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TMI Blog2012 (6) TMI 473X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue is against the order of CIT(A) in directing to compute the profit on sale of shares and securities under the head 'Capital Gains' as against assessed by the Assessing Officer as 'Business Income'. For this, the revenue in both the cases has raised following common grounds: "On the facts and in the circumstances of the case, Ld. CIT(A) has erred in directing to assess the profit on sale of shares and securities under the head 'Capital Gain' instead of 'Business Income' considered by the A.O." 3. Since issues are identical and facts are common, we discuss the facts from ITA No. 586/K/2009. Brief facts relating to the above issue are that the Assessing Officer noted in assessment order that the assessee company is engaged in the business of buying and selling of shares/units. The Assessing Officer also noted the main object of the Company as per Memorandum of Association, which are as under: "(2) To carry on the business of Investment Company and to invest in, acquire, hold and to deal in shares, stocks, debentures, debenture stocks, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in India or elsewhere and debentures, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duce evidence from its records and whether it has maintained distinction between those shares which are its stock-in-trade and those which are the one by way of investments. Also in the case of Janak S. Rangwaila v. ACIT [2007] 11 SOT 627 (Mum) the Hon'ble Mumbai Tribunal has held that it was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction does not change the nature of transaction which are being assessed as income from capital gains in the past several ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stment shares at an opportune moment without making any burry for sale ignoring dividend. The investment shares and securities purchased and held till their sale had served the dual purpose - i.e., for earning dividend as an incidental income as well as to make profit on sale at appropriate time. The AO did not reject the books of account vis-à-vis the audited accounts u/s. 145 of the Act before arriving at such conclusion. The AOs finding cannot, therefore, be accepted. Considering all the above, it is held that the profit on sale of shares and securities by the assessee is to be assessed under the head 'capital gain'. Aggrieved, now revenue is in appeals before us. 4. Before us Ld. CIT-DR Shri D. R. Sindhal argued on behalf of revenue and also filed written submission. Sh. Sindhal argued that cumulative effect of all factors is to be seen and income declared by assessee is business income. He stated that there is nothing on record to show that purchase of shares was for non-commercial purposes and purchase was also not for getting control Interest of company and even shares sold within a short period. Manner in which shares are shown in the Balance Sheet is not conclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue can be decided after considering all the facts of the case and it varies from case to case depending on their own facts. He stated that rejection of books of account vis-à-vis the audited account u/s. 145 is not statutory requirement for deciding the issue in hand. Hence, CIT(A) was not justified for his above observation that the A.O. had not rejected books of account vis a vis the audited accounts u/s. 145. He argued that lastly courts held as under: "If the previous decision is plainly erroneous, there is a duty of the court to review it and not perpetuate the mistake i.e., a vital point was not considered or when an earlier relevant statutory provision have not been brought to the notice of court." (i) U.O.I. v. Raghubir Singh [1989] 178 ITR 548 (SC). (ii) Sri Agasthyar Trust v. CIT [1999] 236 ITR 23/103 Taxman 363 (SC). (iii) Shriram Transport Finance Co. Ltd. v. Asstt. CIT [1999] 70 ITD 406 (Mad.). He requested the Bench to consider above submissions, A.O's order before deciding the issue and restore the order of A.O. 5. The Ld. CIT-DR in his written submissions, stated that in the case of shares, no particular factor is decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint to the trading character of the transaction. The test often applied is whether the assessee has made his shares and securities, the stock-in-trade of a business Raja Bahadur Kamakhya Narain Singh v. CIT (1970) 77 ITR 253 (SC). Where initial intention itself is to make profit by resell, transaction is a business venture - It is no doubt correct to say that the principal consideration in determining whether income from sale of shares is revenue income or capital gain is to find out what was the purpose of purchase of those shares and, if the purpose was investment, the fact that the sale of those shares resulted in a profit will not make that profit revenue income. However, this principle is not applicable to cases where it is found that even the initial purchase of shares by the assessee was not for the purpose of investment; for earning income from dividends, but was with a view to earn profit by resale of those shares - Dalhousie Investment Trust Co. Ltd. v. CIT (1968) 68 ITR 486 (SC). Mere fact that assessee is a big land-holder is not relevant - The fact that the assessee was, at the material time a land-holder of a large estate, would not mean that his transactions in sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsideration according to section 45(2), but there is no provision to deal with the case of transfer of stock to investment account. (vi) If the transaction is not bona fide, then the above stated principles will not be applicable and the loss will not be allowable." 6. Ld. CIT-DR also discussed the concept of relevancy of length of time in his written submissions, which is as under: "It was observed by the Supreme Court in Investment Ltd. v. CIT [1970] 77 ITR 533, that the mere length of time might not be a determining factor. The same view was expressed by the Supreme Court in the case of New Era Agencies (P) Ltd. v. CIT [1968] 68 ITR 585. There the Supreme Court was dealing with preference shares; and it was held that this fact had to be noted, because the case was concerned with preference shares and these shares had been held for a considerable time. The Supreme Court observed that the fact that the appellant had not dealt with the shares for about 14 years from 1949 to 1963 would not be sufficient to draw the inference that the assessee had treated his holding of shares as investment. But as held by the Supreme Court, it is one of the relevant factor. In a case before Calc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Court justified the treatment of loss as business loss in a later year CIT v. Karam Chand Thapar & Bros. (P) Ltd. [1989] 176 ITR 535 (SC). In Express Newspapers Ltd. v. Dy. CIT [1997] 59 TTJ (Mad. Trib.) 516, it was held that where there was adequate evidence to prove that the loss suffered by the assessee in the trading activities of purchase and sale of shares was genuine, such loss could not be disallowed, where assessee's income from sale of shares in earlier years had been treated as business income. In the case of Investment Ltd. v. CIT [1970] 77 ITR 533 (SC), the assessee-company was formed with the objects, amongst others, of dealing in shares, debentures and securities, and it effected transactions of sale and purchase of shares and securities of large magnitude. While determining the nature of shares or securities it was held (i) that the very fact that similar claim was allowed in earlier and later years prima facie led to an inference that the company was a dealer in shares; (ii) that there was no evidence on record as to the true nature of what was called by the taxing authorities as 'redemption of securities'; (iii) that even assuming that the company would redee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 979] 120 ITR 709 (Bom)." The Ld. CIT-DR further discussed when loss is business loss, In case shares are taken as stock-in-trade, as under: "In case share are taken as stock-in-trade or on trading account, then the loss is business loss, i.e., if the assessee is dealer in shares and incurs loss in dealing in shares that are purchased in the ordinary course of dealing with any other intention. Some of the points are discussed below: Losses in case of dealer in shares: In the case of a dealer, shares are held as stock-in-trade, so loss on sale is revenue loss. But it does not mean that every kind of deal in shares in case of dealer will be business deal and result in revenue loss. In some cases, it is held not on revenue account as below: (i) In a case before Calcutta High Court - Gold Co. Ltd. v. CIT [1973] 92 ITR 121, assessee purchased shares of two companies. Shares of S Ltd. were held for seven and half years and shares of B Ltd. were held for sixteen years. Loss in case of S Ltd. was held as revenue and in case of B Ltd. as capital loss being held for considerable length of time. (ii) In another case loss on sale of shares was held not allowable b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n income from dividend and that the purchase of these shares were with the object of selling them subsequently at a profit. (iii) As a general rule when shares are purchased to sell the same on profit and no other motive is involved, then the transactions resulted into business income/loss. The purchase of these shares was with the object of selling them subsequently at a profit and the shares were in fact sold at considerable profit subsequently. (iv) Whether shares shown as investment or stock-in-trade is not relevant for deciding the issue on hand (Investment Ltd. v. CIT [1970] 77 ITR 533 (SC)). Following the ratio of this judgment, it is immaterial as to whether the shares have been shown as investment or stock-in-trade. So by showing the shares as investment by itself will not prove that the shares were held as investment and by showing them as investment, the assessee will not be benefited following the ratio of this judgment. (v) Whether shares valued at cost or market price is immaterial to decide the issue on hand (Investment Ltd. v. CIT [1970] 77 ITR 533 (SC)). Following the ratio of this judgment, it is immaterial as to whether the shares have been valued at cost or m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troduction of Section 111A in statute by Finance Act 2004, whereby the gain on Long-Term Investment was made exempt and the gain on short-term investment was liable to be taxed only @ 10% as against the earlier prevailing rate of tax which were quite high at 20% and 30% respectively. He stated that the revenue accepted such profit on sale of investment as capital gain in all earlier years and since such assessment had reached finality, revenue's stand in this particular year is against the principal of consistency. He relied on the decision of Hon'ble Bombay High Court in the case of 330 ITR 485. To elaborate aspect, it was further submitted as under:- A.Y 2002-03 : (a) In assessment year 2002 -03 in the Profit & Loss A/c (Page 106 of the P.B.) the profit on sale of investment has been disclosed at Rs. 43,82,849/-. In such assessment year in the computation of income (Page 369 of the P.B.) the income from capital gain has been reflected at Rs. 69,72,779/- in aggregate and the total income was shown at Rs. (-) 5,38,783/-. The assessment order was made u/s 143(1) (Page 371 of the P.B.) wherein the income was assessed at (-) Rs. 5,38,783/- as such the capital gain as dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e years the AO considered such claim as business income. It may kindly be appreciated that the statute provides for holding period of one year only and the consequent gain or loss is treated as long-term gain or loss only. The AO has no authority to tinker with law and since the AO himself treat a part of the gain in such year as capital gain only he has justified his action on sale of investment as capital gain even though apart of such gain has been treated otherwise. The law itself provides as to the period of holdings and the AO has no authorities to change such commission on his whims and fancies." Ld. Counsel stated that revenue having accepted such treatment of gain as capital gain, has no authority to treat the same in a particular manner in assessment year 2005-06 according to its own convenience and hence such gain should be treated as capital gain as declared by the assessee. He contended that AO in his order stated that the assessee' s main business is to buy, invest, acquire, subscribe, to hold, dispose of and deal in shares / units etc. The AO further contended that the assessee company carried on in systematic and organized manner numerous transactions of buying and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -in-trade was valued at cost of market value. This fact duly certified in the Audited Accounts. (Pages 107, 162, 199, 236 of Paper Book) v. Assessee company is a NBFC Company (mentioned in Auditor's report at page 220 of paper book) and as per the RBI norms provision of "diminution in value of investment" duly reflected which goes on to show the shares were held as investment only. vi. In Tax Audit Report for A.Y 2002-03 (page 22), A.Y 2003-04 (page 35), A.Y 2004-05 (page 53) & A.Y 2005-06 (page 71) nature of business of the Company was shown as investment in shares and mutual funds. vii. As regards the AO's contention regarding the volume and frequency of the transaction it may kindly appreciate that the shares on which long-term capital gain has been declared treating the year has been brought forward from earlier year only. Please refer page 405 of the P.B. Besides the AO not having rejected the books of account, the AO cannot assume the power to replace the value so disclosed in the audited books of account by treating the opening and closing value of investment as opening stock and closing stock and replacing the cost of such investment by market value. v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised Scheme of Amalgamation with the Hon'ble High Court at Kolkata on 25th September, 2002 pursuant to which Dudhi Limited, Sheela Fiscal Services Pvt. Ltd., Gurgaon Floriculture Limited, Chandni Investments Private Limited, Nav-Jyoti Investment And Dealers Limited and Anumeha Finvest Service Limited are proposed to be amalgamated with the company w.e.f. 1st October, 2001." Even from the Annual Report of FY 2004-05 relevant to AY 2005-06, year under consideration, we find that there is no issue of any fresh shares for which the assessee has received money and even there is no secured or unsecured loan received. Similar is the position in AYs 2002-03, 2003-04 and 2004-05 except the loans appearing as on 31.3.2002 in the Balance Sheet, which is depicted at page 99 of the assessee's paper book and such loan relates to textile business of the assessee company in that year and same have been squared up in the very next year. We find that the entire investment is out of assessee's own fund as is evident from enclosed chart, which shows the sources of funds, application of funds for the AYs. 2002-03, 2003-04 and 2004-05 and relevant chart reads as under: R.V. INVESTMENT & DEALERS LIMITE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rance Premium 47,957 65,101 194,056 Legal & Professional Charges 645,624 608,442 1,542,386 Listing Fees 10,500 10,500 10,500 Loss on Discard of Store Items - 250,663 2,281,736 Misc. Expenses 414,205 181,591 666,009 Motor Car Expenses 215,756 146,664 230,356 Postage, Telegram & Telephone Exp. 143,802 159,213 215,210 Power & Fuel - - 489,941 Printings Stationery Expenses 77,216 103,096 72,595 Rates & Taxes 519,171 221,721 447,968 Rent 62,434 60,934 60,934 Repairs & Maintenance 136,106 58,450 140,910 Salary, Bonus etc. 901,591 1,131.215 20,718,849 Securities Transaction Tax 48,838 - - Service & Maintenance Expenses 493,124 549,382 133,655 Sundry Balances Written Off 14,993 58,552 - Travelling & Conveyance Expenses 286,290 425,583 303,616 4,466,158 5,937,946 29,869,42 REINVESTMENT & DEALERS LIMITED SUMMARY OF 3 YEARS BALANCE SHEET Particulars 31.03.2005 31.03,2004 31.03.2003 Remarks Equity Share Capital 12,225,040 12,225,040 12,225,040 No Change in Share Ca Reserves & Surplus 127,733,407 114,838,908 103,716,417 Secured Loans - - - No Borrowings Unsecured Loans - - - No Borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has closed since 2002. Since the money in respect of such business is not recovered from the debtors of such textile business, hence the amount is being written off in a particular year and as such it cannot be construed as routine expenses. 10. Another objection of Ld. CIT-DR is that the decision taken in earlier year, if the same is plainly erroneous, there is duty of Court to review it and not to perpetuate the mistake, when an earlier relevant statutory provision is not brought to the notice of the Court. We find from the facts of the case that in earlier years revenue having accepted such gain as capital gain only and the assessment having reached finality, it cannot be contended now that such conclusion by the AO is erroneous in those years, besides, the AO has passed such orders after due discussion. We are of the view that the "Rule of Consistency" has to be followed although the "Principle of Res judicata" does not apply to income tax proceedings, where the facts are identical and issue in hand is the same. In case there is change in facts and circumstances, the decision can be changed but in the present case the revenue could not bring any new fact or evidence which cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment proceedings for the years 1974-75 and 1975-76 to show that the finding reached by the ITO in the assessment for the year 1973-74 that the assessee had installed new plant and machinery and had constructed a new building was in any way erroneous. Further, the relief under s. 80J could be obtained when new plant and machinery were erected for producing the same commodity which an assessee was producing earlier. Hon'ble High Court held that it cannot, therefore, be said that the ITO in granting the relief under s. 80J for the assessment year 1973-74 proceeded upon a wrong interpretation of the section. Hence, for the assessment years 1974-75 and 1975-76, the disallowance of the relief under s. 89J to the assessee was not valid. For this, Hon'ble High Court held as under: "It is contended by the learned counsel for the department that the principle of res judicata has no application to proceedings under the I.T. Act and the findings reached for one particular assessment year cannot be held to be binding in the assessment proceedings for a subsequent year. As a general rule, there can be no dispute with this principle. But this general rule is subject to the qualification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each year of assessment had to be considered separately, yet when a fundamental aspect was duly considered after a query was raised by the Assessing officer and was answered by the assessee on the same facts, a change in view was evidently not warranted for the assessment year in question. Hon'ble Bombay High Court held (page 487) as under: "It is in this factual background that the Tribunal, while deciding the appeal for the assessment year 2003-04 has observed that there was no change in the set of facts and circumstances as they obtained for the assessment years 1997-98 and 2002-03. The Tribunal was correct in holding that there was due application of mind by the Assessing Officer to the very same issue during the course of the earlier two assessment years and that the assessments were finalized after considering the reply filed by the assessee specifically to the query raised by the Assessing Officer. In the circumstances, the Tribunal was, in our view, justified in following the decision of the Supreme Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321. While the principle of res judicata could not as an abstract principle apply to assessment proceedings since each year o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly applying Rule 8D of the IT Rules presuming it to be applicable also in case of a proceeding pending as on 24.03.2008 without considering that Rule 8D inserted in the IT Rules only w.e.f 24.03.2008 was not applicable for the year under appeal. The Ld. CIT(A) was also wrong and unjustified in not considering the fact that on the date of submission of the return on 07.10.2005 and also on the date of assessment made on 20.12.2007 the said Rule was not on the statute. Action of the ld. CIT(A) was wholly unreasonable, uncalled for and bad in law." The assessee also raised the following ground in CO No. 33/K/2009: "1. For that in view of the facts and circumstances of the case the Ld. CIT (A) was wholly wrong and unjustified in disallowing Rs. 8,41,755/- as against the disallowance of Rs.1,82,145/- made by the AO u/s 14A of Income Tax Act, 1961. The Ld. CIT (A) had enhances the said disallowance by applying the provisions of Rule 8D(2)(iii) of Income Tax Rules. The CIT (A)'s action in such regard is bad and illegal as such Rule 8D having been notified only on 24.03.2008 cannot be applied for computation of such expenses. The AO's action is liable to be quashed / cancelled. Even other ..... X X X X Extracts X X X X X X X X Extracts X X X X
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