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Commissioner Of Income Tax Delhi Iv Vs. Gee Kay Finance & Leasing Co. Ltd.
February, 14th 2018
$~11, 14 & 15


                                      Date of decision: 09.02.2018
+       ITA 146/2018 & CM APPL. 5059/2018
        ITA 149/2018
        ITA 150/2018 & CM APPL. 5080/2018

                     Through  Mr. Sanjay Kumar, Adv.


        PAVITRA COMMERCIAL LTD.                                  ..... Respondent
                    Through  None.



                In these appeals, the questions of law urged for various years
        are, as follows :

                        1) Whether the decision of the ITAT affirming the
                           Appellate Commissioner's view with respect to the
                           assessee's claim of capital gain ­ rather than business
                           income as held by the Assessing Officer is justified?

                        2) Whether the ITAT was justified in holding that under
                           the mercantile system of accounting, interest income
                           accrued on basis of the assessee's contention that
                           recovery as well as interest (on such deposits) is

                                                                         Page 1 of 6
ITA 146/2018 & connected appeals
        2.      On the first question, this Court notices that the AO brought to
        tax substantial amount for the concerned Assessment Year rejecting
        the assessee's claim of capital gains. The assessee was engaged in the
        business of investment and securities and had at the relevant time
        maintained a distinct portfolio in respect of stock in trade and
        investment. For the particular year, the assessee acquired shares in
        certain companies that underwent amalgamation. Those companies,
        which had investment portfolio containing shares of the companies in
        which the assessee had holdings, were treated as stock in trade. The
        assessee shifted some of the shares to its investment account and later
        sold them during the Assessment Year. The AO rejected the assessee's
        claim and held the profits to be business income. In doing so, the AO
        relied upon the judgment of the Supreme Court in Dalhousie
        Investment Trust Co. Ltd. v. CIT, Central Calcutta, (1968) 68 ITR
        486 (SC) and other rulings. The CIT(A) upon re-appraisal of the facts
        and consideration of the authorities, held as follows :

                        "4.3 I have carefully considered the facts of the case, order
                        of the AO and submissions made by the ld. AR. The central
                        point of dispute in this ground of appeal is regarding the
                        head of income under which the profit earned on
                        shares/mutual funds is taxable. The appellant has
                        vehemently claimed that as per the regular consistently
                        followed policy of the company, the appellant had certain
                        share portfolio under the category of investments on which
                        long term and short terms capital gains have been
                        disclosed, whereas on the sale of shares held as stock in
                        trade profit earned have been disclosed as business income.
                        On the other hand the AO is of the view that the entire
                        income earned by the appellant on sale of shares and
                        mutual funds is taxable as business income. It is noted that

                                                                            Page 2 of 6
ITA 146/2018 & connected appeals
                        the finding of the A0 is primarily based on the notes of
                        audit, wherein it is stated that during the year the appellant
                        company has acquired the amalgamating companies which
                        were engaged in the trading of shares. The appellant is
                        pleading that the observation of the ld. AO is misconceived
                        as it is a matter of record that the companies which have
                        been amalgamated the appellant company were also
                        holding these shares as investment. It is further emphasized
                        by the ld. AR that the AO has misinterpreted the general
                        terminology of the notes of the accounts/audit wherein even
                        the sale of investments are termed as trading in shares.
                        After considering the rival submissions and various case
                        laws quoted by the AO as well as relied upon by the ld. AR,
                        I am of the considered view that in the facts and
                        circumstances of the instant case the view taken by the AO
                        does not appear correct, it is seen from the records of the
                        appellant that the appellant company had distinct portfolio
                        of shares and mutual funds under two categories i.e
                        investments and stock in trade. The contention of the ld. AR,
                        that it is not open for the AO to summarily reject the
                        decisions of the Board of directors of the company as it is
                        their prerogative to decide as to whether the company
                        would earn income under the head capital gains or
                        business income from sale of shares, also appears correct.
                        In the instant case during the last few years too, the
                        appellant company had followed the same practice of
                        holding certain shares under the head investments and
                        some shares as stock in trade. Therefore, under these
                        circumstances the action of the AO treating the entire
                        income as business income is not justified, hence addition
                        made by him on this account is deleted."

        3.      The ITAT's findings are, as follows :

                        "12. From the above observations by Ld. CIT(A)
                        observed that Ld. AO has based his opinion on the basis
                        of Notes to audited account. Two distinct portfolio
                        maintained by assessee in respect of shares held for the

                                                                             Page 3 of 6
ITA 146/2018 & connected appeals
                        purposes of trading and for investment has not been
                        observed by him.
                        13.........The summary of reconciliation of shares has
                        been reproduced hereunder:

                                "PAVITRA COMMERCIALS LTD
                                  ASSESSMENT YEAR 2005-06

                       PARTICULARS                    NO. OF SHARES      AMOUNT (In

                       Opening     Stock    (Refer       8,056,059.710 117,602,153.77

                       Add :

                       Shares   of  Vindhyachal          4,889,109.883   54,007,145.72
                       Holdings transferred on

                       Total stock of shares after      12,945,169.593 171,609,299.49

                       Purchase of Shares                  85,926.000     2,393,674.01

                       Stock of Shares                  13,031,095.593 174,002,973.50


                       Shares held as stock              2,078,066.000   32,767,348.61
                       converted into investment
                       (of Pavitra Commercials
                       Ltd.) transferred to Capital
                       Reserve (Refer Annexure-2)

                       Transferred  to    Capital         287,500.000      662,500.00
                       Reserve on Amalgamation

                       Sale of Shares (on cost)          2,244,050.254   41,425,034.89
                       (Refer Annexure-3)

                                                                             Page 4 of 6
ITA 146/2018 & connected appeals
                       Closing stock of Shares held   8,421,487.000   99,149,290.00
                       as Stock (Refer Annexure-4)

                        14. There is absolutely no allegation by Ld. AO
                        regarding these facts as observed by Ld. CIT(A). We are
                        therefore, of considered opinion that Ld. AO proceeded
                        to compute sale of shares as business income merely on
                        the basis of notes provided to Audited Accounts. We have
                        perused the account at page 19 of paper book. From
                        these Notes, it is clear that nature of business in respect
                        of amalgamating companies has been held to be purchase
                        and sale of shares, debentures stocks, properties and
                        other similar activities. Ld. CIT(A) on the basis of these
                        factual observation deleted the addition. We, therefore,
                        do not find any infirmity in findings of ld. CIT(A) .
                               On the basis of the above discussion, we dismiss
                        this ground raised by revenue."

        4.      The decision of Revenue as to whether the claim of the assessee
        with respect to the income reported by it and whether it constitutes
        business income, is dependent on the entirety of the circumstances.
        The decisions of the Court have emphasized five broad tests whether
        the income bears the character of business income or capital gain ­
        firstly, whether the company or concern is authorized in its
        Memorandum of constituting documents to deal with shares; (2)
        whether the entity had shown the shares under the head "Investment";
        (3) whether the assessee/entity utilized its own funds and had not
        borrowed funds for the purpose of acquiring shares; (4) whether the
        nature of infrastructure ­ whether it is small, represents investment
        activity rather than the trading activity that would require larger
        infrastcuture; and lastly, whether the behaviour of the assessee is such

                                                                          Page 5 of 6
ITA 146/2018 & connected appeals
        as to disclose income/earning has objective i.e. "obtaining dividend"
        rather than trading.

        5.      This Court notes that all the tests and the relevant rulings were
        noticed by both the authorities below, who had applied their mind and
        held that the AO's approach in singular fixing scrutiny to the shifting
        and regulations of some shares to treat as business income, was
        erroneous. In the opinion of the Court, these findings are not only
        factual but sound, as they are based upon appreciation of facts at two
        levels and application of the settled law. No error of law is apparent;
        no question of law arises.

        6.      As far as the question with respect to reporting of mercantile
        interest of doubtful debts is concerned, the question is covered by the
        decision of this Court in Commissioner of Income Tax Vs. Vasisth
        Chay Vyapar Ltd. (ITA 552/2005 and connected cases decided on
        29.11.2010). The Court had applied "real income" principle to uphold
        the assessee's contention. Those observations are squarely applicable
        in the present case.

        7.      The appeals are dismissed. All the pending applications also
        stand disposed off.

                                                   S. RAVINDRA BHAT, J

                                                         A. K. CHAWLA, J
        FEBRUARY 09, 2018

                                                                        Page 6 of 6
ITA 146/2018 & connected appeals
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