICHEVER IS LESS IS APPLICABLE ONLY WHEN THE BUSIN ESS REMAINS AS A GOING CONCERN. THE ABOVE PRINCIPLE IS NOT APPLICAB LE WHEN THE BUSINESS CEASES TO BE A GOING CONCERN. ON THE DATE OF THE CESSATION OF THE BUSINESS, THE STOCK SHOULD BE VALUED AT THE MARKET RATE FOR DETERMINING THE BUSINESS PROFIT. WE FIND THAT ON THE DATE ON WHICH I.T.A.NO.775/11 :- 8 -: THE SHARES WERE TRANSFERRED FROM STOCK-IN-TRADE TO INVESTMENT, ASSESSEES BUSINESS IN RESPECT OF THOSE SHARES CEAS ES. THEREFORE, THE PROFIT OF THE BUSINESS ON THAT DATE SHOULD BE ASCER TAINED BY TAKING THE MARKET VALUE OF THE SHARES AS ON THAT DATE. WE, TH EREFORE, SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND RESTORE THI S ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO RECOMPUTE THE INCO ME OF THE ASSESSEE IN THE LIGHT OF THE DISCUSSIONS MADE HEREIN ABOVE A FTER ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS, THE GROUNDS OF APPEAL OF THE REVENUE ARE ALLOWED FOR STATISTIC AL PURPOSES. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THURSDAY, THE 11 TH OF APRIL, 2013, AT CHENNAI. SD/- SD/- (V. DURGA RAO) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 11 TH APRIL, 2013, RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR