IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 91/HYD/2013 ASSESSMENT YEAR: 2009-10 TANVI FINANCIAL SERVICES PVT. LTD., SECUNDERABAD. PAN AACCT 5778R VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(2), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SUNIL KUMAR JAIN & SHRI SANJAY KUMAR SHARDA REVENUE BY : SHRI A. SITARAMA RAO DATE OF HEARING : 09-01-2017 DATE OF PRONOUNCEMENT : 18-01-2017 O R D E R PER S. RIFAUR RAHMAN, A.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)- III, HYDERABAD, DATED 12/11/2012 FOR AY 2009-10. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS A COMPANY DERIVING INCOME FROM PROVIDING FINANCE AGAINST THE SECURITIES, DEAL IN SHARES AND SECURITIES ETC. IT FILED ITS RETURN OF I NCOME FOR THE AY 2009- 10 ON 29/08/2009 ADMITTING TOTAL INCOME OF RS. 1,34 ,97,1340/-. THE AO COMPLETED THE ASSESSMENT U/S 143(3) DETERMINING THE TOTAL INCOME AT RS. 2,19,96,480/- BY MAKING THE FOLLOWING DISALLOWANCES: I) SHORT TERM CAPITAL GAIN TREATED AS BUSINESS INCOME RS. 77,38,940/- II) DISALLOWANCE OF RCC RS. 3,500/- III) DISALLOWANCE OF PROVISION RS. 84,95,856/- 3. THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE ABOVE DISALLOWANCES MENTIONED AT I) AND III). 2 ITA NO. 91/H/2013 TANVI FINANCIAL SERVICES P. LTD., SECBAD. 4. AS REGARDS THE 1 ST ISSUE RELATES TO THE ADDITION OF RS. 77,38,940/- TREATING THE SHORT TERM CAPITAL GAIN ON SALE OF SHARES UNDER THE HEAD INCOME FROM BUSINESS, THE FACTS AR E THAT THE ASSESSEE COMPANY DERIVES INCOME FROM PROVIDING FINA NCE AGAINST SECURITIES AND IN DEALING IN SHARES AND SECURITIES. THE COMPANY HAS LARGE STOCK OF SHARES AND DEALS IN THE SAME REGULAR LY. IN ITS RETURN OF INCOME THE ASSESSEE HAD DECLARED SHORT TERM CAPITAL GAIN OF RS. 57,58,188/- ON ACCOUNT OF SALE OF SHARES. THE AO FO UND THAT THE TRANSACTIONS PERTAINED TO THE MAIN BUSINESS OF THE ASSESSEE AND AS SUCH THERE WAS NO INVESTMENT INVOLVED. BY GIVING TH E FOLLOWING REASONS, THE AO ASSESSED THE INCOME UNDER THE HEAD INCOME FROM BUSINESS: I) THE ASSESSEE HAS ITSELF SUBMITTED DURING THE CO URSE OF ASSESSMENT PROCEEDINGS THAT THE COMPANY'S PRIMARY B USINESS IS TO PROVIDE FINANCE AGAINST THE SECURITIES BESIDES D EALING IN SHARES & SECURITIES ETC., BUT NOT INVESTMENT IN SHA RES. THE USAGE OF THE WORD 'DEAL IN SHARES & SECURITIES ETC. ITS ELF CLEARLY DEFINES THE INTENTION OF THE ASSESSEE TO TRADE IN SHARES BU T NOT TO INVESTMENT IN SHARES. II) FURTHER IT IS TO STATE THAT THERE IS NO SUCH PR OVISION THAT IF THE SHARES ARE SUBSCRIBED IN INITIAL PUBLIC OFFER THEN IT MAY NOT BE TREATED AS TRADING ACTIVITY, AS CONTENDED BY THE: A SSESSEE. III) THE INTENTION OF THE ASSESSEE IS NOT TO MAKE I NVESTMENT IN SHARES BUT EARN QUICK PROFITS AS CAN BE SEEN FROM T HE PERIOD OF HOLDING THE SHARES IN THE ANNEXURE SUBMITTED THE C OURSE OF HEARING . 5. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A) AND FILED WRITTEN SUBMISSI ONS, WHICH WERE EXTRACTED BY THE CIT(A) AT PAGES 4 TO 6 OF HIS ORDE R. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CIT(A) CONFIRM ED THE ACTION OF THE AO BY HOLDING THAT THE FACTS AND EVIDENCE POINT OUT UNMISTAKABLY TO THE FACT THAT THE ENTIRE TRANSACTION WAS ORGANIZ ED SO AS TO OBTAIN THE QUICK PROFITS THROUGH SALE OF THE SHARES AND IT IS NOT ONLY THE FREQUENCY OF THE TRANSACTION BUT THE INTENT INFERRE D FROM THE OVERALL CIRCUMSTANCES WHICH WILL DETERMINE WHETHER THE TRAN SACTIONS ARE IN THE NATURE OF BUSINESS OR NOT. 3 ITA NO. 91/H/2013 TANVI FINANCIAL SERVICES P. LTD., SECBAD. 6. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 7. BEFORE US, THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED BY THE DECISION OF T HE COORDINATE BENCH OF ITAT HYDERABAD IN ASSESSEES OWN CASE FOR AY 200 8-09 IN ITA NO. 232/HYD/2012, ORDER DATED 25/03/2013, A COPY OF WHI CH HAS BEEN FILED IN THE PAPER BOOK AT PAGES 13 TO 19. 8. LD. DR CONCEDED TO THE SUBMISSIONS OF THE AR OF THE ASSESSEE. 9. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN ASSESSEES OWN FOR AY 2008-09 (SUPRA), WHEREIN T HE COORDINATE BENCH HAS HELD AS UNDER: 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AUTHORITI ES BELOW. THE ASSESSEE IS IN THE BUSINESS OF PROVIDING FINANC E BY WAY OF LOANS AGAINST SECURITIES. THEY ARE NOT IN THE BUSIN ESS OF TRADING IN SHARES. DURING THE YEAR UNDER APPEAL THE ASSESSEE PURCHASED 5 SCRIPS AND MOSTLY THROUGH INITIAL PUBLI C OFFER AND SOLD MOST OF THEM. ACCORDING TO THE ASSESSEE THIS I S ONLY PART OF INVESTMENT ACTIVITIES AND THEY HAVE NOT INDULGED IN TRADING IN SHARES. THEY HAVE ALSO SHOWN THE BALANCE SHARES RETAINED AT THE END OF THE YEAR AS INVESTMENTS. THERE IS NOT HING ON RECORD TO INDICATE THAT THEY HAD INDULGED IN PURCHA SE AND SALE OF SHARES IN THE EARLIER OCCASIONS. WHAT WEIGHED WI TH THE LOWER AUTHORITIES WAS THE FREQUENCY OF PURCHASE AND SALES. THE FREQUENCY OF PURCHASE AND SALE ALONE CANNOT BE THE CRITERION. AS EXPLAINED BY THE ASSESSEE BULK OF SHA RES WERE OBTAINED FROM INITIAL PUBLIC OFFER AND THE SALE OF THESE SHARES WERE SPREAD OVER MORE THAN ONE TRANSACTION. HENCE S ALE OF THE SAME SHARES ON MORE THAN ONE DAY CANNOT BE CONS IDERED AS FREQUENT SALES. WHATEVER WAS RETAINED WAS SHOWN AS INVESTMENTS. IN THE CIRCUMSTANCES THERE IS NOTHING TO SHOW THAT THE SHARES SOLD ALONE WERE TREATED BY THE ASSE SSEE AS STOCK IN TRADE AND THE BALANCE SHARES WAS SHOWN AS INVESTMENT IN THE BALANCE SHEET. THE ASSESSEE IS IN THE BUSINESS PROVIDING FINANCE AND NOT TRADING IN SHARE S. CONSIDERING ALL THE FACTORS, WE CONCLUDE THAT THE P URCHASE AND SALE OF SHARES DURING THE YEAR UNDER APPEAL CAN BE CONSIDERED 4 ITA NO. 91/H/2013 TANVI FINANCIAL SERVICES P. LTD., SECBAD. AS A PART OF INVESTMENT ACTIVITY OF THE ASSESSEE AN D IS NOT TRADING ACTIVITY. HENCE WE DIRECT THE AO TO ASSESS THE PROFIT ON SALE OF THE SHARES OF RS 1,19,80,047/- AS SHORT TERM CAPITAL GAINS AND NOT AS INCOME FROM BUSINESS. FURTHER, WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION THAT IN EV ERY CASE INCOME EARNED FROM SALE OF SHARES IS TO BE TREATED AS CAPITAL GAIN. IT ALL DEPENDS UPON THE FACTS AND CIRCUMSTANC ES OF RESPECTIVE CASE. WE ALSO MAKE IT CLEAR THAT OUR FIN DING IN EARLIER PARAS IS RELATING TO THIS ASSESSMENT YEAR O NLY AND THE ASSESSEE CANNOT MAKE ANY PLEA THAT IN ALL SUBSEQUEN T ASSESSMENT YEARS ALSO THE INCOME IS TO BE ASSESSED UNDER THE HEAD INCOME FROM CAPITAL GAINS. AS THE ISSUE UNDER CONSIDERATION IS MATERIALLY IDEN TICAL TO THAT OF AY 2008-09, RESPECTFULLY FOLLOWING THE SAME, WE DIRECT THE AO TO ASSESS THE PROFIT ON SALE OF THE SHARES AS SHORT TERM CAPI TAL GAINS AND NOT AS INCOME FROM BUSINESS. ACCORDINGLY, THIS ISSUE IS DE CIDED IN FAVOUR OF THE ASSESSEE. 10. AS REGARDS THE NEXT ISSUE PERTAINING TO DISALLO WANCE FOR LOSS ON EQUITY STOCK OPTION AMOUNTING TO RS. 84,95,856/-, T HE AO DISALLOWED THE SAME BY OBSERVING THAT THE ASSESSEE COMPANY HAD DEBITED TO P&L A/C A PROVISION FOR LOSS ON EQUITY STOCK OPTION /INDEX OPTION, THE ASSESSEE OUGHT TO HAVE ADDED BACK THE SAME TO THE I NCOME RETURNED WHICH THE ASSESSEE FAILED TO DO SO. 11. BEFORE THE CIT(A), THE ASSESSEE STATED THAT ACT UALLY IT WAS HOLDING VARIOUS STOCK OPTIONS AND AT THE END OF THE YEAR IT VALUED STOCK OPTIONS AT COST OR MARKET VALUE WHICHEVER IS LESS. THIS LOSS REFLECTS THE LOWER MARKET VALUE OF ITS STOCKS ON TH E LAST DAY OF THE FY. 12. WHILE CONFIRMING THE DISALLOWANCE MADE BY THE A O, THE CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT SUBSTANTIATED IT S CLAIM THROUGH ANY DOCUMENTARY EVIDENCE. NO DETAILS OF ANY STOCK O PTIONS HAVE BEEN PROVIDED. IT IS NOT EVEN CLEAR WHETHER THE STOCK OP TIONS BELONGED TO THE ASSESSEE OR TO SOME CLIENTS. MOREOVER, ANY DIMI NUTION IN THE VALUE OF THE SHARES OF STOCK OR STOCK OPTIONS IS NO T TO BE TAKEN IN TO THE PROVISION. 5 ITA NO. 91/H/2013 TANVI FINANCIAL SERVICES P. LTD., SECBAD. 13. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSES SEE IS IN APPEAL BEFORE US. 14. LD. AR SUBMITTED THAT AS PER ASSESSEES ACCOUNT ING POLICY, LOSS ON EQUITY STOCK OPTION OF RS. 84,95,856/- WAS MADE IN THE BOOKS OF ACCOUNT I.E. THE ASSESSEE VALUED ITS CLOSING STOCK AT COST OR MARKET VALUE WHICHEVER IS LOWER AS PER THE ACCOUNTING POLI CY AND HAS ACCOUNTED FOR THE LOSS IN THE VALUE OF CLOSING STOC K. THIS VALUE HAS BEEN TAKEN AS OPENING STOCK VALUE IN THE NEXT AY I. E. AY 2010-11. HE SUBMITTED THAT IF THIS AMOUNT IS ADDED IN THE CURRE NT AY THEN THE SAME AMOUNT SHOULD BE ADDED TO THE LOSS OF THE NEXT AY 2 010-11. THE TOTAL LOSS INCURRED IN DERIVATIVES IN THE AY 2010-11 WAS RS. 6,55,87,256/-. FURTHER, IT WAS SUBMITTED THAT AS THE ASSESSEE HAS ALREADY MADE THE LOSS ON EQUITY STOCK OPTION/INDEX OPTION OF RS. 84, 95,856/-, THE BALANCE AMOUNT OF RS. 5,70,91,400/- WAS RECOGNIZED UNDER SCHEDULE G IN THE BALANCE SHEET FOR THE AY 2010-11 IN PROFIT /LOSS ON EQUITY STOCK FUTURE/INDEX FUTURE AND THE SAME WAS EXPLAINE D VIDE LETTER DATED 21/12/2011 BEFORE THE REVENUE AUTHORITIES. TH E AR, THEREFORE, REQUESTED THE BENCH TO CONSIDER THE SAID SUBMISSION S AND DELETE THE DISALLOWANCE MADE ON THIS COUNT. 15. LD. DR RELIED ON THE ORDERS OF REVENUE AUTHORIT IES. 16. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. WE HAVE NOTICED THAT THE ASSESSEE HAS S UBMITTED ADDITIONAL EVIDENCE DUE TO THE FACT THAT LD. CIT(A) HAS OBSERVED IN HIS ORDER THAT THE ASSESSEE HAS NOT SUBSTANTIATED ITS C LAIM THROUGH ANY DOCUMENTARY EVIDENCE AND NO DETAILS OF ANY STOCK OP TIONS HAVE BEEN PROVIDED. AS A PART OF PAPER BOOK, ASSESSEE HAS SUB MITTED THE COPY OF THE DELIVERY COURIER STATEMENT ISSUED BY PCS SE CURITIES LTD. AND CONTRACT NOTES OF F&O. THESE DOCUMENTS WERE FORWA RDED TO AO BY THE LD. DR FOR HIS COMMENTS. THE AO HAS SUBMITTED I N HIS COMMENTS 6 ITA NO. 91/H/2013 TANVI FINANCIAL SERVICES P. LTD., SECBAD. ON 04/08/2016 JUSTIFYING THE ADDITIONS MADE BUT HE HAS NOT COMMENTED ON THE ADDITIONAL EVIDENCE AND ALSO NOT P ASSED ANY NEGATIVE COMMENTS ON THE ADDITIONAL EVIDENCE, IT SH OWS THAT HE HAD ACCEPTED THE ADDITIONAL EVIDENCE AND THE SAME IS IN ORDER. LD. DR ALSO ACCEPTED THAT THE EVIDENCE SUBMITTED BY LD. AR IS IN ORDER DUE TO THE FACT THAT AO HAS NOT RECORDED ANY NEGATIVE COMM ENTS ON THE ADDITIONAL EVIDENCE. HENCE, THE ADDITIONAL EVIDENCE SUBMITTED BY LD. AR IS CONSIDERED TO BE IN ORDER. 16.1 WE HAVE NOTICED THAT THE ASSESSEE IS FOLLOWING THE ACCOUNTING STANDARD CONSISTENTLY OVER THE YEARS. THE ASSESSEE HAS DECLARED THE ABOVE ACCOUNTING POLICY IN NOTES TO ACCOUNTS, WHICH IS PART OF BALANCE SHEET AS UNDER: 3. FOR EQUITY STOCK OPTION/INDEX OPTION, PROVISION IS MADE FOR THE MARK TO MARKET LOSS AS ON BALANCE SHEET DATE HO WEVER MARK TO MARKET PROFIT IS NOT RECOGNIZED ON PRUDENT BASIS . AS PER THE ABOVE ACCOUNTING POLICY, WHICH IS FOLLOW ED CONSISTENTLY OVER THE YEARS AND ACCEPTED BY THE DEPARTMENT, THE ASSESSEE IS RECOGNIZING THE MARK TO MARKET LOSS, WHICH IS THE A CTUAL LOSS ON CARRYING AMOUNT OF INVESTMENT. AS PER PRUDENT NORMS , IT IS RECOGNIZED AS LOSS. SINCE, ASSESSEE IS FOLLOWING THE ACCOUNTIN G METHOD, IT AMOUNTS TO ACTUAL LOSS AND CANNOT BE TERMED AS PRO VISION. THE TERM PROVISION IS SOMETHING WHICH CANNOT BE ASCERTAINE D AS PER THE INFORMATION AVAILABLE AT THE YEAR END. BUT IN THIS CASE, ASSESSEE HAS PROPER INFORMATION AND ASCERTAINED THE LOSS AT THE YEAR END, WHICH IS DIFFERENT FROM PROVISION. AS PER THE FACTS OF THE CASE, ASSESSEE IS ELIGIBLE TO CLAIM THE LOSS ON STOCK OPTIONS AND ACC ORDINGLY, GROUND RAISED BY THE ASSESSEE IS ALLOWED. 7 ITA NO. 91/H/2013 TANVI FINANCIAL SERVICES P. LTD., SECBAD. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. PRONOUNCED IN THE OPEN COURT ON 18 TH JANUARY, 2017. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAH MAN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 18 TH JANUARY 2017 KV COPY TO:- 1) TANVI FINANCIAL SERVICES PVT. LTD., 406 B, 4 TH FLOOR, MINERVA COMPLEX, SD ROAD, SECUNDERABAD 500 003 . 2) DCIT, CIRCLE 2(2), HYDERABAD. 3) CIT(A) - IV, HYDERABAD 4 CIT III, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE