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TMI Blog2011 (12) TMI 553X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances of the case, the ld. CIT(A)-XII, has grossly erred in confirming short term capital gain of ₹ 2405283/- as income from business and denied the concessional rate of tax u/s 111A i.e. 10% for A.Y. 2007-08. (B) That the ld. CIT has failed to appreciate the treatment by the company and further failed to consider our reply/note on Treatment of Securities as investment, filed during assessment proceedings. (C) That the CIT(A) has not rendered justice, while treating short term capital gain as Income from Business, because by introduction of sec. 111A and sec. 10(38) by Finance Act, 2004, the legal position becomes crystal clear. (D) That the two court cases sited by the AO i.e. G. Venkataswami Naidu Co., vs. CIT (35 ITR 194) and CIT vs. Sutlej Cotton Mills Supply Agency Ltd., (100 ITR 706) have no bearings on our case because sec. 111A, sec. 10(38) and S.T.T. were not in place at that time. (E) That the court case quoted by us i.e. CIT vs. N.C.S. Investment (P) Ltd., (2007) 158 TAXMAN 13 (Mad.) has not been considered. This is fit case to accept short term capital gains. 2) (A) That on the facts and circumstances of the case, the ld. CIT(A)-XII, has g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad of business or capital gain; that in the immediately preceding year, profits earned on share transactions had been shown as business income only; that to earn short term capital gain, the investor waits for some time before selling the securities; that however, in the case of the assessee, sales had been made prior to purchase, in the case of securities, the profits whereof had been shown as short term capital gain; that such transactions could not be termed as investments but were business transactions. The AO relied on the decisions of the Hon ble Supreme Court in G. Venkataswami Naidu Co. v. CIT , 35 ITR 194(SC), which was reiterated in CIT v. Sutlej Cotton Mills Supply Agency Limited , 100 ITR 706(SC). It was held that except utilization of the assessee s own funds, the assessee did not fulfill any condition being treated as a trader or investor; that the assessee was a trader in the past and the transactions were shown as short term capital gain only so as to take a tax rate advantage; that the intention of the assessee was thus questionable; that the volume of the transactions was worth crores of rupees; that the activity was not incidental in nature; and that even the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised by the AO, stating that it was based on the intention at the time of making investment and that such intention was evidenced by the treatment in the books of account; that the recording of the transactions in the books of account was the evidence that it was held as investment; that the books of account were audited books of account, certified as reflecting the correct position; that the books of account and treatment in the balance sheet had been filed with the Department every year and the same had been accepted as such; that the assessee company had earned dividend of ₹ 2,15,862/- on such investments; that the company had not borrowed any funds for the purpose of such investments; that the AO, while observing that to earn short term capital gain, an investor is one who makes investment or purchase of certain kind of securities and sells the same after waiting for some time, fail to consider that investment is investment, whether it is for a long term or for a short term; that the period is not decisive; that where the Legislature has so intended, it has prescribed that if the investment is made for more than one year, it is long term and if it is held for less than on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of volume, frequency and consistency did not stand specified; that the assessee had invested its own funds and the value of transactions entered into out of the assessee s own funds cannot be an issue against the assessee; that moreover, the AO has himself admitted that the condition of own fund having been utilized by the assessee stood specified; that there is no basis to hold that the activity was not an incidental activity; that admittedly, the assessee had utilized its own funds and had invested its surplus funds; that law does not forbid any assessee not to be a trader as well as an investor; that the assessee has kept classifications; that the activity of investment has been continuing over the years; that such investment in shares has been always duly disclosed and accepted in the past; that the assessee had invested its own funds; that the sales were made after the purchases; and that the investment is clearly evidenced by the balance sheet and the profit and loss account. 8. The learned counsel for the assessee has contended that the ld. CIT(A) has erred in confirming the short term capital gain of ₹ 24,05,283/- as income from business and denied the concessional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as business income and not as short term capital gains. This has been alleged on behalf of the assessee to be factually wrong. Attention, in this regard, has been drawn to APB 55. APB 55 contains profit and loss account for the year ending 31.3.06. A perusal of this document shows for the year ending 31.3.06:- By profit on investment a/c short term 85,335.12 By profit on investment a/c long term 52,36,576.08 13. Further, the profit and loss account for the year ending 31.3.05, (APB 53) shows:- By profit on investment a/c short term 6,937.85 14. The contention of the assessee is, therefore, correct. The AO erred factually in observing that in the immediately preceding assessment year, no profits were declared under the head of short term capital gain. 15. The observation of the AO that the assessee was a trader in the past is correct. However, besides being a trader, the assessee has also been an investor in shares. It has been classifying its investment as investment separately. This is clear from the balance sheet for the years ended 31.3.05, 31.3.06 and 31.3.07, respectively (APB 52, 54 and 19). Moreover, in the Note on treatment of securities and investment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oved the holding of shares as investment. Further, it was stated that the books of account were duly audited and the books of account along with the balance sheet were duly filed with the Department every year and were accepted as such. It was also stated that the assessee had earned a dividend of ₹ 2,15,862/- on such investment and that the assessee company had not borrowed any funds for making such investment. Therefore, it is not comprehensible as to how the AO observed that the queries raised were not explained with evidence, to show as to how a particular transaction was for earning income under the head of business or capital gain. 17. The AO has also gone wrong in observing that the assessee was not an investor since an investor sells the securities purchased after waiting for some time whereas the assessee had made sales even prior to the purchase, in the case of some securities. In this regard also, the observation of the AO is not correct. The details of short term investments for assessment year 2006-07, as filed before both the Authorities below, are at APB 59-62. In the case of the shares of Dena Bank, the purchase bill (APB 61) is dated 23.5.06, whereas the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as investment, it could invest its money the way it wanted and that it had a right to decide whether it wanted to hold shares as stock in trade for trading or hold it as investment for dividend income. In the present case, the assessee company has earned dividend of ₹ 2,15,862/- during the year. This amply indicates the purpose of investment. Moreover, the detail of the dividend earned in the prescribed format also shows the company to be an investor. In Gopal Purohit v. JCIT , 29 SOT 117(supra), for assessment year 2005-06, the assessee earned income from transactions in shares. Receipts from transactions settled otherwise than by actual delivery were returned by the assessee as business income, whereas receipts from transactions by actual delivery were returned as capital gain. On the basis of the frequency of the transactions, the AO assessed the entire income as business income. This was held to be not justified, on the rule of consistency, where in the earlier year, the claim of income as shown by the assessee was accepted by the Revenue authorities. It was observed that the only apparent reason that prompted the Revenue authorities for taking a different stand in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hands of the assessee company. 26. The AO rejected the assessee s reply, observing that the amount of ₹ 25 lakhs shown in the balance sheet as forfeiture of share application money was a revenue receipt which the assessee would be retaining forever; that this amount was apparently unclaimed since long; that had it been debtors, the assessee would have claimed it as bad debts; that in CIT v. Sundaram Iyengar and Sons Pvt. Ltd. 222 ITR 344(SC), it has been held that unclaimed balances in deposits are liable to tax, being the claims barred by limitation and that though they did not have the character of income at the time of receipt, the lapse of time might have definite trade surplus; that the details filed by the assessee might prove the genuineness of the receipt of the original share application money, but it did not have any barring on the taxability of the amount involved, if the same have been forfeited; that further, it was evident from the documents filed by the assessee that the shares have been allotted to the respective share applicants as partly paid up, but due to the non-payment of the allotment money, the shares were forfeited; that in the balance sheet, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly, the bank pass book of Smt. Veena Bhatia had not been filed, due to which, the claim that she had capacity to pay the amount could not be accepted. In this manner, the ld. CIT(A) confirmed the action of the AO. 29. On this issue, it has been contended on behalf of the assessee that it is a case where changing the allegations originally levelled against the assessee, the ld. CIT(A) has upheld the AO s action on the ground that the assessee has failed to prove the credit worthiness of the share holders, which is unsustainable in law; that more over, addition u/s 68 of the I.T. Act can be made only in the year in which the money is credited in the books of account of the assessee; that undeniably, in the year under consideration, there is no receipt; that the share capital was received in the financial year 2003-04 (attention in this regard has been drawn to APB 52); that further, the assessee had submitted all the evidences in support of the identity, credit worthiness and genuineness of the share applicants; that these comprises copies of application, cheque, confirmation, Income Tax return, bank statement, PAN and even the request for extension of time for payment of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, the amount added was not received during the year under consideration. For this short reason itself, the addition is unsustainable. Further, the forfeiture of the share application money came about in financial yearn 2004-05, as is evident from the balance sheet of the assessee as on 31.3.2005 (APB 52). A sum of ₹ 75 lakhs was received in financial year 2003-04. The allotment of shares of ₹ 6,25,000/- was made against this receipt. A sum of ₹ 43,75,000/- was adjusted against share premium. The balance of ₹ 25,00,000/- was forfeited. The relevant entries in the aforesaid balance sheet are as under:- Liabilities Current Yr. Amount Previous Yr. Amount C RESERVE SURPLUS 7,500,000.00 1. Share Application Money 2. Share Premium 4,375,000.00 3. Share Application Money forfeiture 2,500,000.00 32. The balance sheet as on 31.3.2006 (APB 54) shows no change in this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X
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