IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "F", MUMBAI
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND
SHRI SANJAY GARG, JUDICIAL MEMBER
ITA No.7951/M/2010
Assessment Year: 2004-05
ACIT 4(1), M/s. Four Dimensions
6th Floor, Room No.640, Securities (India) Ltd.,
Aayakar Bhavan, Vs. 209/210, Arcadia Building,
Mumbai - 400020 2nd Floor, 195 Nariman Point,
Mumabi 400 021
PAN: AAACF1734F
(Appellant) (Respondent)
CO No.60/M/2012
Assessment Year: 2004-05
M/s. Four Dimensions DCIT 4(1),
Securities (India) Ltd., 6th Floor, Room No.640,
209-210, Arcadia Building 195, Vs. Aayakar Bhavan,
Nariman Point, Mumbai - 400020
Mumabi 400 021
PAN: AAACF1734F
(Appellant) (Respondent)
Present for:
Assessee by : Ms. Amrita Singh, A.R.
Revenue by : Shri Vijay Mehta, D.R.
Date of Hearing : 20.08.2015
Date of Pronouncement : 16.09.2015
ORDER
Per Sanjay Garg, Judicial Member:
The present appeal by the Revenue and the cross objections by the
assessee have been directed against the order dated 01.09.2010 of the
Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)]
relevant to assessment year 2004-05.
2 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
2. The Revenue has taken the following grounds of appeal:
Revenue's grounds of appeal:
"1. On the facts and in the circumstances of the case and in law, the
CIT(A) has erred in holding that loss of Rs.5,21,76,870/- arising from
transactions of the mutual fund units is business loss which is allowed to
be reduced from other business income and this loss is not capital loss
2. On the facts and in the circumstances of the case and in law, the
CIT(A) has erred in holding that the loss of Rs.1,84,13,730/- is arisen due
to valuation of closing stock of the units and the same cannot be
disallowed by invoking the section 94(7).
3. On the facts and circumstances of the case and in law, the
impugned order of the Ld.CIT(A) is contrary to law and consequently
merits to be set aside and that of the Assessing Officer be restored.
4. The appellant craves leave to amend or alter any ground or add a
new ground which may be necessary."
3. Whereas the assessee has taken the following cross objections:
Assessee's cross objection:
"On the facts and circumstances of the case and in law, the reopening proceedings
u/s 147 of Income Tax Act, 1961 are bad in law and requires to be squashed."
4. Since the assessee in his cross objections has raised a legal issue as to
the validity of the reopening of the assessment under section 147 of the Act,
we take it first for discussion.
The original return filed by the assessee was processed under section
143(1) on 24.03.05. The case was selected for scrutiny and the assessment
under section 143(3) was completed on 19.12.06. Thereafter, the AO reopened
the assessment observing that the income of the assessee has escaped
assessment. In the reasons recorded for reopening dated 20.01.09, it has been
mentioned that the assessee had credited the P&L account with an amount of
Rs.21,96,630/- on account of profit on sale and purchase of shares and units.
3 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
The said profit was set off against the loss from redemption of mutual funds
amounting to Rs.5,21,76,870/-. The AO observed that the loss from the sale of
mutual funds was to be computed under the head `Capital gains/capital loss' as
the said loss was incurred by the assessee from investment activity in mutual
funds. The AO further observed that the assessee had sold/redeemed the
mutual funds within 9 months of the record date of dividends. Hence, the
provisions of section 94(7) as amended vide Finacne Act, (2) of 2004 w.e.f.
01.04.05 were applicable and the loss so incurred was liable to be
disallowed/ignored. The above said reasons for reopening of assessment dated
20.01.09, for the sake of ready reference, are reproduced as under:
"In this case, the assessee company has filed its return of income for
A.Y.2004-05 on 29.10.2004 declaring income of Rs.2,50,O1,060/-. The
return was processed u/s.143(1) on 24.03.2005 determining the amount
refundable of Rs.22,99,662/-.
The case was selected for scrutiny and assessment u/s.143(3) was
completed on 19.12.2006 at an income for Rs.2,64,08,970/-.
The assessee has credited the P&L A/c. with an amount of
Rs.21,96,630/- on account of profit on sale of shares and units. The profit
shown was the adjusted balance after setting off the loss from redemption
of mutual funds amounting to Rs.5,21,76,870/-. The mutual funds were
purchased, dividends earned and finally were redeemed. There was
neither further purchase of a company is to derive income by way of
dividend
etc,
then the profit accruing by change in such investment (by sale of
shares/mutual fund) will yield capital gain and the purchase and sale of
shares / mutual funds with motive of earning profit, would result in the
transaction being in the nature of trade / adventure, therefore taxable
under the head 'Business Income'. Under the circumstances, the loss from
mutual fund was required to be held as loss from investment under the
head
'Capital gains' and such loss was not allowable to be set off against the
profit under the head 'Business Income'. Omission to do so has resulted in
the escapement of income of Rs.5,21,76,870/-.
It is further observed during the assessment proceedings for
A.Y.2005-06 that the assessee has incurred a loss of Rs.1,84,13,730/- on
purchase and sale of mutual funds which is covered by section 94(7) of the
I.T. Act. This loss should have been disallowed in the assessment for
4 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
A.Y.2004-05. Complete details of loss incurred on account of purchase and
sale of units of mutual funds is given as under:
Loss booked Loss booked Total Loss Amount of
on A/c. of in A.Y.2005- dividend
Name of the valuation of 06 on
Fund closing stock account of
in A.Y.2004- sale of units
05
Sundaram (- )73,24,992 (-) 15,87,182 (-) 89,12,174 75,71,122
Growh
Sundaram (- )21,59,160 NIL (- )21,51,221 19,37,656
Bond Saver
Principal (- )78,41,587 (-)1,16,11,251 71,60,474
Index Fund- (-)37,69,664
Div.
Reliance (-)1,03,82,093 (-)1,43,27,289 1,03,82,093
Growth (- )39,45,195
Fund Div.
Total (-)2 77,07,832 (-)93,02,041 (-)3,70,01,935 2,70,51,345
These losses were incurred on account of redemption of units of mutual
funds purchased during F.Y.2003-04 and included in the closing stock of the
assessee as on 31.03.2004. These were redeemed during F.Y.2004-05 and
such redemption was made within 9 months of the record date of
dividends. The purchase of these units was also within 3 months of record
date of dividend. The provisions for redemption of units of mutual funds
within a period of 9 months were introduced by the Finance Act (2) of 2004
from A.Y.2005-06 and it was applicable for the redemptions made from and
after 01.04.2004. Hence, the losses incurred by the assessee on account of
redemption of mutual fund are clearly hit by the mischief of provisions of
section 94(7) as amended by the Finance Act (2) of 2004. Failure to disallow
the loss on this account has resulted in the escapement of income to the
tune of Rs.1,84,13,730/-.
In view of the above, I have reason to believe that the taxable income to
the extent of Rs.5,21,76,870/- and Rs.1,84,13,730/- totaling to
Rs.7,05,90,600/- has escaped assessment. Therefore, the assessment is
reopened u/s.147 of the Act. Notice u/s.148 is issued accordingly."
5 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
5. The Ld. A.R. of the assessee, before us, has submitted that so far as the
first reason of reopening i.e. treating the loss from the sale of mutual funds as
capital loss instead of business loss as claimed by the assessee is concerned,
the AO has opined that the same was required to be treated as capital in nature
merely because there were no frequent transactions in these scripts and the
dividend was earned on the same. The Ld. A.R. of the assessee has explained
that most of the mutual funds in question were appearing in the accounts of the
assessee at the start of the year as opening stock and at the end of the relevant
year as closing stock. The assessee company had been carrying on the share
trading business and maintaining two portfolios. The shares and mutual funds
traded in by the assessee were recorded in the trading portfolio and were never
shown as investments in its accounts. The relevant details such as ledger copy
of dividend account, copies of mutual fund statement etc. were duly provided
to the AO during the original assessment proceedings. The AO, after
considering the entire details, had allowed the said loss on mutual funds as
business loss. He has further submitted that reopening of the assessment on
the ground that the mutual funds were to be treated as investments of the
assessee and not the stock in trade, was nothing else but a change of opinion.
He has further submitted that classification of shares and units of mutual funds
whether as investments or inventeries is a highly subjective issue which
depends upon a number of facts which differ from case to case. No single
formula is prescribed to differentiate between the two. The CBDT vide its
circular No.4/2007 dated 15.06.07 has laid down certain parameters to be
observed while making the distinction between the shares held by the assessee
as investment or stock in trade viz. the intention of the assessee at the time of
purchasing/dealing in shares or units; the number of scripts dealt in with;
frequency of transactions and magnitude of investment; duration and length of
time for which the said units are held by the assessee; the nature of transactions
6 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
involved; the intention of the assessee to earn quick profits; the treatment and
characterization with the securities in the books of accounts of the assessee etc.
He submitted that the entire details of sale and purchase of shares and mutual
funds were submitted to the AO during the time of original assessment.
Though the AO has not specifically discussed the issue as to whether the
investment in mutual funds was to be treated as investment activity or as
trading activity, however, the claim of the assessee was accepted by the AO
after due application of mind.
In relation to the second reason, the Ld. A.R. has submitted that the amended
provisions of section 94(7) were applicable prospectively for assessment year
2005-06 and not to the year under consideration. Hence, the second reason
recorded by the AO was factually and legally wrong and the reopening on the
basis of amendment brought subsequently which was not applicable for the
year under consideration cannot be held to be a valid reason.
On the other hand, the Ld. D.R. has relied upon the findings of the AO.
6. We have considered the rival contentions and have also gone through the
records. We find force in the contention of the assessee that so far as the
reopening on the issue that the of the loss on mutual funds was required to be
treated as capital loss is concerned, we find from the reasons recorded by the
AO and even from the assessment order made pursuant to the reopening of the
assessment that the AO's conclusion that the loss in mutual funds was capital
loss was not based on any peculiar fact but only on surmises and conjunctures.
It was nothing but a change of opinion. It is pertinent to mention here that
while reversing the order of the AO on merits, the Ld. CIT(A) in the impugned
order has observed that the AO has not brought on record any material to
justify his conclusion that the said transaction in mutual fund had resulted in
capital loss. Merely because the dividend was earned on these units, that itself,
cannot be held to be a criteria for treating the transactions as capital in nature.
7 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
The units purchased were shown as stock in trade by the assessee in its
accounts. The similar transactions had been accepted by the AO as business
transactions in the earlier assessment years 2002-03 and 2003-04 and the
assessee's claim of business loss was also accepted by the AO. The dividend
earned cannot be said to be income from investment. Merely because the
dividend is exempt that itself cannot be a ground to hold that the mutual funds
were held as investments whereas the assessee has specifically treated the same
as stock in trade in its accounts. Moreover, the assessee's such treatment had
already been accepted in earlier years. No new material or evidence had come
into the possession of the AO to form a belief that the mutual funds
transactions were to be treated as capital in nature. There was neither any new
evidence nor any information before the AO to change or form his belief
regarding the nature or the head under which the loss from mutual funds were
to be computed. The view/computation of the loss from mutual funds as
business loss done by the AO during original assessment proceedings was not
only the possible view but also the correct view as has also been held by the
Ld. CIT(A) in the impugned order. The Hon'ble Bombay High Court in the
case of "Asian Paints Ltd. vs. DCIT" (2009) 308 ITR 195 (Bom.), while
relying upon the full bench decision of the Hon'ble Delhi High Court in the
case of `CIT vs. Kelvinator India Ltd." (2002) 256 ITR 1, has observed that
when a regular order of assessment is passed in terms of section 143(3) of the
Act, a presumption can be raised that such an order has been passed on
application of mind. Such a presumption can also be raised to the effect that in
terms of clause (e) of section 114 of the Indian Evidence Act that judicial and
official acts have been regularly performed; to hold that an order has been
purportedly without application of mind conferring jurisdiction upon the AO to
reopen the proceedings without any new or further information or material
available to him, the same would amount to giving a premium to an authority
8 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
exercising quasi judicial function to take benefit of its own wrong. The
Hon'ble Bombay High Court has, thus, held that the AO cannot take advantage
of his own wrong to reopen the assessment by taking recourse of the provisions
of section 147 of the Act. It may be noted that the decision of the Hon'ble full
Bench of the Delhi High Court has been further upheld by the Hon'ble
Supreme Court in the case of "CIT vs. M/s. Kelvinator India Ltd." reported as
(2010) 320 ITR 561 (SC) holding that the AO has no power to review, he has
power to reassess but reassessment has to be based on fulfillment of certain
pre-condition and if the concept of `Change of opinion' is removed then in the
garb of reopening of the assessment, review would take place. The AO has
power to reopen provided there is tangible material to come to the conclusion
that there is escapement of income from assessment and reasons must have a
link with the formation of the belief. In the case in hand, the original
assessment was done on the basis of material produced by the assessee before
the AO. No new material or information has come into the knowledge of the
AO. The view taken by the AO was one of the possible views treating the
income/loss on mutual funds as business loss. Such a treatment was given by
the AO in the case of assessee in earlier assessment years also. No further
evidence or new information has come to the knowledge of the AO for change
of his opinion in this respect. Hence, the reopening on the ground that the loss
from mutual funds was to be assessed as capital loss was nothing but a change
of opinion that too based on surmises and conjunctures and not based on any
particular material fact or circumstance which can be considered to be a
deciding factor for such a treatment.
7. So far as the second reason regarding the applicability of amended
section 94(7) is concerned, we find that the amendment brought by the said
section was applicable from the assessment year 2005-06. Even the condition
9 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
imposed in the said amendment is that if the assessee buys or acquires any
securities or units within a period of three months prior to the record date of
dividend and sells or transfers such units within a period of nine months after
such date, then the loss is to be disallowed. However, we find that during the
year under consideration the assessee had not sold or transferred the
securities/mutual funds. The loss arrived at by the assessee was on account of
diminution in the value of the stock as compared to the market value. The
units were lying in the stock of the assessee at the close of the financial year.
Under such circumstances, the provisions of section 94(7) were not attracted in
this case. As per the accounting practice prevalent to value the stock in trade
at cost or market price whichever is lower, the loss was arrived at, after valuing
the units at market price and the same was claimed business loss. Neither the
amended provisions of section 94(7) were applicable for the year under
consideration nor otherwise attracted in this case. We find that even the AO
was also of the view that the provisions of section 94(7) were contingent upon
the redemption of units. While framing assessment for A.Y. 2005-06 wherein
the AO had formed the view to reopen the assessment for A.Y. 2004-05 i.e. for
the year under consideration, the AO has observed in para 4.1.0 of the order
dated 28.12.07 that the anticipated loss arrived at for A.Y. 2004-05 could have
been taken into consideration in A.Y. 2005-06 at the time of actual redemption
of the mutual fund units and the difference between the two could have been
taken for consideration/computation of income/loss for the A.Y. 2005-06. In
view of this, the AO had made protective addition on the same issue for A.Y.
2005-06 also. We find that so far as the actual redemption of the unit during
the subsequent year is concerned, the issue as to whether the provisions of
section 94(7) are applicable or not have to be independently examined in that
year. So far as the forming of reasons as to the applicability of section 94(7)
for the year under consideration is concerned, the same was erroneous as the
10 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
amended provisions are not applicable for the year under consideration and the
reasons of the AO to believe that the income of the assessee has escaped
assessment because of the applicability of section 94(7) are fallacious and are
not valid and the reopening on the basis of said belief is bad in law.
8. In view of our observations made above, it is to be held that the
reopening in this case has not been on valid reasons and the same is
accordingly set aside.
9. Even on merits also, in view of our discussion made on the factual
matrix of the case as above, we do not find any infirmity in the order of the Ld.
CIT(A) holding that the mutual funds held by the assessee were stock in trade
and not an investment activity of the assessee and that the amended provisions
of section 94(7) were not applicable for the year under consideration. The
appeal of the Revenue deserves to be dismissed even on merits of the case also.
10. In the result, the cross objections of the assessee are hereby allowed and
the appeal of the Revenue is hereby dismissed.
Order pronounced in the open court on 16.09.2015.
Sd/- Sd/-
(D. Karunakara Rao) (Sanjay Garg)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 16.09.2015.
* Kishore, Sr. P.S.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT (A) Concerned, Mumbai
11 ITA No.7951/M/2010 &
CO No.60/M/2012
M/s. Four Dimensions Securities (India) Ltd.
The DR Concerned Bench
//True Copy// [
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.
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