9911796707
TMI Blog2019 (5) TMI 548X X X X Extracts X X X X X X X X Extracts X X X X ..... k in trade to the investment as valid and upheld the order of the CIT(A) treating the loss on sale of investment arising in the assessment year 2001-02 as not speculative business loss. Explanation to Section 73 of the Act invoked by the Assessing Officer was held to be not applicable in relation to sale of investments in the appeal for the assessment year 2001-02. Learned counsel for the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal, erroneous or perverse warranting interference by this Court. - answered in favour of the assessee Signing of negative covenant for not carrying out a speciality business - whether it does not amount to transfer of right to carry on business, the consideration of which is liable to be taxed as capital gain - AO held that since the assessee extinguished its right to re-enter the market of plating chemicals and process for general metal finishing and electronics plating for consideration, the same amounted to transfer of right to carry on business and therefore the amount of consideration received was liable to be taxed under the head capital gains - CIT(A) held that undertaking a restrictive convenant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r expansion of business are revenue expenditure ignoring the fact that the same has been incurred on projects that were subsequently either shelved or were an entirely new line? d) Whether the ITAT was justified in law and in facts in holding that the assessee is at liberty to convert its stock into investment ignoring the wholistic picture where in the end result of the conversion is to escape provisions of explanation to section 73 of the Income Tax Act? e) Whether the ITAT was justified in law and in facts in not considering that the selective conversion of shares from stock in trade to investment has resulted in undue benefit to the assessee which falls within the purview of tax avoidance through colourable devices which has already been held to be not acceptable by the Hon ble Supreme Court in the Mcdowell case? f) Whether the ITAT was justified in law and in facts in allowing the subsequent losses on the sale of investment as regular losses, ignoring the issue that the conversions were merely colourable devices to escape the provisions of explanation to section 73 and avoid tax? g) Whether the ITAT was justified in law and in facts holding that signing of negative covenant fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Aggrieved by the assessment order, the assessee company filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 12.1.2011, Annexure A.2, the CIT(A) allowed the appeal and deleted the additional/disallowances made by the Assessing Officer. Not satisfied with the order, the revenue filed appeal before the Tribunal. Vide order dated 8.3.2013, Annexure A.3, the Tribunal dismissed the appeal. Hence the instant three appeals by the revenue before this Court. 6. We have heard learned counsel for the parties. 7. Firstly, while taking up ITA No.187 of 2013, question (a) as to whether payment of compete fee is a revenue expenditure and an allowable deduction, the same has already been considered and concluded against the revenue by this Court in ITA No. 193 of 2013, ( Commission of Income Tax, Jalandhar I, Jalandhar vs. M/s Max India Limited) , decided on 06.08.2018. The payment of non-compete fee was held to be allowable as revenue expenditure. Questions (b) (c) are as to whether expenses incurred for starting entirely different line such as health care division and for expansion of business are revenue expenditure. The said issues have already been exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lly owned subsidiary of the assessee was incorporated on 12.09.1996 was merged with the assessee w.e.f. 1.7.1999, pursuant to a scheme of merger approved by the Hon ble Punjab Haryana High Court. Pursuant to merger, all assets and liabilities of Max Corporation Ltd; including various shares held by Max Corporation Ltd, as stock in trade and as investments, vested in the assessee. On 3.7.2000, as per the decision of management, shares of 11 companies, which were acquired by MCL and were held as stock in trade , prior to merger and which vested with the assessee post merger, were decided to be held as investment . Accordingly, the said shares were converted from stock in trade to investment. On the date of conversion, the assessee claimed a loss on account of difference in market value of such shares and cost price thereof. The said loss was claimed as business deduction. Out of the aforesaid converted shares, certain shares were also sold by the assessee during the year. The assessee computed loss from the aforesaid sale, i.e. difference between the sale price and market price as on the date of conversion (3.7.2000) at ₹ 2.12 crores, which was disclosed under the head capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) accepting conversion of stock in trade into investments and allowing loss arising during the relevant previous year on sale of part shares so converted and other shares held as stock in trade. xxxxxxxxxxxxxxxxxx 22. We have heard the rival contentions and perused the facts of the case. We are of the view that conversion of part of shares acquired from Max Corporation Ltd; as stock in trade into investments cannot be said to be a device for evading the tax and such conversion cannot be rejected. It is the prerogative of the assessee as to whether it wants to hold the shares as stock in trade or as an investment or partly as stock in trade or partly as an investment. Reference is made in this regard to the decision of Hon ble Bombay High Court in the case of CIT Vs. Yatish Trading Co. Pvt. Ltd. (supra), wherein conversion of shares from stock in trade into investments in case of dealer of shares was upheld. Such decision of the assessee cannot be disregarded on hypothetical assumption that the same is motivated by the consideration of tax evasion. Reference is made in this regard to the decision of the Hon ble Supreme Court of India in the case of Union of India vs. Azad Bachao A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was held that the shares sold were held by the assessee as investments and the gains arising out of the sale of the investments were to be assessed under the head Capital gains and not under the head Business profits . The relevant paras of the judgment read thus:- The assessee is engaged in the business of investments and also dealing in shares and securities. In the assessment year 2006-07, the assessee declared income under the heads 'profits and gains of profession' and also under the head capital gains. The assessing officer noted that a part of the capital gains declared was in respect of transfer of shares / securities which were held by the assessee originally as stock in trade as a dealer in shares/securities. However, these share securities were converted into investment by the respondent-assessee on 1st April, 2002 and 1st October, 2004. Consequently, the assessing officer held that the short term and long term gains arising out of the sale of shares which were held originally as stock in trade and converted into investments was to be treated as business income. In first appeal before the CIT(A), it was pointed out that upto the date the shares were in its tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exchange. The respondentassessee was a registered broker with the said exchanges. The Assessing Officer held that the business of the assessee was not to invest in shares but to deal with the shares as a stock broker and trader. He observed that conversion of stock in trade into investment was done with the intention not to pay taxes as Section 10(38) was introduced by Finance Act, 2004 with effect from Ist April, 2005. Accordingly, he held that the entire amount was taxable as a trading receipt and not under the head capital gains . 4. The assessment order does not mention the date on which the shares in question were purchased. We also note that the assessment order records that the assessee had converted and transferred the shares in question under the head investment on Ist April, 2004. This factual position was not disputed or questioned. The shares in question were sold during the period ending 31st March 2006, nearly 2 years after the date of conversion of stock in trade into investment with a specific declaration. Mere fact that Section 10(38) was introduced in the statute by Finance Act, 2004 with effect from Ist April, 2005, does not mean that the said conversion was impr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral Board of Direct Taxes, which stipulates that two portfolios one for stock in trade and one in respect of investments could be maintained by the same assessee. He took into account the period of holding by the assessee and the fact that the conversion into investment was made on Ist April, 2004 and outlay was disclosed in the audited accounts for the Assessment Year 2005-06. The sales made, as noticed above, were after considerable delay of approximately two years thereafter. 7. In view of the aforesaid factual findings recorded by the Commissioner (Appeals) and the tribunal, we do not see any reason to interfere and issue notice on the main appeal. 11. In Deeplok Financial of Calcutta Vs. Commissioner of Income Tax-II, Kolkata , [2017] 80 taxman.com 51 (Calcutta), the issue was as to whether where assessee converted its shares held as stock in trade into investment and sold them at later stages, profit arising from sale of shares would be deemed to be long term capital gains and not as business income. The answer was given in the affirmative. The relevant para of the judgment reads thus:- 11. That apart, this assessee lost its right of appeal to this Court on the question arisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfer of any business was not in the nature of right to carry on business to be regarded as transfer of capital asset. The CIT(A) held non compete fees received as capital receipt not exigible to tax under the provisions of the Act. Identical issue was considered by the Tribunal in assessee s own case for the assessment year 1998-99 and the Tribunal held that taking over a restrictive obligation did not amount to transfer of right in any business and therefore non compete fee could not be considered as resulting in capital gains. Even Section 55(2)(a) of the Act which was prospective in nature was not held to be applicable to the facts of the present case in the absence of any capital asset being transferred by the assessee in lieu of which the assessee had received the impugned amount of non compete fee. The relevant findings recorded by the Tribunal read thus:- 81. As regards ground No.6 of the revenue, where the revenue has challenged the order of the ld. CIT (A) in holding that the amount received towards non-compete fee is not liable to tax under the head of capital gains. 81.1 The facts in relation to said ground of appeal are that during the relevant previous year, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion taken by the High Court holding that prior to April 1, 2003, when Parliament stepped in to specifically tax such receipts, the payment was in the nature of a capital receipt. The relevant para of the judgment reads thus:- 7. Two questions arose for determination, namely, whether the amounts received by the appellant for loss of agency were in normal course of business and therefore whether they constituted revenue receipt? The second question which arose before this court was whether the amount received by the assessee (compensation) on the condition not to carry on a competitive business was in the nature of capital receipt? It was held that the compensation received by the assessee for loss of agency was a revenue receipt whereas compensation received for refraining from carrying on competitive business was a capital receipt. This dichotomy has not been appreciated by the High Court in its impugned judgment. The High Court has misinterpreted the judgment of this Court in Gillanders case (supra). In the present case, the Department has not impugned the genuineness of the transaction. In the present case, we are of the view that the High Court has erred in interfering with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
