2018 (11) TMI 878 - HC - Income Tax

Nature of loss - capital loss or Loss revenue loss - incurred from the transactions relating to the mutual fund units - whether there was evidence available on record to indicate that the intention of the assessee was to treat the holding as stock-in-trade? - Held that - It is clear that the assessee has stated that they are a financial service company rendering financial advisory and syndication services. Apart from that, the assessee is also trading in shares, units of mutual funds, etc. Memorandum of Association of the Company authorizes the Company to deal in shares and services vide its main objects clause. Further, it is stated that as authorized, the assessee had made mutual funds units during the financial year 2000-01 and sold the units during the same year. The trading in such units was done in the ordinary course of its business and as such revenue in nature. It does not amount to capital asset to be attracting Capital Gain Tax. Further, the assessee stated that the company has treated the transaction as revenue transaction and debited the loss incurred to profit and loss account as revenue expenditure and more particularly, in the earlier financial year also i.e. 2000-01, transaction was treated as revenue expenditure and the same was allowed by the AO. We find that the Tribunal erred in coming to a conclusion that there was no evidence available on record to indicate that the intention of the assessee was to treat the holding as stock-in-trade. AO came to the conclusion that it is a capital investment, because, the assessee was a financial services company. Memorandum of Association of the Company authorised to deal in shares and services. Furthermore, for all the previous assessment years and the subsequent assessment years, similar transactions have been held to be revenue in nature and for the assessment year 2006-07, AO did not agree with the assessee. CIT-A after taking into consideration of the Memorandum of Association of the Company, held that the assessee had acquired equity shares, which it held as stock-in-trade and out of which, a portion was sold incurring a loss which was accounted for as business loss. It held that the method of accounting and the principle of accounting for loss or gains from investments or stock-in-trade have been consistently and regularly followed by the assessee and accordingly, the claim of the assessee with regard to loss arising from trading in shares is to be allowed as a business loss as claimed by the assessee. - Decided in favour of the Assessee

Summary

Issues Involved:
1. Determination of treatment of loss from transactions relating to mutual fund units as capital loss or revenue loss.
2. Consistency in treatment of similar transactions for different assessment years.

Issue 1: Determination of treatment of loss from transactions relating to mutual fund units
The appeals were filed against the order of the Income Tax Appellate Tribunal regarding the treatment of the loss incurred from transactions relating to mutual fund units as a 'capital loss' instead of a 'revenue loss.' The main contention was whether the treatment given in the books of account, naming it as 'capital loss,' was decisive in ascertaining the intention of the assessee. The Tribunal concluded that there was no evidence to indicate that the assessee intended to treat the holding as stock-in-trade. However, the assessment order and submissions by the assessee highlighted that the transactions were done in the ordinary course of business, treated as revenue transactions, and consistently accounted for as revenue expenditure in previous years.

Issue 2: Consistency in treatment of similar transactions
The Assessing Officer initially treated the loss as a capital investment due to the nature of the company being a financial services company. However, the Memorandum of Association authorized dealing in shares and services, and similar transactions in previous and subsequent assessment years were considered revenue in nature. The Commissioner of Income Tax (Appeals) analyzed the method of accounting and the principle of accounting for losses or gains from investments, concluding that the loss arising from trading in shares should be allowed as a business loss. The Tribunal's decision was challenged based on the inconsistency with previous assessments and the established accounting principles followed by the assessee.

In conclusion, the High Court held that the Tribunal erred in reversing the order passed by the Commissioner of Income Tax (Appeals) and allowed the appeals filed by the assessee. The substantial questions of law were answered in favor of the assessee, emphasizing the importance of consistent treatment of transactions and adherence to established accounting principles.