Income Tax Appellate Tribunal - Delhi
Sentinel Financial Services Pvt. Ltd, ... vs Department Of Income Tax on 19 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'G ', NEW DELHI)
BEFORE SHRI T.S. KAPOOR, ACCOUNTANT MEMBER
AND SHRI A. T. VARKEY, JUDICIAL MEMBER
I.T.A. No. 2762/Del/2008
Assessment year : 2005-06
ITO, Ward 8(1), Vs. M/s. Sentinel Financial
New Delhi Services Pvt. Ltd.,
R-75, Grater Kailash I,
New Delhi.
GIR / PAN:AABCS5576P
(Appellant) (Respondent)
Appellant by : Shri BRR Kumar, Sr. DR
Respondent by : Shri Ajay Vohra, Sr. Adv.,
Shri Gaurav Jain Adv. and
Ms. Shikha Sharma, CA
ORDER
PER T.S. KAPOOR, AM:
This is an appeal filed by Revenue against order of Ld. CIT(A) dated 30.06.2008. The only ground taken by Revenue is against action of Ld. CIT(A) by which he had allowed relief to assessee by treating the income earned by it as long term capital gain instead of income from business or profession as held by A.O.
2. The facts of the case are that during assessment proceedings, the A.O. observed that assessee had purchased 226271 equity shares of a company namely Jubiliant Organosys Ltd. in the month of January 2004. He further noted that in the month of April 2004, assessee was allotted 135762 equity shares of the above mentioned company as bonus shares. The assessee had 2 ITA No.2762/Del/2008 sold 169000 shares out of above shares in Feb., 2005 and had declared the income as long term capital gain. The A.O. held that assessee was not able to substantiate as to out of which lot the shares were sold. He held that the assessee might have sold shares out of bonus shares instead of original purchase and moreover, he held that assessee had earned small dividend of Rs.4,52,541/- on a huge investment of Rs.10 crores and has further paid interest amounting to Rs.1,09,49,709/- on such loan and, therefore, he treated the income as business income instead of capital gain. Aggrieved, the assessee filed appeal before Ld. CIT(A) and made various submissions. Ld, CIT(A) on the basis of submissions of the Ld. A.R., remand report and rejoinder, arrived at the conclusion that the assessee was entitled to the benefit of long term capital gain and allowed relief by holding as under:
"4.1 I have carefully considered the submissions made on behalf of appellant. I have seen the discussion in the assessment order & the AO's report dtd 18/6/08. I have also called and examine the assessment records. The brief facts of the issue under consideration are that the appellant company purchased 226271 shares of the company JOL by way of two transactions on 14/1/04 and 16/1/04. The rate of purchase was almost the same at Rs 445 per share. The investment in these shares was authorized by the Board of directors by way of specific resolution passed in its meeting on 17/12/03. The investment involved total funds of about Rs 10 crores which was borrowed by the appellant from three companies namely Green Tea Industries Pvt Ltd, Indemsat Pvt Ltd and Scindia Investment Pvt Ltd. The shares originally purchased as well as those received by way of bonus were held by the appellant company in its demat account. Out of total holding of 362033 shares the appellant company sold 169000 shares in Feb, 05 at the rate of Rs 801 per share. Out of the sale proceeds of about Rs 13.54 crores the loan received from the three companies was repaid alongwith interest. The total interest of about Rs 1.09 crores was paid to these companies which was debited to P&L account but was disallowed in the statement of income filed with the return. The dispute is that whether the profit on sale of shares 3 ITA No.2762/Del/2008 should be assessed under the head 'capital gains' as done by the appellant or as business profit as held by the AO. The main reasons which the AO has discussed in assessment order and reiterated in his report dated 18/6/08 to reject the Appellant's claim can be summarized as under:-
i) It cannot be proved that 169000 shares sold in Feb 05 were out of 226271 shares originally purchased or out of bonus share because there Was no distinction between the shares in demat account.
ii) The appellant company carried out frequent transactions in purchase and sale of shares.
iii) It was not specified by the appellant as to what basis the shares were categorized as investment. Whether such holdings could have resulted in controlling interest or strategically relation with the company JOL.
iv) Huge borrowed funds were utilized for the investment and interest of Rs 1.09 crores was paid. Such investment could not have been made merely to earn dividend income of Rs 4,52,441.
v) The entries made by an assessee in books of account cannot be held conclusive to ascertain the true and correct nature of transaction. For this the AO relied on two decisions.
4.2 These issues raised by the AO can be discussed in the light of submissions made by the appellant as follows:-
i) In demat system the shares of a company are held is shown in the form of credit entry in the demat account. Any shares acquired are added to it and those sold are deducted. On a particular date the shares cannot be identified or linked to the specific purchase transaction carried out earlier. Therefore in such system, FIFO theory has to be applied. This means that any sale of shares is to be linked to the purchases in chronological order. In other words the shares purchased first have to be treated as sold first. Applying this principle it may be concluded that the 169000 shares sold in Feb 05 consisted of 1472712 purchased on 14/1/04 and 21727 shares out of 79000 shares purchased on 16/1/04. Only if the number of shares sold exceeded the quantity originally acquired by purchase it can be said that some shares out of bonus allotted in April, 04 were sold. Even otherwise for the sake of argument (though not provable on facts) the shares are said to be sold out of bonus shares, the nature of transaction does not change to business. Hence his contention of the AO is not valid to treat the gain as business profit.4 ITA No.2762/Del/2008
ii) As discussed earlier the appellant purchased the original shares in only two transactions on 14/1/04 and 16/1/04. Thereafter no purchase or sale was carried out in the shares till Feb, 05. Only the bonus shares allotted to the appellant were added in the demat account. Therefore there is in fact no transaction in these shares except for the sale which is under consideration.
Therefore, AO's allegation that there were frequent transactions in shares is Not supported by facts. The AO had also referred to transaction in some shares other than JOL. It is noted that the appellant company carried out some transactions in shares of Hinduja TMT and Units of Kotak Floater. These transactions were however done in the month of Feb & March, 05 and resulted in small short term capital gain/loss. 150000 shares of Hinduja TMT were purchased on various dates and sold on three dates resulting in loss of Rs 56,833. Further 1,10,16,008 units of Kotak Floater were acquired in Feb & Mar 05. The main transaction was on 17/2/05 and then there were some small purchases. Out of that 89,91,508 units were sold in three transaction. Resulting in gain of Rs 15,680. Blance units were shown in the balance sheet as on 31/3/05 under the head investment. It may be noted that when some funds are to be invested in shares, entire purchases is not made in one day but it is split on various dates so as to take advantage to price fluctuation. Further at times there is no offer for sale and therefore even if a bid is made to acquire the shares, they may not be available on a particular date. Therefore it cannot be said that the appellant was doing any frequent transaction in purchase and sale of other shares/units. In any case since there was no transaction of purchase and sale only shares of JOL it cannot be considered as business transaction.
iii) The concept of acquiring controlling interest and strategic relationship are irrelevant for determining the nature of investment. There are a number of companies listed on the stock exchange and lacs of investors daily purchase millions of shares of different companies. Whether such investment is made for acquiring controlling interest? In fact if a investment is made to acquire controlling interest, the nature of such transaction is altogether different and a number of legal formalities like information to SEBI, Stock Exchanger' Company Law Board etc have to be completed. As about the basis to categorize the purchase as investment it is explained by the appellant that the investment was specifically 5 ITA No.2762/Del/2008 authorized by the Resolution of Board of Directors. There is no need for specific resolution to carry out day to day business transactions. Since the shares were acquired in pursuance to specific resolution of the Board whereby it was to be held as long term investment the shares were categorized and reflected under the head investment right from the beginning of the transaction in the balance sheets as on 31/3/04 and 31/3/05.
iv The companies which are listed in the stock exchange are supposed to disclose not only their annual financial results but also a number of other price sensitive information & decisions which may affect the market price of the shares. The financial strength/weaknesses of these companies are well known to members of public. The financial statements/balance sheet of the companies are analyzed and assessed by financial investments experts who give recommendations for purchase/ sale of shares of particular companies after considering a large number of factors which may be affecting the future prospects of the company. In such analysis of profit earning capacity of a company, dividend track records etc are studied. The prospectus of declaration of bonus shares is also analyzed considering the quantum of reserves and surplus and old history. Investment in any shares may not be made by an investor only for the purpose of earning dividend income. Other factors like growth of the company resulting in higher profitability & increase of market price as well as possibility of bonus issue are also considered. Basically an investor is concerned with the overall return on the funds he proposes to invest. In the case of appellant, though the dividend received appear to be a meager amount of 4.5 lacs on investment of Rs 10 crores, but the bonus shares (more than 50% of the original holding) received is also to be treated as return on the funds invested. It may be noted that normally after declaration of bonus, the market price gets proportionately adjusted (reduced). However in the shares of JOL the price again rose and even ex- bonus price was much higher than the original purchase price of the shares. The appellant company might have made a decision to invest in the share JOL on the basis of some study or recommendations in the hope to earn handsome return of investment which actually it received. Therefore the decision cannot be viewed from the point of view of meager quantum of dividend income compared to the interest cost on borrowed funds to treat it as business 6 ITA No.2762/Del/2008 transaction. Even on partial sale of shares the appellant earned much higher return on the investment made than the cost by way of interest. Theoretically what the AO says may be correct that merely on the basis of Entries of books of account the nature of particular share/security cannot be Determine. In fact this issue has been clarified in the circular No 4/2007 15/6/2007 issued by CBDT. In that circular as well as the instruction No 1827 (which has also been referred to in the above circular No 4) the general principles on the basis of various decisions to decide as to whether a particular share/unit was held as stock-In-trade or investments have been discussed. These include the nature of normal business activities, quantity of item purchased, repetition (frequency) of transaction etc. I have seen the two decisions relied upon by the AO and it is found that they are on different facts. In first case the frequent trading was done in shares of some 30 companies which was treated in the nature of business transaction. In the case before Supreme Court, the facts were entirely different. Therefore they are not applicable. 4.3 In the judgements of Supreme Court on this subject the test of intention is also discussed. It held that in case where the purchase was made solely with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, it was a relevant factor and would give rise to strong presumption that a transaction was an adventure in the nature of trade. In circular No 4 some other decisions were discussed in which following principles were curled out after referring to several decisions on the subject.
(i) Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii) the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales &: the holding would furnish a good guide to determine the nature of transactions
(iii) ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade but where the object of the investment in shares of a company is to derive- income by way of 7 ITA No.2762/Del/2008 dividend etc then the profits accruing by change in such investment (by sale of shares} will yield capital gain and not revenue receipt. 4.4 In the Circular No.4 as above, it was mentioned by CBDT- The Assessing Officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee is investment or stock-in-trade. Therefore, the decision about nature of shares/securities held by an assessee is not to be made only on the basis of some single principle or reason. The totality of facts and circumstances has to be considered. In the case of appellant, it is quite clear that frequency of transaction was almost missing. In fact it was a solitary transaction. The intention at the time of investment was also clear as per the Board's resolution. The entry in books of accounts is also under the head investment. The appellant had not carried out any business in share trading. Moreover even if such business was done and some shares were held as stock- in-trade, still there is no bar on holding some other shares as investment. In this regard we may refer to Para 10 of the circular No 4 reproduced as under:-
10. The Central Board of Direct Taxes also wishes to emphasise that it is possible for a tax payer to have two portfolios, ie, an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in- trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads ie, capital gains as well as business income.
From the above it is quite clear that in the case of appellant, the acquisition of shares of JOL has to be treated as investment and cannot be said to be business transaction. The profit on part sale of such investment has to be computed under the head 'Capital Gains' and not business. Therefore action of the AO in treating such profit as business income is reversed. The AO is directed to grant benefit of LTCG to the appellant."
3. At the outset, Ld. D.R. submitted that the assessee had utilized borrowed funds and therefore, the purpose or purchasing shares cannot be said to be appreciation as no prudent businessman would incur a huge cost 8 ITA No.2762/Del/2008 on account of interest just in anticipation of appreciation. It was further submitted that the assessee was NBFC and it was entitled to enter into business transaction on account of sale and purchase of shares and merely reflecting the purchase under the head investment is not sufficient and conclusive evidence that assessee was into investment activities.
4. Ld. Senior Counsel. on the other hand invited our attention to paper book pages 53-66 where copies of audited accounts were placed. Our specific attention was invited to paper book page 62 where significant accounting policies were mentioned and it was submitted that in this accounting policy also, it was mentioned that investment of assessee were meant to be held for long term period. He further submitted that the purchase was classified as investment and was valued at cost price. Regarding interest expenditure incurred by assessee, it was submitted that the same was not claimed as business expenditure. Our attention was also invited to the fact that the assessee had passed a Board Resolution on 17.12.2003 for making investment in the said company. As regards the arguments of Ld. D.R. that assessee had incurred huge interest cost, Ld. Senior Counsel submitted that even after paying interest, the assessee had earned significant capital gain. Our attention was also invited to paper book pages 131A to 131M where copies of Tribunal order in the case of CIT vs Jubilant Securities Pvt. Ltd. in I.T.A. No. 3337/Del/2008 was placed. Ld. Senior Counsel submitted that in similar circumstances, the Tribunal in the case of said group companies had held similar profit as long term capital gain.
5. We have heard rival parties and have gone through the material placed on record. We find from the findings of Ld. CIT(A) and from the 9 ITA No.2762/Del/2008 arguments of Sr. Counsel for the assessee that assessee has been rightly allowed the relief. Ld. CIT(A) has passed a well reasoned and speaking order in which we do not find any infirmity.
6. In view of above, appeal filed by the revenue is dismissed.
7. Order pronounced in the open court on 19th Dec., 2014.
Sd./- Sd./-
(A. T. VARKEY ) (T.S. KAPOOR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
th
Date: 19 Dec., 2014
Sp
Copy forwarded to:-
1. The appellant
2. The respondent
3. The CIT
4. The CIT (A)-, New Delhi.
5. The DR, ITAT, Loknayak Bhawan, Khan Market, New Delhi. True copy.
By Order (ITAT, New Delhi).
S.No. Details Date Initials Designation
1 Draft dictated on Sr. PS/PS
2 Draft placed before author Sr. PS/PS
Draft proposed & placed before
3 JM/AM
the Second Member
Draft discussed/approved by
4 AM/AM
Second Member
Approved Draft comes to the Sr.
5 Sr. PS/PS
PS/PS
6 Kept for pronouncement Sr. PS/PS
7 File sent to Bench Clerk Sr. PS/PS
Date on which the file goes to
8
Head Clerk
9 Date on which file goes to A.R.
10 Date of Dispatch of order