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Indo Stosec Private Limited, 6, Padam II, 4B Peddar road, Mumbai-400026, Vs. Income Tax Officer 5(2)(1),Aayakar Bhavan, Churchgate, Mumbai-400020
August, 22nd 2014
                      ,                  ""            
         IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI

     BEFORE S/SHRI B.R.BASKARAN (AM) AND DR. S. T. M.PAVALAN (JM)


                        ./I.T.A.No.3472/Mum/2010
                      (   / Assessment Year: 2006-07)

      Indo Stosec Private Limited,     /        Income Tax Officer 5(2)(1),
      6, Padam II,                     Vs.      Aayakar Bhavan, Churchgate,
      4B Peddar road,                           Mumbai-400020
      Mumbai-400026,

      ( /Appellant)                             (    / Respondent)
            . /   . /PAN/GIR No. :                       AAACI3712Q


               / Appellant by               :   Shri Naresh Jain
                 /Respondent by                 Shri Sanjeev Jain


                   / Date of Hearing
                                                     : 11.7.2014
               /Date of Pronouncement : 20.8.2014

                                       / O R D E R

PER B.R.BASKARAN,AM:


         The appeal of the assessee is directed against the order dated 25-03-2010

passed by Ld CIT(A)-9, Mumbai and it relates to the assessment year 2006-07.


2.      The first issue contested by the assessee relates to the assessment of gain

arising on sale of shares.       The facts relating thereto are state in brief.   The

assessee is engaged in the business of manufacture of Gas mantle and stove.

Besides the assessee was also engaged in trading of shares and it has show the

shares on hand as its "stock in trade" in the earlier years. As on the beginning of

the current year, i.e., on 1.4.2005, the assessee transferred the Shares from

"Stock in trade" to "Investment" account. Immediately thereafter, the assessee

sold shares, the details of which are furnished at page 83 of the paper book.
                                                              I.T.A.No.3472/Mum/2010
                                       2





From the said statement, we notice that the assessee sold shares on 05.04.2005,

19-04-2005, 20-04-2005 and 26-04-2005. Since the assessee had classified the

shares as "Investments" as on 01.04.2005, the assessee computed Long term

Capital gain of Rs.28,33,476/- and Short term Capital gain of Rs.79,094/- for

income tax purposes.     The assessee claimed the long term capital gain as

exempt u/s 10(38) of the Act and paid tax on Short term Capital gains at

concessional rate u/s 111A of the Act. In the assessment proceedings, the AO

did not recognize the conversion of Stock in trade into Investments by holding

that the change of method of accounting was effected with a view to reduce the

tax liability and also to claim exemption u/s 10(38) of the Act. Accordingly, the

assessing officer assessed the gains arising on sale of shares as business income

of the assessee. The Ld CIT(A) also confirmed the same.



3.    The Ld Counsel appearing on behalf of the assessee submitted that the

assessee has been holding the shares for quiet a long period of time. Referring

to the statement placed in page 83 of the paper book, the Ld A.R submitted that

some of the shares are held prior to 1.1.2000 also. Accordingly he contended

that the intention of the assessee should be inferred from the period of holding

the shares. He submitted that though the assessee had classified these shares

as `stock in trade' in its books of account, the same is not decisive.      In this

regard, he placed reliance on the decision of Hon'ble Supreme Court rendered in

the case of Investment Ltd Vs. CIT (77 ITR 533).          He submitted that the

intention of the assessee should be gathered from the facts surrounding the

issue. He further submitted that the assessee has converted the shares as its

"investments" in the books of account so as to reflect its intentions. The Ld A.R
                                                                I.T.A.No.3472/Mum/2010
                                         3


placed reliance on the order dated 22-10-2013 passed by Hon'ble Delhi High

Court in the case of CIT Vs. M/s Express Securities Pvt Ltd and submitted that

the Hon'ble Delhi High Court, in the above cited case, has held that the assessee

is entitled to convert the stock in trade into investments on noticing the benefit

of exemption provided u/s 10(38) of the Act.        He further submitted that the

assessee sold the shares, since they were fetching good prices. Accordingly, he

contended that the tax authorities are not justified in rejecting the explanations

of the assessee. The Ld A.R further submitted that the CBDT has prescribed

various criterian to be examined to ascertain the nature of transaction.           He

submitted that the assessee is satisfying most of the tests prescribed by the

CBDT.    However, the Ld CIT(A) has confirmed the order of the AO without

examining all the test criterias. Accordingly he prayed that the matter may be

set aside to the file of the Ld CIT(A) for considering the matter afresh.



4.    On the contrary, the Ld D.R submitted that the assessee was indulging in

trading of shares in the earlier years also and the assessee had offered the gains

realized on sale of shares as business income only. Inviting our attention to the

financial statements relating to the earlier years, the Ld D.R submitted that the

assessee has been consistently declaring the Shares as its Stock-in-trade only.

He further submitted that the assessee has converted the stock in trade into

investments only in the current year and immediately sold the shares after such

conversion. Accordingly, the Ld D.R submitted that the assessee has entertained

the idea of conversion, only to avail the exemption u/s 10(38) of the Act and also

to avail concessional rate of tax in respect of short term capital gains.
                                                               I.T.A.No.3472/Mum/2010
                                        4


Accordingly he contended that the order of Ld CIT(A) passed on this issue should

be sustained.



5.    We have heard the rival contentions on this issue and perused the record.

As submitted by Ld D.R, the assessee has been consistently declaring the Shares

as its Stock in trade. Only on the opening date of this year, i.e., on 1-04-2005,

the assessee seems to have converted the stock in trade into Investments in its

books of account and thereafter sold most of the shares within a period of about

20 days.    When questioned about the compliance of the provisions of the

Companies Act, if any, in this regard, the Ld A.R submitted that the decision

taken by the assessee is reflected in the books of account. Thus, it is seen that

the entry passed in the books of account to convert stock in trade into

investments is not substantiated with any document. The Ld A.R contended that

the Ld CIT(A) did not examine the applicability of various tests prescribed by the

CBDT in its Circular to determine the nature of transactions. In our view, the

examination of the applicability of various tests is not required in the instant

case, since the assessee has clearly brought out its intention by classifying the

shares as its "Stock in Trade" in all the earlier years. Further the assessee is a

legal person and its intention can be ascertained only through the documents,

resolutions passed in Board meetings etc.       The question of conduct of the

assessee may be more relevant in the case of human beings.            Further, the

question of application of various test criterias prescribed by the CBDT would

arise only when there is confusion about the intention of the assessee. In the

instant case, there appears to be no confusion at all. On the contrary, it is clear

that the assessee has decided to convert the stock in trade into Investments on
                                                                I.T.A.No.3472/Mum/2010
                                         5


1.4.2005 only when it took the decision to sell the shares immediately thereafter

and the purpose is very clear, i.e., to avail the benefit of exemption and

concessional rate of tax. Hence, in our view, the assessee cannot take support

of the decision rendered by the Hon'ble Supreme Court in the case of Investment

Ltd (supra), since the assessee has, all along, shown the shares as its stock in

trade and further it has also declared the gains arising on sale of shares as its

business profit only. In the case of M/s Express Securities Pvt Ltd (supra), the

Hon'ble Delhi High Court has noticed that the assessee has held the shares as

investments for a period of two years after the date of conversion from "Stock in

trade". On the contrary, in the instant case, the assessee has immediately sold

the shares after the alleged conversion. Hence, under these set of facts, in our

view, the Ld CIT(A) was justified in confirming the gains arising on sale of shares

as the business income of the assessee by disregarding the claim of Long term

Capital gain and Short term Capital gain.      Accordingly, the Ground No.1 and

Ground No.2 are disposed of.






6.     The assessee has raised an additional ground of appeal, wherein it is

contended that the assessing officer should have excluded the long term capital

gain while computing book profit u/s 115JB of the Act. Since, we have upheld

the action of the assessing officer in assessing the gains arising on sale of shares

as business income, the additional ground urged by the assessee becomes

infructuous and accordingly liable to be dismissed. Accordingly, we dismiss the

additional ground.
                                                                I.T.A.No.3472/Mum/2010
                                         6


7.      The next issue relates to the disallowance of Rs.25,380/- made u/s

40(a)(ia) of the Act on the reasoning that the assessee did not pay the Tax

deducted at source before the due date prescribed for the payment of the same.

However, it is an admitted fact that the assessee has paid the TDS amount

before the due date prescribed for filing return of income u/s 139(1) of the Act.

According to the decision rendered by Hon'ble Calcutta High Court in the case of

Virgin Creations in ITA No.302 of 2011 dated 23.11.2011, the amendment

brought out by the Finance Act 2010 in sec. 40(a)(ia) providing for non-

disallowance if the TDS amount is paid before the due date prescribed for filing

return of income u/s 139(1) is retrospective in nature. The Co-ordinate bench of

Mumbai Tribunal, in the case of Piyush C Mehta Vs. ACIT (ITA No.1321 of 2009

dated 11.4.2012) has followed the decision of Hon'ble Calcutta High Court

rendered in the case of Virgin Creations (supra) and deleted the identical

disallowance made in that case. By following both the decisions referred above,

we set aside the order of Ld CIT(A) on this issue and direct the assessing officer

to delete the impugned disallowance made u/s 40(a)(ia) of the Act.



8.   In the result, the appeal filed by the assessee is partly allowed.



      Order pronounced in the open court on 20th Aug, 2014

              20th Aug, 2014    

      Sd/-                                              sd/-
(DR. S. T. M.PAVALAN)                            (B.R.BASKARAN )
     / JUDICIAL MEMBER                           / ACCOUNTANT MEMBER

  Mumbai:
                 on this 20th day of August, 2014

. ../ SRL , Sr. PS
                                             I.T.A.No.3472/Mum/2010
                            7



        /Copy of the Order forwarded to :
1.  / The Appellant /Applicant
2.  / The Respondent.
3.     () / The CIT(A)-
4.      / CIT
5.      ,     ,         /
     DR, ITAT, Mumbai
6.     / Guard file.
                                              / BY ORDER,

                                      (Asstt. Registrar)
                             ,  /ITAT, Mumbai

 
 
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