IN THE INCOME TAX APPELLATE TRIBUNAL
`G' : NEW DELHI
DELHI BENCH `G
G.D.AGRAWAL, VICE PRESIDENT AND
BEFORE SHRI G.D.AGRAWAL,
SINGH, JUDICIAL MEMBER
SMT. DIVA SINGH,
Nos.3588/Del/2010 & 3589/Del/2010
ITA Nos
Years : 2006-
Assessment Years 2007-08
2006-07 & 2007-
M/s Sukarma Finance Vs. Assistant Commissioner of
Limited, Income Tax,
4832/24, Chamber No.104,
4832/24, Circle-9(1),
Circle-
Prahalad House, New Delhi.
Ansari Road, Daryaganj,
New Delhi 110 002.
AAACS3512L.
PAN : AAACS3512L.
(Appellant) (Respondent)
Appellant by : Shri Ajay Vohra, Shri Rohit Jain,
Advocates and Shri Shaily Gupta,
CA.
Respondent by : Shri Gagan Sood, Sr.DR.
ORDER
G.D.AGRAWAL, VP :
PER G.D.AGRAWAL,
ITA No.3588/Del/2010 (Assessee's appeal for AY 2006-
ITA No.3588/Del/2010 07) :-
2006-07)
This appeal by the assessee is directed against the order of
learned CIT(A)-XII, New Delhi dated 30th March, 2010 for the AY 2006-
07.
2. Ground Nos.1 & 2 of the assessee's appeal read as under:-
"1. That the Commissioner of Income-tax (A) erred on
facts and in law in confirming the disallowance of
Rs.5,90,029 under section 14A of the Act, 1961 (`the Act').
1.1 That the Commissioner of Income-tax (A) erred on
facts and in law in not appreciating that the provisions of
section 14A of the Act were not at all applicable and,
therefore, no disallowance under that section was called
for.
2 ITA-3588 & 3589/D/2010
1.2 That the Commissioner of Income-tax (A) erred on
facts and in law in confirming the action of the Assessing
Officer in making disallowance under section 14A of the Act
as per Rule 8D of the Income Tax Rules.
2. Without prejudice, that the Commissioner of Income-
tax (A) erred on facts and in law in not appreciating the
disallowance under section 14A of the Act was not
correctly computed by the Assessing Officer as per Rule 8D
of the Income Tax Rules."
3. We have heard the arguments of both the sides and perused
relevant material placed before us. After considering the arguments of
both the sides, we find this issue to be covered by the decision of
Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd.
Vs. CIT [2012] 347 ITR 272 (Delhi). Respectfully following the same,
we set aside the orders of authorities below on this point and restore
the matter to the file of the Assessing Officer. We direct him to
readjudicate the issue afresh as per the direction of Hon'ble
Jurisdictional High Court in the case of Maxopp Investment Ltd. (supra).
Needless to mention that Assessing Officer will allow adequate
opportunity of being heard to the assessee.
4. Ground No.3 of the assessee's appeal reads as under:-
"3. That the Commissioner of Income-tax (A) erred on
facts and in law in confirming the action of the Assessing
Officer in assessing `short term capital gains' of
Rs.47,11,569 as `business income' of the appellant.
3. That the Commissioner of Income-tax (A) erred in
holding that the frequency and volume of transactions of
sale/purchase of shares was very large.
3.2 That the Commissioner of Income-tax (A) failed to
appreciate that `long term capital gains' on transfer of
shares similarly held as `investment' by the appellant was
accepted by the Assessing Officer and therefore, there was
no warrant to assess `short term capital gains' as business
income."
3 ITA-3588 & 3589/D/2010
5. At the time of hearing before us, it is stated by the learned
counsel that originally the assessee company was incorporated to do
the finance business and after restrictions imposed by Reserve Bank of
India, the company stopped its main business and started dealing in
shares. However, during the accounting year relevant to assessment
year 2005-06, i.e., on 30th September, 2004, the assessee company
turned into investor of shares and securities by converting the closing
stock of the immediately previous year into investment and paid short
term capital gains thereon. That the conversion of stock-in-trade into
investment in the preceding year, i.e., AY 2005-06 was not disputed by
the Revenue. That during the year under consideration, the assessee
realized the investment and offered capital gains tax thereon. The
assessee showed long term capital gain where the holding of the
shares was more than 12 months and short term capital gain where
the holding was less than 12 months. That the Assessing Officer
accepted the long term capital gain but with regard to short term
capital gain, he observed that in the immediately preceding year, the
conversion of closing stock of the shares into investment was to take
the advantage of differential rate of tax on short term capital gain and
business income. It is submitted by the learned counsel that first of all,
if the Department had any objection to the conversion of stock-in-trade
to the capital gain, it should have been taken in assessment year
2005-06 in which the conversion took place and not in the year under
consideration. He further submitted that even on merits, the issue is
settled in favour of the assessee by the decision of Hon'ble
Jurisdictional High Court in the case of M/s Express Securities Pvt.Ltd.
vide order dated 22nd October, 2013 in Income Tax Appeal
No.406/2013. In the said case, under identical facts, the conversion of
stock-in-trade to the head `investment' was upheld by the ITAT and
Hon'ble Jurisdictional High Court dismissed the Revenue's appeal. He
further pointed out that the Assessing Officer wrongly held that the
4 ITA-3588 & 3589/D/2010
intention of the assessee was to act as a trader as in the past. He
submitted that after the conversion of stock-in-trade as investment,
the intention of the assessee is to hold the investment and realize the
investment. He also stated that the volumes of purchase and sale
transactions are not high and the same are only in a few scripts.
Learned counsel relied upon the decision of Hon'ble Bombay High
Court in the case of Gopal Purohit wherein the Revenue's SLP was
rejected by Hon'ble Apex Court. He also referred to the decision of
Hon'ble Jurisdictional High Court in the case of Rohit Anand vide ITA
No.1135/2010 and CIT Vs. Avinash Jain [2014] 362 ITR 441 (Delhi).
6. Learned DR, on the other hand, relied upon the orders of
authorities below and he stated that in the preceding year, the
conversion of stock-in-trade to investment was only to take advantage
of change in the law. He further submitted that the assessment for AY
2005-06 was not taken under scrutiny and, therefore, the Revenue did
not get any opportunity to examine the intention behind the
conversion of stock-in-trade to investment and, therefore, the same is
examined in the year under consideration. He further submitted that
the sale transactions are huge and there is a frequency of the
transactions. Therefore, even otherwise, the activity of purchase and
sale of shares by the assessee was in the nature of trading and not
investment. He, therefore, submitted that the order of learned CIT(A)
is perfectly justified and that the same should be sustained and
assessee's appeal should be dismissed.
7. We have carefully considered the arguments of both the sides
and perused relevant material placed before us. Originally, the
assessee company was incorporated to do the finance business but,
later on, it started dealing in shares. On 30th September, 2004, the
company converted the stock-in-trade into investment and also paid
short term capital gain on such conversion. The same has been
5 ITA-3588 & 3589/D/2010
accepted by the Revenue, of course under Section 143(1). During the
year under consideration, the Assessing Officer objected to such
conversion on the ground that the conversion was done to take
advantage of differential rate of tax on short term capital gain and
business income. The relevant observation of the Assessing Officer in
paragraph 6 of the assessment order reads as under:-
"The assessee was a trader of shares and securities in the
past and it was so in the immediately previous year also.
But to gain the advantage of differential rate of tax on
STCG and business income the assessee has turned into an
investor of shares & securities by converting the closing
stock of immediately previous year into investments. In
this context the authorized representative was asked as to
why capital gains should not be treated as business
income."
8. We find that identical issue has been considered by Hon'ble
Jurisdictional High Court in the case of M/s Express Securities Pvt.Ltd.
(supra). The facts in that case were that the assessee was a company.
In the AY 2006-07, the assessee company declared long term capital
gain of `3.34 crores and claimed the same as exempt under Section
10(38) of the Income-tax Act, 1961. The assessee company was
maintaining two sets of portfolio, i.e., investment and trading portfolio.
The Assessing Officer did not accept the long term capital gain on the
ground that the assessee was a share broker with the Bombay, Delhi
and Calcutta Stock Exchange. He also observed that conversion of
stock-in-trade into investment was done with the intention not to pay
tax as Section 10(38) was introduced by the Finance Act, 2004 with
effect from 1.4.2005. Accordingly, he held that the entire amount was
taxable as trading receipt and not under the head capital gain. The
CIT(A) accepted the assessee's contention which is further upheld by
the ITAT. The Revenue filed the appeal before Hon'ble Jurisdictional
High Court which, vide order dated 22nd October, 2013, dismissed the
6 ITA-3588 & 3589/D/2010
Revenue's appeal. Their Lordships in paragraph 4 of the order held as
under:-
"Mere fact that Section 10(38) was introduced in the
statute by Finance Act 2004 with effect from 1st April,
2005, does not mean that the said conversion was
improper or illegal. After the said Section was inserted, the
assessee on noticing the tax benefit, was entitled to
convert and change his holding from stock in trade into
investment. Such conversion cannot be dealt with and
rejected on the ground that Section 10(38) of the Act was
introduced with effect from the said date. Conversion may
be rejected for other reasons and grounds like the
intention was not to convert and the assessee still
continued to treat and regard the shares as stock in trade
and not investment. But there is hardly any discussion in
the assessment order in this regard. Justification and
reasons have not been elucidated and brought on record to
uphold the contention of the Revenue that the shares were
continued to be held as stock in trade and not as an
investment."
9. That the facts of the assessee's case are identical and, therefore,
the above observations would be squarely applicable to the assessee's
case. That merely because due to amendment under the Income Tax
Act by which long term capital gain is exempt and short term capital
gain is chargeable at a lesser rate of tax, then business income does
not mean that the conversion of stock-in-trade to the investment is
improper or illegal. The assessee was entitled to convert the holding
from stock-in-trade to investment on noticing the tax benefit. No other
reason is given by the Assessing Officer for rejecting the conversion of
stock-in-trade into investment. In view of the above, we hold that the
above decision of Hon'ble Jurisdictional High Court in the case of M/s
Express Securities Pvt.Ltd. would be squarely applicable to the case of
the assessee. We also find that on the sale of shares during the year
under consideration which were converted into stock-in-trade last year,
the gain arising was partly long term capital gain and partly short term
capital gain in view of the period of holding of such shares. The
7 ITA-3588 & 3589/D/2010
Revenue accepted the long term capital gain, meaning thereby,
conversion of shares from stock-in-trade to investment was accepted
in respect of shares which were held for more than 12 months but not
accepted in respect of shares which were held for less than 12 months.
The Revenue cannot take this double stand. All the shares which were
earlier held as stock-in-trade were converted into investment as on 30th
September, 2004. Merely because some shares were sold before 12
months from the purchase, it cannot be said that the conversion of
those shares from stock-in-trade to investment was not permissible in
law.
10. The Assessing Officer has also held that the sole intention of the
assessee was to resale the shares at a profit. Therefore, the
transaction is an adventure in the nature of trade. We are of the
opinion that the Assessing Officer has not rightly appreciated the facts
of the case. In this case, till 30th September, 2004, all the purchases of
shares were certainly made with the intention of trading and in the
books of account also, the assessee has recorded the shares as stock-
in-trade. However, as on 30th September, 2004, the assessee
converted the stock-in-trade into investment and thereafter, the
purchases made were recorded in the books as investment. In the
balance sheet of 31st March, 2005, the shares were disclosed as
investment in the balance sheet. Therefore, in the year under
consideration, it cannot be said that the shares were held by the
assessee with the intention of carrying on adventure or business in
such shares. The Assessing Officer has not given any reason for his
inference that the purchases were made with the intention to resale
them at a profit. The intention of an assessee is to be gathered from
the facts on record and the undisputed facts on record are that as on
30th September, 2004, the assessee converted the stock-in-trade into
investment and thereafter, purchases of shares and stock of shares
have been recorded in the books of account as investment. Therefore,
8 ITA-3588 & 3589/D/2010
for holding that the intention of the assessee was to trade in shares,
the Assessing Officer was required to bring some material on record
which may justify this inference. The Assessing Officer has not brought
on record any material which may indicate that the intention of the
assessee was to carry on the business in shares.
11. It is not in dispute that the investment in shares has been made
by the assessee's own firm and no borrowed money has been utilized.
12. The Assessing Officer has also observed that the volume of the
share transactions is very high as well as the frequency of the
transactions is also high. Complete details of the purchase and sale of
shares giving rise to short term capital gain is given at pages 20 to 22
of the assessee's paper book from which it is evident that the total sale
is `2,62,04,884/-. The details are annexed for ready reference to this
`A' From such details, it is evident that in the case
order as Annexure `A'.
of most of the shares, there is only one or two instances of purchase
and sale. It is only in respect of one share, i.e., Maha Seamless in
which there are nine instances of purchase and sale. Therefore, the
observation of the Assessing Officer that there is high frequency of
purchase and sale cannot be accepted. Considering the high value of
the shares nowadays, the total sale consideration of `2.62 crores
cannot be said to be huge volume and, moreover, the volume itself
cannot be determinative of the fact whether the assessee is trading in
shares or made an investment in shares. In the case of Gopal Purohit,
the short term capital gain was `57.31 crores and long term capital
gain claimed exempt was `102.68 crores and long term capital gain
taxable at the rate of 10% was `60 crores. Even with such quantum of
the capital gain, the ITAT Mumbai Bench in the case of Gopal Purohit
29 SOT 117 held that the Assessing Officer was not justified in treating
profit arising from such transaction as income from business or
profession. The above order of the ITAT was upheld by Hon'ble
9 ITA-3588 & 3589/D/2010
Bombay High Court in the case of CIT Vs. Gopal Purohit 228 CTR 582.
The Revenue filed the SLP and their Lordships of the Apex Court
dismissed the SLP which is reported in 334 ITR 308 (Statute).
13. In the case of Rohit Anand (supra), on the similar facts, the
Assessing Officer has treated the profit from sale of shares as profits
and gains of business as against the capital gain claimed by the
assessee. The ITAT accepted the assessee's contention with the
following finding:-
"9. We have carefully considered the relevant facts and
the findings of both the authorities below. The assessee in
his individual carries on business of jewellery. Apart from
said business, the assessee invested in shares and treats
shares as investment in his books of account. This itself
manifest the intention of the assessee as to whether he
proposed into dealing in shares or earn dividend and profit
out of such investment. The Assessing Officer was guided
more because of the total amount involved rather than the
actual intention and the way of carrying on share
transaction. There is no doubt that even a single
transaction can be in the nature of trade but the assessee
has demonstrated that his intention was never to trade in
shares. The intention is manifested by treatment given to
such investment that the investment is out of own fund
and not borrowed that the investment is not rotated
frequently, that the total number of transactions are very
few, that all the shares purchased are not sold and rather
held for quite number of days. It is to be noted the Income
Tax Act itself has provided that when the shares are held
for a period of one year or more will be treated as long
term capital asset contrary to other assets where the
holding period to treat such asset a long term is more than
36 months. Thus even after holding the shares for more
than 12 months and showing such intention from the
conduct, the Assessing Officer cannot replace his opinion
for that of the assessee in holding that the shares are held
as stock in trade and profit from which is to be assessed as
business income. In all such cases the intention is
manifested by the assessee himself by his conduct and
other relevant facts as considered by the learned CIT(A). It
is also seen that the shares were treated as investment in
earlier year and which fact has been accepted by the
10 ITA-3588 & 3589/D/2010
Assessing Officer. The assessee has also earned huge
dividend income from such shares. The Assessing Officer
merely because of the total volume of transaction is
substantial, is guided to hold the income as business
income. However, he failed to recognize that the volume
of transaction includes the appreciation in shares also and
such appreciation has been offered for tax. If volume of
transaction is the criteria, what is to be examined is how
frequently the transaction is done, whether the transaction
is settled in the course of the day of trading itself or in the
settlement period itself so as to avoid payment of full
purchase price. Here the assessee has been holding the
shares by taking delivery and making full payment for such
investment. In such circumstances, the transactions are to
be treated as giving rise to the capital gain and cannot be
branded as trading of making investment so as to
determine whether the transaction was for dealing in
shares or making investment for earning dividend and
appreciation from such investment. The total number of
shares dealt in respect of long term portfolio is only 5. This
cannot be considered as volume transaction. Therefore,
this transaction in shares cannot be said to be with
intention to deal in such shares. Rather the transaction
were with intention of earning appreciation from such
shares. Therefore, the same are assessable as capital gain
and not as profits and gains of business. We, therefore,
uphold the orders of the learned CIT(A)."
14. The Revenue, aggrieved with the order of the ITAT, filed appeal
before the Hon'ble Jurisdictional High Court and Hon'ble Jurisdictional
High Court, vide order dated 16th August, 2010 in ITA No.1135/2010,
upheld the order of the ITAT and held as under:-
"4. In our opinion, the factual findings of the final fact
finding authority are neither perverse nor contrary to
record. Accordingly, we find that no substantial question of
law arises in the present appeal."
15. The facts of the assessee's case are identical. Therefore, the
above decision of ITAT which is approved by Hon'ble Jurisdictional High
Court would be squarely applicable. Considering the totality of the
above facts and relying upon the decision of ITAT, Hon'ble Bombay
11 ITA-3588 & 3589/D/2010
High Court as well as Hon'ble Apex Court in the case of Gopal Purohit
(supra) and of the ITAT and Hon'ble Jurisdictional High Court in the
case of Rohit Anand (supra), we are of the opinion that the Assessing
Officer was not justified in treating the short term capital gain as
income from business or profession. We, therefore, direct the
Assessing Officer to assess the income from short term capital gain
under the head `capital gains' and not under the head `profits and
gains from business or profession'. Accordingly, ground No.3 of the
assessee's appeal is allowed.
16. Ground No.4 of the assessee's appeal reads as under:-
"Without prejudice, the Commissioner of Income-tax (A)
erred in not directing the assessing officer to allow
securities transaction tax paid on shares, income
wherefrom was assessed as `business income', as business
expenditure."
17. At the time of hearing before us, it was submitted by the learned
counsel that ground No.4 is only an alternative ground and would
survive for adjudication only if ground No.3 is adjudicated against the
assessee. Since we have allowed ground No.3 of the assessee's
appeal, ground No.4 is treated as not pressed and the same is rejected
as such.
2007-08) :-
ITA No.3589/Del/2010 (Assessee's appeal for AY 2007-
18. All the grounds raised in this appeal by the assessee are identical
to grounds raised in assessee's appeal for AY 2006-07. For the
detailed discussion therein, the issue arising vide ground Nos.1 & 2 is
set aside and restored to the file of the Assessing Officer for
readjudication as per the decision of Hon'ble Jurisdictional High Court
in the case of Maxopp Investment Ltd. (supra).
12 ITA-3588 & 3589/D/2010
19. Ground No.3 of the assessee's appeal is allowed and the
Assessing Officer is directed to assess the short term capital gain
under the head `capital gains' and not under the head `profits and
gains from business or profession'.
20. Ground No.4 of the assessee's appeal is treated as not pressed
and accordingly rejected.
21. In the result, the appeals of the assessee are partly allowed.
Decision pronounced in the open Court on 2nd May, 2014.
Sd/- Sd/-
SINGH)
(DIVA SINGH) (G.D.AGRAWAL)
JUDICIAL MEMBER VICE PRESIDENT
Dated : 02.05.2014
VK.
Copy forwarded to: -
1. Appellant Sukarma Finance Limited,
: M/s Sukarma
4832/24, Chamber No.104,
Prahalad House, Ansari Road, Daryaganj,
New Delhi 110 002.
2. Respondent : Assistant Commissioner of Income Tax,
Circle-9(1), New Delhi.
Circle-
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar
Contd./..
13 ITA-3588 & 3589/D/2010
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15 ITA-3588 & 3589/D/2010
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