Dy.CIT, Circle-16(2), Hyderabad V. M/s Vinod Kumar Malpani, Hyderabad

ITA 869/HYD/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 2296 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-12-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 27-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B RAJARAM
• Keywords: Capital asset converted into stock in trade; Capital asset; Business income; Salary income; Source of fund; Fair market value
• Section: 45(2); 143(3)

Judgement Text

ITA NO 869 OF 2013 VINOD KUMAR MALPANI HYDERABAD PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.869/HYD/2013 (ASSESSMENT YEAR: 2009-10) DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(2) HYDERABAD VS SHRI VINOD KUMAR MALPANI HYDERABAD PAN: AEAPM 0870 J (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI B. RAJA RAM, DR FOR ASSESSEE : SHRI K.C. DEVDAS O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS REVENUES APPEAL FOR THE A.Y 2009-10. IN THI S APPEAL, THE REVENUE HAS RAISED THE FOLLOWING GROUND S OF APPEAL: 1. THE ORDER OF THE CIT(A) IS ERRONEOUS IN LAW AND ON FACTS OF THE CASE. 2. THE CIT (A) ERRED IN FOLLOWING THE ASSESSEES SUBMISSIONS WITHOUT ADHERING TO THE PROVISIONS OF THE I.T. ACT, 1961. 3. THE CIT (A) OUGHT TO HAVE UPHELD THE ADDITION MADE BY THE AO, AS THE ASSESSEE IS ADOPTING CHANGE IN HEAD OF INCOME AS A POINT TO AVOID LEGITIMATE TAX . 2. AS THE EXACT GRIEVANCE OF THE REVENUE WAS NOT EV IDENT FROM THE GROUNDS ABOVE, THE REVENUE HAS FILED THE F OLLOWING DATE OF HEARING : 04.07.2017 DATE OF PRONOUNCEMENT : 31.07.2017 ITA NO 869 OF 2013 VINOD KUMAR MALPANI HYDERABAD PAGE 2 OF 6 REVISED GROUNDS OF APPEAL ALONG WITH THE COPY OF TH E AUTHORIZATION OF THE PRINCIPAL CIT (4), HYDERABAD AND ALSO THE CE RTIFIED COPIES OF THE RELEVANT PORTIONS OF RECORDS THAT THESE GROUNDS WERE AUTHORIZED BY THE PRINCIPAL CIT (4), WHEN THE APPEA L WAS FILED: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, AND IN LAW, THE LEARNED CIT (A) ERRED IN TREATING THE SHARE TRANSACTIONS OF THE ASSESSEE AS BUSINESS TRANSACTIONS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, AND IN LAW, THE LEARNED CIT (A) ERRED IN DELETING THE DISALLOWANCE OF SET OFF OF BUSINESS LOSS OF RS.1,11,52,710 INCURRED IN SHARE TRANSACTIONS AGAINST OTHER HEADS OF INCOME. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE AO BE RESTORED . 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, A N INDIVIDUAL, WHO DERIVED INCOME FROM SALARY, HOUSE P ROPERTY, CAPITAL GAIN AND OTHER SOURCES, FURNISHED HIS RETUR N OF INCOME FOR THE A.Y 2009-10 ON 27.09.2009, ADMITTING INCOME OF R S.4,82,820. DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE AO NOTICED THAT THE ASSESSEE HAS EARNED RS.43,51,147 F ROM LONG TERM CAPITAL GAINS FROM SALE OF LAND, RS.25,24,662 FROM SALE OF UNLISTED SHARES AND RS.45,09,428 FROM SALE OF COMMODITIES. I N ADDITION TO THIS, THE ASSESSEE HAS ALSO OFFERED SALARY INCOME O F RS.6.00 LAKHS AND CLAIM LOSS OF RS.2,66,815 UNDER THE HEAD INCOME FROM HOUSE PROPERTY. HE OBSERVED THAT THE NET INCOME FROM THE ABOVE MENTIONED HEADS OF INCOME WAS SET OFF AGAINST THE B USINESS LOSS OF RS.1,11,52,710 WHICH HAS ACCRUED DUE TO SALE OF SHARES. THE AO VERIFIED THE RECORDS OF THE EARLIER YEARS AND OB SERVED THAT THE ITA NO 869 OF 2013 VINOD KUMAR MALPANI HYDERABAD PAGE 3 OF 6 ASSESSEE WAS CONSISTENTLY SHOWING THE SHARE TRANSAC TIONS UNDER THE HEAD CAPITAL GAIN I.E. SHARES ARE HELD BY THE ASSESSEE AS CAPITAL ASSET, BUT ONLY DURING THE RELEVANT A.Y, THE ASSESSEE TOOK THE STAND THAT THESE TRANSACTIONS ARE BUSINESS TRAN SACTIONS AND THE LOSS ARISING THEREFROM IS LOSS FROM BUSINESS AN D SET IT OFF AGAINST THE LONG TERM CAPITAL GAINS. HE THEREFORE, DISALLOWED THE ASSESSEES CLAIM OF BUSINESS LOSS TREATING THE SHAR ES AS CAPITAL ASSET AND BROUGHT IT TO TAX. AGGRIEVED, THE ASSESSE E PREFERRED AN APPEAL BEFORE THE CIT (A) WHO ACCEPTED THE ASSESSEE S CONTENTION THAT THE TRANSACTIONS OF SALE OF SHARES WAS ON A LA RGE SCALE DURING THE RELEVANT A.Y AND THEREFORE, THE INCOME THEREFROM IS BUSINESS INCOME OF THE ASSESSEE. AGGRIEVED BY THE RELIEF GRA NTED BY THE CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 4. THE LEARNED DR, SHRI B. RAJA RAM, SUBMITTED THAT THE ASSESSEE HAS ALL ALONG BEEN TREATING THE SHARES AS CAPITAL ASSETS IN HIS BOOKS OF ACCOUNT AND IT WAS ONLY DURING THE RELEVANT A.Y THAT THE ASSESSEE HAS TREATED THEM AS STOCK-IN-TRAD E AND REPORTED BUSINESS LOSS AGAINST WHICH THE INCOME FROM OTHER S OURCES SUCH AS CAPITAL GAIN, SALARY ETC., HAS BEEN SET OFF. HE SUBMITTED THAT THE ASSESSEE HAS NOT PROVIDED ANY EVIDENCE BEFORE THE A O OR THE CIT (A) THAT THE INVESTMENTS WERE CONVERTED INTO STOCK- IN-TRADE DURING THE RELEVANT PREVIOUS YEAR AND AS TO HOW THE SAID S TOCK WAS VALUED WHEN IT WAS CONVERTED INTO STOCK-IN-TRADE. T HEREFORE, ACCORDING TO HIM, THE CONTENTION OF THE ASSESSEE CA NNOT BE ACCEPTED AND THE CIT (A) HAS ERRONEOUSLY ALLOWED TH E RELIEF TO THE ASSESSEE WITHOUT ANY VERIFICATION. ITA NO 869 OF 2013 VINOD KUMAR MALPANI HYDERABAD PAGE 4 OF 6 5. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, SUBMITTED THAT UNDISPUTEDLY THE ASSESSEE IS T REATING THE SHARES PURCHASED IN THE EARLIER YEARS AS INVESTMENT S BUT DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE HAS CONVERT ED THE INVESTMENT INTO STOCK-IN-TRADE AND THEREFORE, THE I NCOME ARISING OUT OF THE SALE OF SUCH SHARES IS NOTHING BUT ASSES SEES BUSINESS INCOME AND THE ASSESSEE HAS RIGHTLY SET OFF THE BUS INESS LOSS SO ARISING FROM THE INCOME FROM VARIOUS OTHER SOURCES OF INCOME REPORTED BY THE ASSESSEE. THE LEARNED COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THERE WAS NO PROHIBITION IN ASSESSEE CONVERTING THE INVESTMENTS INTO STOCK-IN-TRADE. HE HAS ALSO DR AWN OUR ATTENTION TO THE VARIOUS TRANSACTIONS ON PURCHASE A ND SALE OF SHARES TO DEMONSTRATE THAT THE VOLUME OF TRANSACTIO NS IS HUGE AND THE DURATION OF HOLDING IS ALSO VERY SMALL TO D ERIVE HIS POINT THAT THESE ARE BUSINESS TRANSACTIONS. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAS BEEN HOLDI NG THE SHARES AS ON 1.4.2008 AND IN THE EARLIER YEARS, THESE SHAR ES WERE HELD AS INVESTMENTS. IT IS ALSO NOT IN DISPUTE THAT THE ASS ESSEE HAS PURCHASED LARGE NUMBER OF SHARES DURING THE RELEVAN T PREVIOUS YEAR AND HAS ALSO SOLD THEM WITHIN A SHORT SPAN OF TIME. AS REGARDS THE PURCHASE AND SALE OF SHARES AFTER 1.4.2 008 IS CONCERNED, IT CANNOT BE DISPUTED THAT THESE TRANSAC TIONS AMOUNT TO TRADING IN SHARES. BUT, AS FAR AS SHARES PURCHAS ED IN THE EARLIER A.YS AND HELD BY HIM FOR MORE THAN 12 MONTHS IN SOME CASES AND UP TO 8 MONTHS IN SOME CASES AND EVEN TREATED AS IN VESTMENTS IN ITS BOOKS OF ACCOUNT CANNOT BE TREATED AS STOCK-IN- TRADE UNLESS THE ASSESSEE HAS CONVERTED THEM INTO STOCK-IN-TRADE . THE ITA NO 869 OF 2013 VINOD KUMAR MALPANI HYDERABAD PAGE 5 OF 6 NECESSARY ENTRIES IN THE BOOKS OF ACCOUNT WOULD REF LECT THE INTENTION OF THE ASSESSEE TO CONVERT THE INVESTMENT S INTO STOCK-IN- TRADE. THE PROVISIONS OF SECTION 45 AND SUB-SECTION 2 THEREOF WOULD COME INTO PLAY IN SUCH A SITUATION. FOR THE S AKE OF CONVENIENCE AND READY REFERENCE, THE RELEVANT PORTI ON IS REPRODUCED HEREUNDER: SECTION 45(2): NOTWITHSTANDING ANYTHING CONTAINED IN SUB- SECTION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CA RRIED ON BY HIM SHALL BE CHARGEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM AND, FOR THE PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVE RSION OR TREATMENT SHALL BE DEEMED TO BE THE FULL VALUE OF T HE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER OF THE CAPITAL ASSET. 7. ON A LITERAL READING OF THE ABOVE PROVISION, IT IS SEEN THAT WHEN ANY CAPITAL ASSET IS CONVERTED INTO STOCK -IN-TRADE, THE PROFITS/GAINS ARISING FROM SUCH CONVERSION SHALL BE CHARGEABLE TO INCOME TAX AS THE ASSESSEES INCOME OF PREVIOUS YEA R IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE CONVERTED BY HIM AND THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED/ACCRUING AS A RESULT OF THE TRANSFER OF TH E CAPITAL ASSET. THE ASSESSEE HAS NOT BEEN ABLE TO DEMONSTRATE BEFOR E US THAT THE ASSESSEE HAS AFFECTED ANY SUCH CONVERSION IN ACCORD ANCE WITH SECTION 45(2) OF THE I.T. ACT. IN THE ABSENCE OF SU CH PROCEDURE BEING FOLLOWED BY THE ASSESSEE, THE ASSESSEES CONT ENTION THAT IT HAS CONVERTED THE CAPITAL ASSET INTO STOCK-IN-TRADE CANNOT BE ACCEPTED. IN SUCH CIRCUMSTANCES, WE DIRECT THE AO T O TREAT THE TRANSACTIONS OF PURCHASE AND SALE AFTER 1.4.2008 AS BUSINESS TRANSACTIONS AND THE TRANSACTIONS OF PURCHASE BEFOR E 1.4.2008 ITA NO 869 OF 2013 VINOD KUMAR MALPANI HYDERABAD PAGE 6 OF 6 AND HELD AS INVESTMENT BUT SOLD SUBSEQUENT TO 1.4.2 008 AS CAPITAL ASSETS AND THE PROFITS THEREFROM AS CAPITAL GAIN. THE AO IS ACCORDINGLY DIRECTED TO RECOMPUTE THE INCOME OF THE ASSESSEE. 8. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST JULY, 2017. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 31 ST JULY, 2017. VINODAN/SPS COPY TO: 1 DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(2), 2 ND FLOOR, I.T. TOWERS, AC GUARDS, MASAB TANK, HYDERABAD 2 M/S. VINOD KUMAR MALPANI, 8-2-293/82/A/617 ROAD N O.33, JUBILEE HILLS, HYDERABAD 500033 3 CIT (A)-V HYDERABAD 4 CIT IV HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER