Income Tax Appellate Tribunal - Pune
Abbott Hotels Pvt.Ltd., , Ahmednagar vs Assessee on 30 April, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH " B", PUNE
BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
ITA No 1424/PN/08
(Asstt. Year: 2005-06)
Abbott Hotels P. Ltd., .. Appellant
13 Abbott Marg,
Camp, Ahmednagar
PAN - AACCA2908E
Vs.
Dy. Commissioner of Income-tax, .. Respondent
Ahmednagar
Appellant by: Shri Mukesh Bhatt
Respondent by: Shri A S Singh
ORDER
PER I C SUDHIR, JM:
The first appellate order has been questioned on several grounds involving the issue as to whether the ld CIT(A) was justified in holding that short- term capital gain of Rs 49,19,877/- and long-term capital gain of Rs 98,31,915/- on sale of shares was assessable as business income and not as capital gains? (Ground Nos 1 to 5)
2. An alternative ground has been raised as under:
"Without prejudice to the above grounds, the assessee submits that there is no prohibition on an assessee to hold certain shares as stock and certain shares as an investment and therefore, assuming without admitting that the assessee had carried out some trading in shares, the long term capital gain on sale of shares ought to have been treated as exempt u/s 10(38)?" (Ground No. 6)
3. We have gone through the orders of the authorities below, material available on record and the decisions relied upon in view of the arguments advanced by the parties.
4. The relevant facts are that the assessee company in the hotel business for the last 30 years having around Rs 3 to 4 crores of turnover in the last 2 - 3 years claimed to have earned capital gains from the sale of the shares, wherein they 2 had invested in earlier years. It was claimed that the said investment was made from the surplus funds generated out of the profits of the hotel business. The investments made in the shares of certain company were reflected in the Balance Sheet under the head investment and not as stock-in-trade. In support, Balance sheet as on 31.3.2005 was made available for perusal. It was submitted by the assessee that the shares held as investments in the books were accepted by the department as investment for the assessment year 2001-02. It was further submitted that what is relevant is frequency of the transaction and not the volume of the transaction. It was submitted with the assistance of chart giving details of long-term and short-term capital gain, that even though in the case of long-term capital gain, the transactions are running into a page, actually there are hardly 10 to 15 transactions in the year in respect of Essar Steels Ltd., 17000 shares were purchased on 19.5.1997 and out of which 2000 shares were sold on 14.3.2005 and 15000 shares were sold on 15.3.2005. In the chart, these two transactions are shown separately because the dates of sale are different. However, in reality, the assessee wanted to dispose off the entire 17000 shares purchased way back in 1997 and only because part of the shares could not be sold on 14.3.2005, they were sold on 15.3.2005. Similar is the case in the context of Jai Prakash Industries Ltd and Taj GVK Ltd. It was further mentioned that the assessee had invested large amount in UTI Master shares. The investment was made in the shares from 1997 to 2001. All these shares were redeemed on 15.12.2004 and in the chart they are shown separately only because the dates of investment are different. Regarding the short-term capital gain also, it was stated that the assessee had hardly entered into around 15 to 17 transactions in a period of 12 months, i.e. one transaction per month. Even in this case the transactions in a particular scrip are shown separately only on the ground that the investment date or the sale date were different. It was submitted further that the assessee has not traded in one particular scrip. It is not a case that the assessee had purchased certain shares of a particular scrip and sold it later on and thereafter it has again re-purchased the shares of same scrip. The frequency 3 of transaction was very small. In certain months there are no transactions at all. The AO did not agree with the submissions and treated the claimed capital gain as business income. The ld CIT(A) has upheld the same.
5. Before us, the ld AR has basically reiterated the submissions made before the authorities below. He referred to page No 6 of the Paper Book I, i.e. Balance sheet as on 31.3.2005 of the assessee company to support his contention that the investments in shares are reflected in the Balance Sheet under the head 'investment' and not as 'stock-in-trade'. He also referred to page No 81 to 84 of Paper Book No II showing the details of duration of holding in the share transactions. He also referred to Annexures A-5, A-6, A-7, A-8 and A-9 of the Paper Book No. II giving the total number of company/mutual fund in which the investment was made. With the assistance of Annexure 6, he submitted that the transaction pertaining to sale and purchase in respect of capital gain were carried on for 49 days during the year when the stock exchange was open for transaction almost on 250 days during the year. During this period, there was no transaction at all in the months of April, August, September and October. In the remaining months, only 2 to 10 transactions were there. The ld AR submitted further that the intention as to whether to make investment in shares or to trade is to be seen at the time of purchase of shares. The ld AR referring to page No 6 of the Paper Book No. I submitted that the company has paid up capital of Rs 25 lakhs and its reserves (accumulated profits) are Rs 474 lakhs, i.e. almost 19 times the share capital. Even before making gain on sale of investment during the year under appeal, the assessee had reserves (accumulated profits) of Rs 225 lakhs, i.e. almost 9 times the share capital as on 31.3.2004. He also drew our attention to page 36 of Paper Book No. I to support his submission that the object clause of the Memorandum of Association does not permit the assessee to carry on business in buying and selling of shares. Investment in shares and securities was made out of accumulated profits year after year. The borrowing of Rs 22 lakhs appearing in the Balance sheet and of secured loan was patently 4 linked with the purchase of vehicle worth Rs 27 lakhs. He referred to page 29 of the Paper Book with the submission that the assessee did not sell its investment even when market value of its investment went down considerably. The assessee has disclosed investment and stock in trade separately in its balance sheet. In support, he referred to page 10 and 11 of the Paper Book No. I. He submitted further that income by way of dividend was Rs 15,42,273/- as against Rs 8,9,282/- in the previous year. In support, he drew our attention to page no 12 of the Paper Book No. I. He submitted that though the investment during the year has gone up from Rs 1,10,64,891/- to Rs 3,24,65,114/-, the fresh fund deployed in investment is hardly Rs 66,53,431/- as the balance is out of re-investment of profits generated during the year. In support, he referred to page A-7 of Paper Book No. II.
6. Regarding claimed long-term capital gain, the ld. AR submitted that it was claimed at Rs 98,31,915/- on sale of shares and units of mutual fund holding period of which was from one to two years to over 10 years. In support, he referred to page A-2 of the Paper Book No. II. In terms of percentage, the appreciation in investment was 60% in the case of units of mutual fund and 308% in the case of shares. In support, he referred to page A-3 of the Paper Book No. II. The total year of mutual fund in which investment was made was 3 (6 schemes) and the number of companies whose shares were involved was 7. A reference to page A-4 of Paper Book No II was made in support.
7. Regarding short-term capital gain, the ld AR submitted that it was gained at Rs 49,19,878/- on sale of units of mutual funds and shares wherein holding period was from 1 to 3 months to 9 to 12 months. In support, he referred to page A.4 of the Paper Book No. II. In terms of percentage, appreciation in investment was 27% even on selling investment in short period of time. The total number of mutual funds in which investment was made was two and the number of companies whose shares were involved was 13. Ignoring all these material facts, the authorities below have wrongly come to the conclusion that the claimed 5 capital gain was business income and not out of investment. He placed reliance on the following decisions:
(i) CIT v H. Holck Larsen 160 ITR 67 (SC);
(ii) Management Structure & Systems v ITO, ITA No 6966/Mum/07 (AY
2004-05), order dated 30.4.2010;
(iii) CIT v PNB Finance & Industries Ltd. ITA No 306/210 dated
18.10.2010 (Delhi H.C);
(iv) ACIT & Ors. v Vinod K Nevatia, Mumbai ITA No 6556/Mum/09 &
Ors. (A.Y. 2005-06), Order dated 03.12.2010
(v) DCIT v. SMK Shares & Stock Broking P. Ltd. Mumbai ITA No
799/Mum/09 (A.Y 2005-06), Order dt 24.11.2010;
(vi) Mr Neval V Shah v ACIT ITA No 2733/Mum/09 (A.Y 2005-06),
Order dated 15.12.2010;
(vii) Sarnath Infrastructure P.Ltd. v. ACIT 120 TTJ 216 (Luck);
(viii) Gopal Purohit v JCIT 29 SOT 117 (Mum) (upheld by the Hon'ble Bombay High Court in CIT v Gopal Purohit)
(ix) Radhasoami Satsang v CIT 193 ITR 321 (SC);
(x) CIT v Nirmal Commercial Ltd. 213 ITR 361 (Bom)(FB).
8. The ld DR, on the other hand, tried to justify the orders of the authorities below. He submitted that the share transaction in the case of assessee suddenly increased during the year suggesting that it was trade in nature. Every assessment year is an independent unit. Hence, there is no estoppel against the action of the department in treating the transaction differently in future assessment year, when the facts and circumstances are different. He submitted that the decisions relied upon by the ld AR are having distinguishable facts and these are not helpful to the assessee. The ld DR placed reliance on the following decisions:
(i) Ajinkya Electromelt P. Ltd. Pune v ACIT ITA No 1519/PN/08 (A.Y 2005-06), Order dated 30.7.2010;
(ii) Smt Sadhana Nabera, Mumbai v. ACIT ITA No 2586/Mum/09 (AY 2005-06), Order dated 26.3.2010
9. Considering the above submissions, we full agree with the contention of the ld. AR that in the case of CIT v. H. Holck Larsen (supra), the Hon'ble 6 Supreme Court has been pleased to hold that the intention of the assessee at the time of purchase and not at the time of sale of shares is relevant to decide whether shares were purchased as stock in trade or as investment. Undisputedly, in its books of account and Balance sheet, the purchase of shares in question has been shown as investment. The shares were purchased by the assessee way back in the years 1994, 1997, 1998 etc. which have been sold in this year. If the assessee was a trader in shares, it was not possible to hold various shares for such a long time. Besides, the most important aspect of the matter is that the shares held as investment in the books have been accepted by the department as investments for the assessment year 2001-02. Thus, when the substantial investment has been accepted by the department as investment and not as stock-in-trade, there was no reason for the department to treat the shares as stock in trade for the year of sale. In the case of Sarnath Infrastructure P. Ltd. v. ACIT (supra) followed by the Mumbai Bench of the Tribunal in the case of Gopal Purohit v. JCIT now upheld by the Hon'ble jurisdictional High Court, it has been held that what is the intention of the assessee at the time of purchase of shares (or any other item) can be found out from the treatment it gives to such purchase in the books of account as to whether it has treated8 it as stock-in- trade or investment. There is no dispute that the intention of the assessee cannot be read from his mind, but it reflects in his conduct and the way he treats the transactions. The Mumbai Bench of the Tribunal in the case of Gopal Purohit v JCIT (supra) has also held that if the items in question are valued at cost, it would indicate that they are investments or where they are valued at lower of cost or market value, it will indicate that the items in question are treated as stock-in-trade. The Hon'ble Delhi High Court in the case of CIT v. PNB Finance & Industries Ltd. (supra) has been pleased to hold that if shares are shown as a capital asset in the Balance sheet from the date of purchase and no objection was taken by the AO in the earlier years, he cannot hold it to be stock-in-trade without there being any change in facts. The Hon'ble Supreme Court in the case of Radhasoami Satsang v CIT (supra), which has also been followed by the 7 Hon'ble Bombay High Court in the case of CIT v Shree Nirmal Commercial Ltd. (supra), and Gopal Purohit (supra), held that though the doctrine of res judicata does not apply to tax proceedings and that each year is a separate year, yet the rule of consistency must be followed and the income that was taxed under the head capital gains in earlier year must also be taxed under the same head of income when the facts and the law on the subject are unchanged. The magnitude of transactions does not alter the nature of transaction and hence a transaction of investment does not become a transaction of trade only because of its magnitude, held Mumbai Bench of the Tribunal in the case of Jana S. Rangwalla 11 SOT 627 (Mum), and Hyderabad Bench of the Tribunal in the case of Shah-La Investments & Financial Consultants (P) Ltd. v. DCIT 2 SOT 371 (Hyd). The short period of holding shares does not per se suggest business activity. Primarily, the intention with which an assessee starts his activity is the most important factor. If shares are purchased from own funds, with a view to keep the funds in equity shares to earn considerable return on account of enhancement in the value of share over a period then merely because the assessee liquidates its investment within six months or eight months would not lead to the conclusion that the assessee had no intention to keep the funds as invested in equity shares but it was actually intended to trade in shares. Mere intention to liquidate the investment at higher value does not imply that the intention is only to trade in security. While volume of transaction is an important indicator of the intention of the assessee whether to deal in shares as trading asset or to hold the shares as investor, it is certainly not the sole criterion. A prudent investor always keeps a watch on the market trends and, therefore, is not barred under law from liquidating his investments in shares. The law itself has recognized this fact by taxing the transaction under the head 'short-term capital gain'. Investment company periodically varies its investment does not necessarily mean that the profits resulting from such variation is taxable under the Income-tax Act. Variation of its investments must amount to dealing in investments before such profits can be taxed as income under the Income-tax 8 Act. Considering these material aspects in the present case, as discussed hereinabove, especially the undisputed fact that shares shown as capital asset in the Balance sheet from the date of purchase accepted by the AO in earlier years, the AO now cannot hold it to be stock in trade without there being any change in the facts. We thus decide the issue raised in favour of the assessee that the ld CIT (A) was not justified in treating the claimed short-term capital gain of Rs 49,19,877/- and long-term capital gain of Rs 98,31,915/- on sale of shares assessable as business income and not as capital gains. We thus set aside the matter to the file of the AO to verify the claimed short-term and long-term capital gains in view of above findings that transactions in question are capital gain, after affording opportunity of being heard to the assessee. The Grounds No 1 to 5 raising the issue are thus allowed for statistical purposes.
Ground No. 6 is alternative ground, which does not need adjudication in view of the above finding on the main issue.
In the result, the appeal is allowed for statistical purposes. Order pronounced in the open Court on this 31st Day of May, 2011.
Sd/- Sd/-
(G.S. PANNU) (I.C. SUDHIR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Pune: Dated: 31st May, 2011
B
Copy of the order is forwarded to :
1. Assessee
2. DCIT, Ahmednagar,
3. The CIT(A)
4. The CIT
5. The D.R, 'B' Bench, Pune
6. Guard file
"True copy"
By order
Assistant Registrar
ITAT, Pune Benches, Pune