Income Tax Appellate Tribunal - Mumbai
Swan River Financial Services Ltd, ... vs Assessee on 6 September, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'J' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI RAJENDRA (ACCOUNTANT MEMBER)
ITA No.3588/Mum/2010
Assessment Year: 2005-06
Income Tax Officer 7(2)(4), M/s. Swain River Financial Services Ltd.,
Mumbai. Kalyan Bhavan, 1st floor, 183, J.S.S.Road,
Opp: Gaiwadi, Girgaon, Mumbai-004
Vs.
PA No.AAACS 9228 B
(Appellant) (Respondent)
C.O.No.75/Mum/2011
(arising out of ITA No.3588/Mum/2010)
Assessment Year: 2005-06
M/s. Swain River Financial Services Income Tax Officer 7(2)(4),
Ltd., Mumbai.
Kalyan Bhavan, 1st floor, 183,
J.S.S.Road, Opp: Gaiwadi, Girgaon, Vs.
Mumbai-004
PA No.AAACS 9228 B
(Appellant) (Respondent)
Revenue by : Rajashri Dwivedi
Respondent by: Shri B.V.Jhaveri
Date of hearing: 6.9.2012
Date of pronouncement: 14 .9.2012
ORDER
Per B.R.Mittal, JM:
The department has filed this appeal for assessment year 2005-06 against order dated 4.1.2010 of ld CIT(A)-13, Mumbai on the following grounds:
"1. "Whether on the facts and circumstances of the case the CIT(A) erred in law in holding that the income from sale of shares was in the nature of short term capital gains when the shares were being held as stock-in- trade ever since 31 .03.2002 as shown in the Balance Sheet of the earlier years"?2 ITA No.3588/Mum/2010
C.O.No.75/M/2011 Assessment Year: 2005-06
2. Whether on the facts and circumstances of the case the CIT(A) erred in law in not appreciating the fact that there was no provision in the Income Tax Act to convert stock into investments and an item if once shown as stock has to continue as stock"?
3. Whether on the facts and circumstances of the case the CIT(A) erred in law in not appreciating fact that the shares sold were treated as investments only to avoid tax by resorting to colourful devices which according to the Supreme Court cannot be part of tax planning"?
2. The assessee has filed cross objection on the following ground:
"The CIT(A) erred in holding that the profits on sale of shares amounting to Rs.14,75,063 is to be taxed as 'short term capital gains' and not as 'long term capital gains' even though the facts on record clearly show that the shares sold by the assessee company in the previous year relevant to assessment year 2005-06 were held prior to 31.3.2002."
3. The relevant facts are that assessee is a private limited company engaged in the business of granting and arranging loans & advances and carrying out activities in shares. Assessee is a Non-banking finance company (NBFC) registered with Reserve Bank of India.
4. During the assessment year under consideration, assessee company has converted stock-in-trade as on 1.4.2004 of 59 scrips out of 60 scrips into investment by passing a resolution, copy placed at pages 12 and 13 of PB and credited the difference between the cost and market price of Rs.38,974 to profit and loss account as under:
:A: Shares stated at lower of cost or market value : Rs.1930251 Less: Adjusted for shares of Rushabh Precision continuing as stock-in-trade : Rs. 7920 Rs.1922331 B: Actual cost of the above shares(new held as Investments) : Rs.1969225 Less: Adjusted for shares of Rushabh Precision amounting as stock-in-trade : Rs. 7920 Rs.1961305 C: Difference of A&B credited to P&L a/c Under "shares stock adjustment" account for The y.r. 31.3.05. Rs. 38974 3 ITA No.3588/Mum/2010 C.O.No.75/M/2011 Assessment Year: 2005-06
5. 29 scrips out of the said 59 scrips were subsequently sold by the assessee during the year on 29.1.2.2004 and the profit arising therefrom of Rs.14,75,053 was shown as long term capital gain and claimed exempt under section 10(38) of the Act. AO held that said scheme adopted by the assessee was to avoid tax and cannot be accepted at face value. The form of the transaction as adopted by the assessee is not binding on revenue authorities and the substance has to be seen. AO did not accept the contention of assessee that the taxing authorities cannot go beyond the form of transaction, look into the substance and reveal the real intention. Accordingly, AO considered the said profit arising out of such sale of shares of Rs.14,75,053 as business income being share trading profit. Accordingly, claim of the assessee that said profit is arising out of sale of shares as long term capital gain and reduced the same from net profit for computing the book profit u/s.115JB of the Act was also rejected because the said profit was considered by the AO as share trading profit. Being aggrieved, assessee filed appeal before the first appellate authority.
6. Ld CIT(A) after considering the submissions of assessee has held that shares were held by the assessee for a period less than 12 months from the date they were converted into investments and, accordingly, considered profit/gain on sale of shares as short term capital gain. Hence, this appeal by the department disputing the order of ld CIT(A) to treat as short term capital gain as against business profit considered by the AO.
7. Assessee has also filed cross objection disputing the order of ld CIT(A) to treat the profit on sale of shares as short term capital gain instead of long term capital gain.
8. During the course of hearing, ld D.R. supported the action of AO and submitted that assessee is a NBFC and is dealing in business of shares. He submitted that assessee passed a resolution on 1.4.2004 to segregate its stock in trade of shares into investment and some of the shares were kept as stock in trade. He referred pages 12 & 13 of PB, which is a copy of resolution passed by the Board of Directors of assessee company to treat the stock-in-trade of shares as investment w.e.f. 1.4.2004 and submitted that no reasons or scientific method has been adopted by the assessee while converting few of the shares held in stock-in-trade as investment. He submitted that a 4 ITA No.3588/Mum/2010 C.O.No.75/M/2011 Assessment Year: 2005-06 colourable device has been adopted to void tax. He submitted that assessee held shares only for a period of nine months and, without prejudice to above, even if scheme of the assessee is accepted to treat the conversion of stock-in-trade into investment, the profit could be considered only as short term capital gain and not long term capital gain.
9. On the other hand, ld A.R. made his submissions stating that the Board of Directors of the assessee company took a conscious decision to covert its stock-in-trade as on 31.3.2004 as investment by considering the value of shares at lower of cost or market value and the difference between the cost of shares held as stock-in-trade and difference of Rs.38,974 was credited to the profit and loss account. He submitted that there was no tax avoidance scheme adopted by the assessee. He submitted that said shares were purchased prior to 31.3.2002 though shown under the head "stock-in- trade" but had not been traded and continued to be held as investment only. He submitted that said shares were sold by the assessee company, considering market condition. He submitted that the period of holding prior to conversion of stock-in-trade to investment has to be considered while computing the period of holding and placed reliance of ITAT in the case of ACIT vs. Bright Star Investment Pvt Ltd., 24 SOT 288(Mum). He submitted that Hon'ble Bombay High Court has also considered in the case of Keshavji Karsanji vs CIT, 207 ITR 737(Bom) and Hon'ble Madras High Court in the case of Nachiappan M vs. CIT, 230 ITR 98(Mad) that the period of total holding has to be considered irrespective to the fact as to whether the said asset is held as stock-in- trade or as investment and the date of acquisition at the time of sale is to be considered. He submitted that similar issue was also considered in the case of CIT vs. Janhavi Investments Pvt Ltd, 304 ITR 276, wherein, it was held that costs of acquisition can only be the cost on the date of the actual acquisition and, therefore is no acquisition of shares when the same were converted from stock-in-trade to a capital asset. Ld A.R. submitted that the entire profit has to be considered as long term capital gain and, accordingly, cross objection filed by the assessee should be allowed.
10 We have considered submissions of ld representatives of parties and orders of authorities below. We have also considered the reliance placed by ld A.R. 5 ITA No.3588/Mum/2010 C.O.No.75/M/2011 Assessment Year: 2005-06
11. We observe that shares of 59 scrips were held by the assessee as stock-in-trade as on 31.3.2004. Assessee is a NBFC and is carrying on trading in shares. On perusal of Board resolution, copy placed at pages 12 & 13 of PB, we observe that assessee has passed a resolution stating that the amount of Rs.19,22,313 being the value of various shares as per details given therein is considered as stock-in-trade as on 31.3.2004 be transferred to investment account, wherein, the name of the company and value as on 31.3.2004 has been stated. We observe that in the said resolution, there is no such mention as to why the said stock-in-trade is converted into investment. The said resolution does not indicate intention of the assessee that it was done with the motive to hold the said shares as an investment.
12. The Hon'ble Bombay High Court in the case of Holck Larsen vs CIT, 85 ITR 285 (Bom), which was affirmed by Hon'ble Supreme Court, reported in 160 ITR 67((SC) held that whether transaction of sale and purchase of shares were trading transactions or they were in the nature of investment is a mixed question of law and facts. Further, Hon'ble Supreme Court has held in the case of Ramnarain Sons (P) Ltd. v. Commissioner of Income-tax, 41 ITR 534(SC) held that the intention of the assessee at the time of acquisition of the asset, whether the purchase is for the purposes of long term investment or for the purposes of dealing in shares is the dominant factor for determining the nature of asset. As mentioned hereinabove, from the said resolution passed by the Board of Directors of assessee company as on 1.4.2004, there is no such purpose, which could be revealed as to why assessee has transferred shares kept in stock-in-trade to investment. Even if we go into the averments of the assessee that assessee decided to hold the said shares as an investment, the said intention of the assessee is not fortified by the subsequent act of the assessee as assessee sold the shares within a period of 9 months from the date they were converted from stock in trade to investment. Considering the facts of the case in entirety, we are of the considered view that AO is justified to treat the conversion of shares by the assessee from stock-in-trade to investment as a scheme to avoid payment of tax. In view of above, the cases cited by ld A.R. do not require any consideration. Hence, we reverse the order of ld CIT(A) and confirm the action of AO that the said profit to the assessee company is the share trading profit from its share trading activities 6 ITA No.3588/Mum/2010 C.O.No.75/M/2011 Assessment Year: 2005-06 and not out of its investment. In view of our said finding, cross objection of the assessee is dismissed and grounds of appeal taken by department are allowed.
13. In the result, appeal filed by department is allowed and cross objection of assessee is rejected.
Pronounced in the open court on 14th September, 2012
Sd/- Sd/-
(RAJENDRA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 14th September, 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),13, Mumbai
4. Commissioner of Income Tax, 7 , Mumbai
5. Departmental Representative, Bench 'J' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI