Income Tax Appellate Tribunal - Hyderabad
Spectra Shares & Scripts Pvt.Ltd.,, ... vs Assessee on 31 March, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' A ', HYDERABAD
BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND
SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER
ITA No.748/Hyd/2011 : Assessment year 2006-07
AND
S.A.No.50/Hyd/2011
(in ITA No.748/Hyd/2011) : Assessment year 2006-07
M/s. Spectra Shares & Scripts V/s. Dy. Commissioner of Income-tax Circle
(P)Ltd., Hyderabad 3(2), Hyderabad
( PAN - AABCV 4969 M )
(Applicant/Appellant) (Respondent)
Appellant/Applicant by : Dr. M.V.R.Prasad
Respondent by : Shri Parneet Singh Sachdev
ORDER
Per Chandra Poojari, Accountant Member:
This appeal by the assessee for the assessment year 2006-07 is directed against the order under section 263 of the Income-tax Act, 1961 dated 31.3.2011, passed by the Commissioner of Income-tax III, Hyderabad. The assessee also filed a Stay Petition seeking the stay of operation of revision order passed by the CIT.
2. Facts of the case in brief are that the assessee-company is carrying on business of dealing in shares and mutual fund units. Its ancillary business is running a function hall at Vijayawada, from which it declared gross receipts of Rs.4,37,315 and net profit at Rs.1,72,292. For the assessment year 2006-07, the assessee has filed return of income on 13.11.2006, declaring a total loss of Rs.45,38,701. Schedule-I of the return of income, containing computation of income from business, showed the assessee's net profit from the profit and loss account at Rs.21,95,18,260, against which, in item No.10 of Schedule-I, 2 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad assessee claimed exempt income at Rs.22,17,11,512. The details of income claimed as exempt are as under-
_____________________________________________________________ Dividend income from Companies Rs. 47,19,169 Income from Mutual Funds Rs.2,71,85,732 Rs. 3,19,04,901 Long term capital gains Rs.18,98,06,611 Rs.22,17,11,512
3. The break-up of the amount of long term capital gains of Rs.18,98,06,611, noted above, is furnished in adjusted statement of computation of total income enclosed to the return of income, which indicates Long term capital gains from sale of quoted shares at Rs.13,56,48,478 and Long term capital gains from the sale of Mutual Fund units at Rs. 5,41,58,133. Assessment thereafter was completed under S.143(3) determining the total income of the assessee at Rs.21,32,002, vide order of assessment dated 16.12.2008.
4. The Commissioner of Income-tax on perusal of the records of the assessee up to assessment year 2009-10, found that in the tax audit report for the assessment year 2004-05, it was mentioned by the auditors, M/s. Brahmayya & Co. that the nature of the assessee's business was 'investment/trading in shares and securities'. The Tribunal also for that year in its order dated 3.10.2008 in ITA No.477/Hyd/2008, found that the assessee was engaged in the business of investments and trading in shares and securities. The Commissioner of Income-tax further noted from the statement of gain/loss on quoted shares filed by the assessee before the assessing officer on 29.8.2008 that the assessee had been buying and selling a large number of shares several times during the year. He noted that the total number of shares of 53 listed companies and units of 121 Mutual Funds were sold during the year at 1,01,23,003 and net sale consideration of Rs.21,21,98,8822 was received in respect of mutual fund units. The Commissioner of Income-tax further noticed that for the other assessment years also the assessee has been 2 3 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad systematically doing huge volumes of purchase and sales on a regular basis, with a turnover of Rs.50 crores, in about 100 listed companies and about 100 Mutual Funds. In addition to this, the assessee had also declared net short term capital gains from sale of units of debt funds at Rs.3,81,297 and gain from sale of unquoted shares at Rs.43,65,508. The Commissioner of Income-tax also noted from the 43rd Annual Report filed by the assessee before the assessing officer on 25.3.2008 that the company reported that during the year "the market was upbeat" and the company's investments in shares and mutual funds have yielded good results.
5. On examination of the above information available before the assessing officer and in assessment records, the Commissioner of Income-tax found that the assessee company has been carrying on the business in shares. He also found from the Balance Sheet for the financial year 2005-06 that the assessee had sold 6100 shares of ITC Limited and claimed the income earned there from as exempt on the ground that the gain constituted long term capital gains, though the shares were acquired and sold in the same year. The assessing officer, according to the Commissioner had not examined the issue in detail and erroneously accepted the claim of the assessee as long term capital gains. The Commissioner of Income-tax therefore was of the opinion that though the assessee has been carrying on trading in shares and units extensively and regularly in huge volumes an high frequency, but offered the profit generated there from as capital gains and claimed exemption from tax of an amount of Rs.22,17,11,512. Accordingly, he issued a show cause notice under S.263 dated 20.1.2010, calling upon the assessee to show cause as to why the activity of the assessee should not be treated as trading in units and shares and tax its profits as business income, since the assessment order dated 16.12.208 passed under S.143(3) of the Act accepting the claim of the assessee treating it as capital gains and short term capital gains, according to the Commissioner of Income-tax, was erroneous and prejudicial to the interests of the Revenue. After 3 4 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad detailed consideration of the submissions of the assessee in response thereto, the Commissioner of Income-tax ultimately arrived at the following conclusions-
(i) The scale of activity of buying and selling shares, mutual fund units, debt funds, etc. is substantial. The assessee sold 10123003 shares of 53 listed companies during the year for a net sale consideration of Rs.23,31,25,764/-. Similarly, 9764511 Units of 121 Mutual Funds were sold for a sale consideration of Rs.21,21,98,822/-.
(ii) The assessee has carried out day-trading. It has purchased and sold 500 shares of RELIANCE Industries Limited on 08.08.2005 i.e. on the same day without taking delivery, by squaring the account.
(iii) The assessee made purchase and sale transactions in shares and units continuously and regularly during the entire year as per the details mentioned above. The assessee made repetitive purchases and sales of the same shares during the year.
(iv) The purchase and sale of shares and units is its main business activity while running a marriage hall at Vijayawada with gross receipts of Rs.4,37,315/- is only its ancillary activity.
(v) The only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend therefrom. The profit earned from buying and selling of shares is Rs.19,18,77,121/- which constituted long term capital gains shown at Rs.18,98,06,611/- and short term capital gains shows at Rs.20,70,510/- while its dividend income from companies is only Rs.47,19,169/- i.e. the ratio between dividend and profits is 2:40. It shows that the dividend income was meagre compared to profit on sale of shares. "
4 5 ITA No.748/H/2011 and SA No.50/Hyd/2011M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad
6. In view of the above findings, the Commissioner of Income-tax concluded that the shares in respect of which the assessee admitted income under the head short term and long term capital gains, are "stock-in-trade" of the assessee and not "investments' as claimed by the assessee and the activity of the assessee in buying and selling shares is nothing but its business activity and consequently the surplus therefrom represented its business profit Accordingly, the Commissioner of Income-tax concluded that the income declared by the assessee under the head long term capital gains amounting to Rs.18,98,06,611 and short term capital gains amounting to Rs.20,70,510 together amounting to Rs.19,18,77,121 is the assessee's income from business. With these findings, the Commissioner of Income-tax, vide order under S.263 dated 31.3.2011, directed the assessing officer to revise the assessment order passed under S.143(3).
7. Aggrieved by the order of the Commissioner of Income-tax passed under S.263 of the Act, the assessee preferred the present appeal before us.
8. Learned counsel for the assessee, after narrating the facts of the case in brief submitted that initially a show cause notice under S.263 was issued to the assessee on 20.1.2010 to which the assessee has filed its reply on 29.1.2010. After a long pause, the successor Commissioner of Income-tax issued again a show cause notice under S.263 of the Act on 21.2.2011 proposing revision on entirely different grounds. This act of successor Commissioner of Income-tax amounts to starting fresh litigation on new views which is against the ratio of the decision of the jurisdictional High Court in the case of Syrup Paper Mills Ltd. v. ITO & Anr. (114 ITR 404). He further submitted that the order of the Commissioner of Income-tax passed under S.263 is only an alternative method of assessment based on his own study and reappraisal of the same record, which amounts to mere substitution for the assessment order, taking a different and an alternative view. Such a revision made by the Commissioner is not sustainable in law. He further submitted that the assessment in this case was made after the assessee substantiated its claim for exemption in respect of long 5 6 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad term capital gains and short term capital gains before the assessing officer, and the assessee has clarified before the assessing officer that the investments were all shown under the head "Investment" in the balance sheet and as such there was no trading activity, and it is only after considering all the submissions of the assessee and the evidence on record that the assessing officer came to the conclusion as to the nature of the assessee's activity. As such, the assessment order cannot be said to be erroneous either in law or on facts and the Commissioner was not correct in observing that the assessing officer has failed to apply the CBDT Circular No.4/2007. He also submitted in this behalf that not only in this year, but even in other years - earlier as well as subsequent- assessments were made by the assessing officer under S.143(3) of the Act, accepting the claim of the assessee that the it's activity constituted one of investment only. Relying on plethora of decisions, including the decisions of the Hon'ble Supreme Court in Malabar Industrial Co. Limited (243 ITR 83); and CIT V/s. Max India Ltd. (295 ITR 282), learned counsel for the assessee submitted as a settled position of law that when the assessing officer has taken a certain view on the basis of evidence before him, in the shape of accounts and information furnished by the assessee regarding the extent and nature of its acidity in response to enquiries made by the assessing officer, the Commissioner of Income-tax cannot seek to revise the asset under S.263 of the Act by taking a different view. Learned counsel for the assessee submitted that while the Commissioner has not discussed or referred to any of the decisions relied upon by the assessee, the decisions relied upon by the Commissioner in the impugned order under S.263, including the one of the Gujarat High Court in CT V/s. MM Khambhatwala (198 ITR 144); and of the Apex Court in the case of Sri Manjunathewara Packing Products & Camphor Works (231 ITR 335), are clearly distinguishable from the facts of the present case, inasmuch as in the present case it is not a mere change of opinion on the part of the Commissioner, but it is a question of finding of fact as regards the nature assessee's activity given by the assessee based on the evidence on record. He further relied on following judgements:
6 7 ITA No.748/H/2011 and SA No.50/Hyd/2011M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad i. Malabar Industrial Co. Ltd. v. CIT (243 ITR 83) (SC) ii. CIT vs. Max India Ltd. (295 ITR page 282) (SC) iii. CIT vs. Gabriel India Pvt. Ltd. (203 ITR 108) (Bom) iv. CIT vs. Arvind Jewellers (290 ITR 689) (Guj.) v. CIT vs. Development Credit Bank Ltd. (323 ITR 206) (Bom) vi. CIT vs. Vikas Polymers (194 Taxman 57) (Del.) vii. CIT vs. Anil Kumar Sharma (194 Taxman 504) (Del.)
9. On merits, the learned counsel for the assessee submitted that the Commissioner of Income-tax has erred in not considering all the facts cumulatively, viz. (a) the assessee has not borrowed any funds and made all the investments with its own funds; (b) the closing stock is valued in the books of accounts consistently at cost and not at cost or market price whichever is lower; (c) the share holders of the company are all family members and first degree relatives; (d) the intention of the assessee to indulge only in the activity of investment. The Commissioner according to the learned counsel considered each of the above facts as only grounds of the assessee. He further submitted relying on catena of decisions, including those of Apex Court, that neither the number of transactions nor the frequency in an year carried on by the assessee as an investor in the course of shifting of investments depending on the market conditions, is indicative of the fact of trading. Referring to the purchase and sale of 500 shares of Reliance Industries Limited on the same day without taking delivery, which has been specifically noted by the Commissioner of Income-tax in support of his conclusion against the assessee, learned counsel submitted that this was a solitary transaction which happened by mistake on the part of the broker. He submitted in this behalf that when this was informed of the purchase of shares of RIL, it immediately told the broker to cancel the transaction, which was done accordingly, even though this resulted in a loss of Rs.1,197. As for the availing of the services of multiple number of brokers by the assessee, he submitted that there was nothing wrong if the assessee had availed the services of three leading brokers for the purpose of investment in 7 8 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad shares and that fact has no bearing on the nature of activity. He clarified in this behalf that while more than 90% of the transactions were carried out by availing services of one broker who has only NSE terminal, the transactions relating to shares listed only in BSE were being done with the help of the other two brokers. As for the purchase of 20,00,000 unquoted shares of M/s. Hindustan Coca Cola Beverages P. Ltd. (HCCBL for short), learned counsel submitted that that transactions in relation that scrip have taken place in special circumstances. Elaborating in this behalf, it was submitted that the assessee company as one of the franchisees of HCCBL, which offered its shares to its franchisees in 2003, and it was understood that HCCBL would go public. The assessee company acquired the shares in question as it felt that when HCCBPL would go public, there would be good appreciation in share value. However, as the HCCBPL did not go public, the assessee thought it wise to sell the shares to the company itself, which agreed to take. From these events, it was submitted that the intention of the assessee in acquiring the shares of HCCBPL was to invest in shares with the hope of future appreciation when the shares are listed, and as such it was a clear case of investment. Though evidence in this behalf, as furnished before the assessing officer on specific query from him, was also available in the paper-book, the Commissioner failed to notice this information on record. As regards acquisition of 6,95,000 shares of 1$ each of the assessee's subsidiary company formed in USA, it is submitted that it is a pure investment as observed by the Commissioner himself. The learned counsel for the assessee also disputed the observation of the Commissioner that the assessee has sold more than 1 crore shares in the year under consideration, and submitted that the total number of shares sold was only 10,23,003. The learned counsel for the assessee also disputed the findings of the Commissioner with regard to assessee's transactions of buying and selling on the same day of shares of Andhra Sugars Limited, by submitting that the transaction dates recorded in the Demat Account were different form the actual dates of transaction and consequently, the dates recorded in the Demat Account would not reflect the correct date of execution of transaction. He 8 9 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad clarified in this behalf that all the shares purchased were taken delivery and all the shares sold were given delivery and same is the case with regard to all other scrip where there were no transactions on the same date.
10. As for the assessee's transactions in units of Mutual Funds, disputing the observation of the Commissioner that assessee's activity in relation to the units too constituted trading activity, the learned counsel for the assessee submitted that the assessee has no role to play after the investments are made in mutual funds, as the investments in mutual funds are managed by separate Fund Managers who take decisions on making investments. Whenever the assessee wants to withdraw any amount, it has to only give a request to the fund, and thus the assessee has no role to play as far as the investments in mutual funds are concerned, except timing the entry and exit from the fund depending on the market conditions as a prudent investor.
11. Learned counsel further submitted that compared to earlier year, the number of purchase and sale transactions in the year under appeal, more particularly in the month of March, was significantly large and this fact appears to have led the Commissioner to take the view that the assessee was indulging in trading activity. Elaborating in this behalf, he submitted that the Finance Act, 2006 provided that the Long Term Capital Gains shall form part of income liable for MAT(Minimum Alternate Tax) and this provision was made effective from 1.4.2006. Hence, in order to avoid the incidence of MAT, the assessee booked Long Term Capital Gains on its holdings by selling them in the month of March and again purchasing back. This aspect besides being a Tax Planning Measure is also indicative of the assessee's position as an investor. Repurchase of shares after booking Long Term Capital Gains also clearly shows the assessee's interest on holding on to its investment.
12. Disputing the observation of the Commissioner that in earlier years the assessee was treated as investor and investment activity was accepted is not relevant and principle of res judicata does not apply, learned counsel for the 9 10 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad assessee submitted that the assessee's case is not based on the principle of res judicata but on principles of consistency, which was stressed in a number of decisions, including those of Bombay High Court in the case of CIT V/s. Gopal Purohit (in Income-tax Appeal No.1121 of 2009 dated 6th January, 2010); and of the Delhi High Court in CITV/s. Escorts Limited (in Income Tax Appeal No.14 of 1999 dated 1.2.2011), besides the Bombay High Court decision in CIT V/s. Darius Pandole (330 ITR 485). It is submitted in this behalf that the Commissioner has failed to consider the relevant fact that the assessee consistently valued the investments at the end of each year at cost price and not at cost/market price whichever was lower, which is a very important feature of a trader. This aspect has been highlighted in a number of decisions like Fidelity North Star & Others in re (2007) 288 ITR 641(AAR) and ARA Trading and Investments Pvt. Ltd. Vs, DCIT (ITAT Pune in ITA No.499/PN/2008 dated 31.2009), besides the Circular of the Board, being Circular No.4 of 2007. He disputed the observations of the Commissioner of Income-tax that the very name of the assessee-company as also its Memorandum of and Articles of Association are indicative of the nature of activity of the assessee being business and trading in shares, and submitted that these observations are irrelevant and one has to look into what was done by the assessee and not what could have been done. The learned counsel for the assessee submitted that dividend income of the assessee is the outcome of investment and depends upon the business results of the companies concerned and it has nothing to do with the activity of an investor in acquiring the shares with a view to make gains on appreciation of value of the shares and thereby accretion to wealth, and therefore, the observations of the Commissioner based on the ratio of Dividend to capital gains are misplaced and not relevant for the purpose of determining the nature of activity of the assessee. While the Commissioner drew an adverse inference against the assessee from the fact that the assessee did not borrow funds from outside for the purpose of its activity, learned counsel for the assessee submitted that this in fact indicates that the activity of the assessee is one of investment and not business. In this behalf he referred to 10 11 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad and relied on a plethora of decisions, numbering as many as 18, including the decision of the Mumbai Bench of the Tribunal in the case of DCIT V/s. SMK Shares & Stock Broking Pvt. Ltd., Mumbai in ITA No.799/Mum/2009 for assessment year 2005-06 dated 24.11.2010 and the decision of the Pune 'B' Bench of the Tribunal in the case of ARA Trading & Investments Pvt. Ltd. in I.T.A. Nos. 499 & 500/PN/2008 dated 31st August, 2009.
13. The learned counsel for the assessee has also elaborately argued distinguishing the case-law referred to and relied upon by the Commissioner in his order under S.263 of the Act and submitted that, the assessee has only replenished the stock after booking the long term capital gains which is indicative of its position as an investor. He submitted that the assessee has held on to its investments through all the fluctuations of the stock market, and being a corporate investor, naturally the number, volume and frequency of transactions is high, which indicates the care and watchfulness of the assessee company. He submitted that the same position holds good even in the assessee of many FIIs and Portfolio Management Schemes and therefore, simply because of the magnitude of the transactions, the assessee does not cease to be an investor. Recapitulating the background of the assessee company, which was floated in 1963, it was stated that it was a franchisee of Coca Cola company and was in bottling business up to December, 1997 when Coca Cola Company took over the business as a going concern, it paid substantial amount by way of slump price and with that fund, the assessee company entered the stock market as an investor. Being a family concern, it is submitted, the assessee company is conservative and cautious and is interested in the safety of its capital and wealth creation, and it has never taken the risky plunge into the waters of share trading. Referring to the decision of the Tribunal in assessee's own case for the assessment year 2004-05 in ITA No.477/Hyd/2008, and relying on the conclusion of the Tribunal for that year that assessee was only an investor and not a trader, it is submitted that there is no substantial variation between the facts of that year and the facts of the year 11 12 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad under appeal, but for the booking of substantial capital gains in the year under appeal, more particularly in the month of March, which too accrued over a number of years, and this is also due to the impact of the proviso of S.10(38). In this view of the matter, it is pleaded that for the year under appeal also, assessee should be treated only as an investor and activity should not be treated as 'business'. The learned counsel for the assessee relied on the following case-law:
i. CIT vs. Max India Ltd. (268 ITR 128) (P&H). ii. CIT v. Mehsana District Co-operative Milk Producers Union Limited (263 ITR 645) (Guj.) iii. CIT v. Simon Carves Ltd. (105 ITR 212) (SC). iv. Piem Hotels Ltd. vs. DCIT (ITA No. 523/Mum/2009 dt. 13.8.2010). v. Hindustan Shipyard Ltd. vs. DCIT (130 TTJ (Visakha) (UO) 76) in ITA Nos. 295 & 296/Vizag/2005 dated 2.3.2010. vi. Sirpur Paper Mills Ltd. v. ITO (1978) (114 ITR 404/407) (AP). vii. CIT vs. Gopal Purohit (2010) (228 CTR 582) viii. CIT vs. Darius Pandole (330 ITR 485 (Bom). ix. Fidelity North Star & Others in re (2007) 288 ITR 641 (AAR). x. ARA Trading & Investments Pvt. Ltd. vs. DCIT (ITAT Pune) IN I.T.A. Nos. 499 & 500/PN/2008 dated 31.8.2009. xi. DCIT vs. SMK Shares & Stock Broking Pvt. Ltd. , Mumbai (ITA No. 799/Mum/2009 dated 24.11.2010) xii. CIT vs. Escorts Ltd. (ITA No. 14 of 1999 (Delhi) dated 1.2.2011. xiii. Rajiv Agnihotri vs. CIT (ITAT Delhi) ITA No. 1253/Del/2006 xiv. Shri Chimanlal C. Shah v. ACIT (ITAT Mumbai) ITA No. 185/Mum/2008 order dated 17.2.2010. xv. ITO vs. Radha Birju Patel (ITA No. 5382/Mum/2009 order dated 30.11.2010). xvi. Nagindas P. Sheth (HUF) vs. ACIT 21(3) (ITAT Mumbai) ITA No. 961/Mum/2010 dated 5th April, 2011. xvii. ACIT vs. Naishadh v. Vachharajani (ITAT Mumbai) ITA No. 6429/Mum/2009 dated 25.2.2011.
xviii. Shri Ramesh Babu Rao, Mumbai vs. ACIT 17, Mumbai (ITAT Mumbai) ITA No. 3719/Mum/2009 dated 13thapril,2011.
12 13 ITA No.748/H/2011 and SA No.50/Hyd/2011M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad xix. Shri Sunil G. Khandelwal, Mumbai vs. ITO Mumbai (ITAT Mumbai) ITA No. 2768/Mum/2009 dated 3.3.2010. xx. Sarnath Infrastructure (P) Ltd. vs. ACIT, (ITAT Lucknow) ITA No. 301/Luck/2006 dt. 20.12.2007.
xxi. Bharat Kunverji Kenia vs. Addl. CIT (ITAT Mumbai) ITA No. 6544/Mum/2008 dt. 15.5.2009.
xxii. Paresh D. Shah vs. Joint CIT (ITAT Mumbai) ITA No. 2232/Mum/2009 dt. 14.1.2010.
xxiii. Management Structure & Systems (P) Ltd. v. ITO 6(3)(2) ITAT Mumbai ITA No. 6966/Mum/2007 dt. 30.4.2010.
14. The learned DR submitted that in order to appreciate the nature of activity of the assessee it is necessary to analyse the transactions carried out by the assessee during the year. The assessee has been buying and selling shares and units of Mutual Funds throughout the year through an organised full time and day-to-day activity. A statement of sale of shares of 82 listed companies furnished by the assessee shows the number of shares and units sold at 10787514. Similarly, the units sold of 121 mutual funds were 9764511. At least equal number of shares and units have been purchased during the year. These details are enumerated in tabular form on page 7 of the CIT order u/s. 263 of the Act. The assessee-company has purchased and sold 500 shares of Reliance Industries Limited on 8.8.2005 i.e., on the same day without taking delivery, by squaring the account. This is a day trading transaction. The assessee had availed the services of three leading stock brokers for its trading activity viz., Purchase & Sl. No. Name of the company Sales (Rs.)
1. M/s. Excel Fincap Pvt. Ltd. 36,62,25,492
2. Standard Chartered Securities 1,60,86,428
3. UTI securities 1,40,00,000
15. The learned DR further submitted that the above turnover covers only part of the year. The assessee has sold 2,00,000 unquoted shares of M/s. Hindustan Coca Cola Beverages Pvt. Ltd. and received Rs. 2,66,08,493. The 13 14 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad assessee has invested in 6,95,000 shares of 1 dollar each of its subsidiary company formed in USA viz., Vijaya Finvest Inc. Amounting to Rs. 3,36,72,409. The assessee has also purchased and sold shares of Andhra Sugars Ltd., the details of which are given in para 5.3.1 of the CIT order. A careful analysis of the statement shows that the assessee is buying and selling shares in the same year very frequently. For example on 31.1.2006 the assessee bought 15500 shares and sold 1500 shares on the same day. Similarly on 1.2.2006 the assessee bought 1000 shares and sold the same on the next day. The assessee bought 20000 shares on 3.2.2006 and sold 2000 shares on the same day, 2000 on the next day and 10,000 shares on the fifth day. Similarly there was sale of 20000 shares on 1.3.2006 and 20000 shares purchased on 8.3.2006. There was a sale of 13000 shares on 9.3.2006, the next day and purchase of 11000 shares the very next day. Such correlation of buying and selling day after day can be seen from the above table of huge number of shares of the same scrip. Similar pattern was found on analysis of purchase and sale of several other scripts which are not reproduced here for brevity.
16. A sample study of the shares purchased and sold in April, 2005 and February, 2006 was done as furnished by the assessee. The data shows that during April, 2005, the assessee purchased 64476 shares of 28 listed companies for Rs. 1,39,82,193 and in the same month sold 29910 shares for Rs. 33,80,617. Similarly during the month of February, 2006, the assessee purchased 56769 shares of 45 companies for Rs. 1,01,40,444 and sold during the same month 118806 shares for Rs. 3,14,16,760. This data shows that each month the assessee is buying and selling over 60,000 shares of over Rs. 3 crores. In order to see the trend of purchases and sales made on a single day the data of two dates was compiled and listed in para 5.5.1 of the CIT order.
17. The learned DR further submitted that the assessee-company has carried out substantial activity of purchase and sale of units of Mutual Funds.
14 15 ITA No.748/H/2011 and SA No.50/Hyd/2011M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad During the year, it has sold units of 121 Mutual Funds. The details of units sold during the year are as under:
Sl.
Details Amount (Rs.)
No.
(i) No. of Mutual Funds Traded in 121
(ii) No. of units sold 9704511
(iii) Net sale consideration received Rs. 21,21,98,996
(iv) Long term capital gains claimed Rs. 5,41,58,133
(v) Short term capital gains claimed Rs. 8,27,498
(vi) Short term gain in Debt Funds Rs. 3,81,297
18. The learned DR submitted that the assessee-company had repeatedly purchased and sold Mutual Fund units of the same fund throughout the year.
Few instances of repetitive purchase and sale of units are as under:
No. of MF units Date Particulars sold/purchased 26011 8.3.2006 Franklin India Prima Fund 9030 22116 10.3.2006 Franklin India Prima Fund 52734 35659 33814 10.3.2006 Tata Equities Opportunities Fund 97252 65221 19586 3.10.2003 Franklin India Prima Fund 20000 20000
19. The learned DR submitted that on 27.03.2006, the assessee purchased through one broker 23400 shares and sold 28607 shares. Similarly on 28.3.2006, it brought 43340 shares of 17 companies and sold 4750 shares of four companies. Per day more than 50 trade orders are executed on the stock exchanges covering purchases and sales. A study of the above data reveals that the assessee has been regularly buying and selling shares and mutual fund units though very high volume of transactions throughout the year. The fact that the assessee-company is doing buying and selling of shares on day to day 15 16 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad basis shows that it is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions. The assessee's earning dividend income is incidental to the trading activity as stocks held by it through rolling at any given point of time is so huge that on the record dates the assessee has been able to receive dividend income also. The activity of buying and selling shares in a systematic and regular manner with high frequency and volumes, repetitive purchases and sales of the same scrip as shown above shows trading in shares to earn profit. Such an activity to be considered as business and profit to be taxed as business profit. For this purpose he relied on the order of the Tribunal, Mumbai Bench, in the case of Wall Fort Financial Services Ltd. vs. Addl. CIT [(2010) 134 TTJ 656]. Further in the case of Shri Pratik S. Shah in ITA No. 883/Mum/2010 dt. 31.12.2010, ITAT Mumbai Bench where the assessee was dealing in shares as an organised activity with high volume and frequency, it was held to be carrying on business and not investment.
20. The learned DR further submitted that the assessee's contention that its claim of investment activity and exemption of its income as capital gain was accepted in earlier years cannot be changed in a subsequent year on the basis of principle of consistency, is not tenable because on proper enquiry, the tax authority is entitled to draw a different conclusion in a different assessment year as has been done in this case now. The principle of res judicata is not applicable to the income-tax proceedings. Surplus in the sale of shares where repeated purchases and sales are done in the shares is held to be business income. For this purpose he relied on the order of the Tribunal in the case of Sri Upendra P. Dadia in I.T.A. No. 485/Mum/09 dated 18.2.2011. He submitted that the assessee had been consistently investing in shares and rotating the funds again and again in various scrips to make profit with an intention to make profit in the share market and it has to be held carrying on business activity.16 17 ITA No.748/H/2011 and SA No.50/Hyd/2011
M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad
21. The DR further contended that the assessee's contention that it had shown the value of the stocks as investments in it books of account and not as stock-in-trade could given an indication of its nature but it is not conclusive fact to show the intention of the transactions. In fact, the Hon'ble A.P. High Court in the case of CIT v. JD Italia (141 ITR 953) and even the Hon'ble Supreme Court in the case of CIT v. Bazpur Co. Operative Sugar Factory Ltd. (172 ITR 330) has held that the name or label given by a party to a particular amount in its books of account is not conclusive. The Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT (227 ITR 172) held that the entries in the books of account are not the determining factor regarding the real nature of transaction. Thus, the assessee's contention that the closing stock was shown as investment in its balance sheet are held to be closing stock of its business and not investments.
22. The learned DR further submitted that merely because borrowed funds were not used is not a conclusive fact in understanding the true nature of transactions. One can do business with more ease and high profits with own funds. That is no conclusive fact to say that it was not doing trading in shares. Similarly, the fact that a large part of the profit was because of some shares sold after six months or one year, is also not conclusive as to the intention of the transactions. What is pertinent is to see as to how the assessee is repeatedly buying and selling shares of the same scrip and taking advantage of the dips and highs of the stock market to make high profits, as is being done by the assessee. The contention of the assessee that it has passed a resolution in the Board of Directors' Meeting authorising the directors to make investments and that it shows the intention of the company to make investment and not trading - cannot come to the rescue of the assessee as all the directors are from the same family and first degree relatives and that there is not a single outsider on the Board of Directors. The assessee is a closely held company with the family members of the chairman running the business. Such Board 17 18 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad resolutions of closely held companies are intended to cover up its true activities viz., trading in shares.
23. The learned DR submitted that mere fact that the shares have been treated as investments in the accounts from the very beginning and that the investments have been valued at the purchase price and not market price or cost price whichever is lower, does not in anyway help the case of the assessee. Had it been the sole intention of investments, there should not have been much administrative set up with considerable administrative expenditure. The innumerable purchase and sale transactions made by the assessee are clearly covered by the situations contemplated in Board's Circular No. 4/2007 dt. 25.06.2007 and the tests laid down in the Hon'ble Apex Court's decision in the case of G. Venkataswami Naidu and Co. [35 ITR 549 (SC)]. The very name of the assessee company i.e., Spectra Shares & Scrips Pvt. Ltd., is clearly indicative of its business activity of dealing in shares and scrips. The annual report for the year 2005-06 shows the income of the company in the P & L account which is drawn only for an entity carrying on business. It also shows the net profit before depreciation. The directors' report for the year 2005-06 states that during the year the market was upbeat and the directors were hopeful of good results.
24. He submitted that the assessee's contention that it is an NBFC and obtained RBI permission for making investments cannot be a shield from taxing its profits in trading of shares and mutual fund units. What is most relevant in this regard is the real business activity undertaken by the company rather than the category to which it belongs viz., NBFC or not. The income tax authority has the power to lift the veil and find the true nature of the business of the assessee. In this case, the assessee has been doing trading in shares and units as shown above and not investments or financing of other business enterprises. On the facts of the case, the ratio laid down by the Supreme Court in the case of McDowell & Co. Ltd. (154 ITR 148) is squarely applicable as the assessee is trying to take shelter of its being an NBFC to camouflage its trading 18 19 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad activity in shares and units of mutual funds. In the Memorandum of Articles of Association of the company one of the objects clause states that:
"the company will raise funds to acquire or hold, sell, buy or otherwise deal in shares, debentures, bond units, obligations and other securities."
25. The learned DR submitted that the assessee has been precisely doing buying and selling of shares, mutual fund units, debt funds, unlisted company shares, etc. These are all reflective of the assessee's clear business activity and not investment activity. On the basis of the above facts and analysis, he submitted that the following conclusions are to be drawn:
(a) The scale of activity of buying and selling shares, mutual fund units, debt funds, etc., is substantial. The assessee sold 10123003 shares of 53 listed companies during the year for a net sale consideration of Rs.
23,31,25,764. Similarly, 9764511 units of 121 Mutual Funds were sold for a sale consideration of Rs. 21,21,98,822.
(b) The assessee has carried out day-trading. It has purchased and sold 500 shares of Reliance Industries Ltd., on 8.8.2005 i.e., on the same day without taking delivery, by squaring the account.
(c) The assessee made purchases and sale transactions in shares and units continuously and regularly during the entire year as per the details mentioned above. The assessee made repetitive purchases and sales of the same shares during the year.
(d) The purchase and sale of shares and units is its main business activity while running a marriage hall at Vijayawada with gross receipts of Rs. 4,37,315 is only its ancillary activity.
(e) The only and sole objective of purchase and sale of shares is to derive profits and not to earn dividend there from. The profit earned from buying and selling of shares is Rs. 19,18,77,121 which constituted long term capital gain shown at Rs. 18,98,06,611 and short term capital gains shown at Rs. 20,70,510 while its dividend income from companies is only Rs. 47,19,169 i.e., the ratio between dividend and profits is 2:40. It shows that the dividend income was meagre compared to profit on sale of shares.
26. The learned DR submitted that in view of the aforesaid discussion, the shares in respect of which the assessee admitted income under the head short term and long term capital gains, are stock-in-trade of the assessee and not investments as claimed by the assessee. The activity of the assessee in buying 19 20 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad and selling shares is nothing but a business activity and the surplus there from represented its business profits. The learned DR, accordingly, vehemently supported the orders of the lower authorities.
27. We have carefully considered the rival submissions in the light of material placed before us and also gone through all the judgements cited by the parties before us. First we take up the legal issue with reference to the jurisdiction of invoking the provisions of section 263 of the Act by the learned CIT. The scheme of the IT Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to erroneous order of the assessing officer, the Revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interest of the revenue. As held in the case of Malabar Industries Co. Ltd., Vs. CIT ( 243 ITR 83 (SC), the Commissioner can exercise revision jurisdictional u/s 263 if he is satisfied that the order of the assessing officer sought to be revised is (i)erroneous; and also (ii) prejudicial to the interests of the revenue. The word 'erroneous' has not been defined in the Income Tax Act. It has been however defined at page 562 in Black's Law Dictionary (seventh Edition) thus';
'erroneous, adj. Involving error, deviating from the law'.
The word 'error' has been defined at the same page in the same dictionary thus:
'error No. 1 : A psychological state that does not conform to Objective reality; a brief that what is false is true or that what is true is false'.
At page 649/650 in P. Ramanatha Aiyer's Law Lexicon Reprint 2002, the word 'error' has been defined to mean-
'Error. A mistaken judgement or deviation from the truth in matters of fact, and from the law in matters of judgement 'error' is a fault in judgement, or in the process or proceeding to judgement or in the execution upon the 20 21 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad same, in a Court of Record; which in the Civil Law is called a Nullityie" (termes de la ley)' Something incorrectly done through ignorance or inadvertence S.99 CPC and S.215 Cr.PC.
'Error, Fault, Error respects the act; fault respect the agent, an error may lay in the judgement, or in the conduct, but a fault lies in the will or intention."
28. At page 650 of the aforesaid Law Lexicon, the scope of Error, Mistake, Blunder, and Hallucination has been explained thus:
"An error is any deviation from the standard or course of right, truth, justice or accuracy, which is not intentional. A mistake is an error committed under a misapprehension of misconception of the nature of a case. An error may be from the absence of knowledge, a mistake is from insufficient or false observation. Blunder is a practical error of a peculiarly gross or awkward kind, committed through glaring ignorance, heedlessness, or awkwardness. An error may be overlooked or atoned for, a mistake may be rectified, but the shame or ridicule which is occasioned by a blunder, who can counteract. Strictly speaking, Hallucination is an illusion of the perception, a phantasm of the imagination. The one comes of disordered vision, the other of discarded imagination. It is extended in medical science to matters of sensation, whether there is no corresponding cause to produce it. In its ordinary use it denotes an unaccountable error in judgement or fact, especially in one remarkable otherwise for accurate information and right decision. It is exceptional error or mistake in those otherwise not likely to be deceived."
29. In order to ascertain whether an order sought to be revised under Section 263 is erroneous, it should be seen whether it suffers from any of the aforesaid forms of error. In our view, an order sought to be revised under Section 263 would be erroneous and fall in the aforesaid category of "errors" if it is, inter alia, based on an incorrect assumption of facts or an incorrect application of law or non-application of mind to something which was obvious and required application of mind or based on no or insufficient materials so as 21 22 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad to affect the merits of the case and thereby cause prejudice to the interest of the revenue.
30. Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by the Assessing Officer. It empowers the Commissioner to initiate suo moto proceedings either where the Assessing Officer takes a wrong decision without considering the materials available on record or he takes a decision without making an enquiry into the matters, where such inquiry was prima facie warranted. The Commissioner will be well within his powers to regard an order as erroneous on the ground that in the circumstances of the case, the Assessing Officer should have made further inquiries before accepting the claim made by the assessee in his return. The reason is obvious. Unlike the Civil Court which is neutral in giving a decision on the basis of evidence produced before it, the role of an Assessing Officer under the Income-tax Act is not only that of an adjudicator but also of an investigator. He cannot remain passive in the face of a return, which is apparently in order but calls for further enquiry. He must discharge both the roles effectively. In other words, he must carry out investigation where the facts of the case so require and also decide the matter judiciously on the basis of materials collected by him as also those produced by the assessee before him. The scheme of assessment has undergone radical changes in recent years. It deserves to be noted that the present assessment was made under Section 143(3) of the Income-tax Act. In other words, the Assessing Officer was statutorily required to make the assessment under Section 143(3) after scrutiny and not in a summary manner as contemplated by Sub-section (1) of Section 143. Bulk of the returns filed by the assessees across the country is accepted by the Department under Section 143(1) without any scrutiny. Only a few cases are picked up for scrutiny. The Assessing Officer is therefore, required to act fairly while accepting or rejecting the claim of the assessee in cases of scrutiny assessments. He should be fair not only to the assessee but also to the Public Exchequer. The Assessing Officer has got to protect, on one hand, the interest 22 23 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad of the assessee in the sense that he is not subjected to any amount of tax in excess of what is legitimately due from him, and on the other hand, he has a duty to protect the interests of the revenue and to see that no one dodged the revenue and escaped without paying the legitimate tax. The Assessing Officer is not expected to put blinkers on his eyes and mechanically accept what the assessee claims before him. It is his duty to ascertain the truth of the facts stated and the genuineness of the claims made in the return when the circumstances of the case are such as to provoke inquiry. Arbitrariness in either accepting or rejecting the claim has no place. The order passed by the Assessing Officer becomes erroneous because an enquiry has not been made or genuineness of the claim has not been examined where the inquiries ought to have been made and the genuineness of the claim ought to have been examined and not because there is anything wrong with his order if all the facts stated or claim made therein are assumed to be correct. The Commissioner may consider an order of the Assessing Officer to be erroneous not only when it contains some apparent error of reasoning or of law or of fact on the face of it but also when it is a stereo-typed order which simply accepts what the assessee has stated in his return and fails to make enquiries or examine the genuineness of the claim which are called for in the circumstances of the case. In taking the aforesaid view, we are supported by the decisions of the Hon'ble Supreme Court in Rampyari Devi Saraogi v. CIT (67 ITR 84) (SC), Smt. Tara Devi Aggarwal v. CIT (88 ITR 323) (SC), and Malabar Industrial Co. Ltd's case ( 243 ITR 83) (SC).
31. In Malabar Industrial Co. Ltd. case the Hon'ble Court has held as under:
"There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer, it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall the orders passed without applying the principles of natural justice or without application of mind.23 24 ITA No.748/H/2011 and SA No.50/Hyd/2011
M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad In our humble view, arbitrariness in decision-making would always need correction regardless of whether it causes prejudice to an assessee or to the State Exchequer. The Legislature has taken ample care to provide for the mechanism to have such prejudice removed. While an assessee can have it corrected through revisional jurisdiction of the Commissioner under Section 264 or through appeals and other means of judicial review, the prejudice caused to the State Exchequer can also be corrected by invoking revisional jurisdiction of the Commissioner under Section 263. Arbitrariness in decision-making causing prejudice to either party cannot therefore be allowed to stand and stare at the legal system. It is difficult to countenance such arbitrariness in the actions of the Assessing Officer. It is the duty of the Assessing Officer to adequately protect the interest of both the parties, namely, the assessee as well as the State. If he fails to discharge his duties fairly, his arbitrary actions culminating in erroneous orders can always be corrected either at the instance of the assessee, if the assessee is prejudiced or at the instance of the Commissioner, if the revenue is prejudiced. While making an assessment, the ITO has a varied role to play. He is the investigator, prosecutor as well as adjudicator. As an adjudicator he is an arbitrator between the revenue and the taxpayer and he has to be fair to both. His duty to act fairly requires that when he enquires into a substantial matter like the present one, he must record a finding on the relevant issue giving, howsoever briefly, his reasons therefor. In S.N. Mukherjee v. Union of India AIR 1990 SC 1984, it has been observed by the Hon'ble Supreme Court as follows:
"Reasons, when recorded by an administrative authority in an order passed by it while exercising quasi-judicial functions, would no doubt facilitate the exercise of its jurisdiction by the appellate or supervisory authority. But the other considerations, referred to above, which have also weighed with this Court in holding that an administrative authority must record reasons for its decision are of no less significance. These considerations show that the recording of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances or arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and 24 25 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi- judicial functions irrespective of the fact may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appellate or revisional authority agrees with the reasons contained in the order under challenge."
32. Similar view was earlier taken by the Hon'ble Supreme Court in Siemens Engg. & Mfg. Co. Ltd. v. Union of India AIR 1976 SC 1785. It is settled law that while making assessment on assessee, the ITO acts in a quasi-judicial capacity. An assessment order is amenable to appeal by the assessee and to revision by the Commissioner under Sections 263 and 264. Therefore, a reasoned order on a substantial issue is legally necessary. The judgments on which reliance was placed by the learned Counsel for the assessee also points to the same direction. They have held that orders, which are subversive of the administration of revenue, must be regarded as erroneous and prejudicial to the interests of the revenue. If the Assessing Officers are allowed to make assessments in an arbitrary manner, as has been done in the case before us, the administration of revenue is bound to suffer. If without discussing the nature of the transaction and materials on record, the Assessing Officer had made certain addition to the income of the assessee, the same would have been considered erroneous by any appellate authority as being violative of the principles of natural justice which require that the authority must indicate the reasons for an adverse order. We find no reason why the same view should not be taken when an order is against the interests of the revenue. As a matter of fact such orders are prejudicial to the interests of both the parties, because 25 26 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad even the assessee is deprived of the benefit of a positive finding in his favour, though he may have sufficiently established his case.
33. In view of the foregoing, it can safely be said that an order passed by the Assessing Officer becomes erroneous and prejudicial to the interests of the Revenue under Section 263 in the following cases:
(i) The order sought to be revised contains error of reasoning or of law or of fact on the face of it.
(ii) The order sought to be revised proceeds on incorrect assumption of facts or incorrect application of law. In the same category fall orders passed without applying the principles of natural justice or without application of mind.
(iii) The order passed by the Assessing Officer is a stereotype order which simply accepts what the assessee has stated in his return or where he fails to make the requisite enquiries or examine the genuineness of the claim which is called for in the circumstances of the case.
34. We shall now turn to the facts of the case to see whether the case before us is covered by the aforesaid principles. Perusal of the assessment order passed by the Assessing Officer does not show any application of mind on his part. He simply accepted the income declared by the assessee under the head 'long term capital gains' as it is, though the assessee company has been carrying on the business in shares. The Assessing Officer not bothered to examine the nature of business carried on by the assessee though it was mentioned in the tax audit report that the assessee is engaged in the business of 'investment/trading of shares and securities'. It was also on record that the Tribunal for the assessment year 2004-05 vide order dated 3.10.2008 in ITA No.477/H/2008 has held that the assessee was engaged in the business of investments and trading on shares and securities. This is a case where the Assessing Officer mechanically accepted what the assessee wanted him to accept without any application of mind or enquiry. The evidence available on record is not enough to hold that the claim made by the assessee was 26 27 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad objectively examined or considered by the Assessing Officer. It is because of such non-consideration of the issues on the part of the Assessing Officer that the claim by the assessee stood automatically accepted without any scrutiny. The assessment order placed before us is clearly erroneous as it was passed without proper examination or enquiry or verification or objective consideration of the claim made by the assessee. The Assessing Officer has completely omitted the issue in question from consideration and made the assessment in an arbitrary manner. His order is a completely non-speaking order. In our view, it was a fit case for the learned Commissioner to exercise his revisional jurisdiction under section 263 which he rightly exercised by cancelling the assessment order and directing the Assessing Officer to pass a fresh order considering the income declared by the assessee under the head 'long term capital gains' amounting to Rs.18,98,06,611/- and 'short term capital gains' at Rs.20,70,510/- together amounting to Rs.19,18,77,121/- as income under the head 'business'. In our view, the assessee should have no grievance in the action of learned Commissioner.
35. It was however contended by the learned Counsel that the Assessing Officer had taken a possible view in accepting the return of the assessee with reference to head of income and hence, the Commissioner was not justified in assuming the revisional jurisdiction under Section 263. We have given our thoughtful consideration to the aforesaid submissions. As already stated earlier, an order becomes erroneous because inquiries, which ought to have been made on the facts of the case, were not made and not because there is anything wrong with the order if all the facts stated or the claims made in the return are assumed to be correct. Thus, it is mere failure on the part of the Assessing Officer to make the necessary inquiries or to examine the claim made by the assessee in accordance with law, which renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing more is required to be established in such a case. One would not know as to what would have happened if the Assessing Officer had made the requisite inquiries 27 28 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad or examined the claim of the assessee in accordance with law. He could have accepted the assessee's claim. Equally, he could have also rejected the assessee's claim depending upon the results of his enquiry or examination into the claim of the assessee. Thus, the formation of any view by the Assessing Officer would necessarily depend upon the results of his inquiry and conscious, and not passive, examination into the claim of the assessee. If the Assessing Officer passes an order mechanically without making the requisite inquiries or examining the claim of the assessee in accordance with law, such an order will clearly be erroneous in law as it would not be based on objective consideration of the relevant materials. It is therefore, the mere failure on the part of the Assessing Officer in not making the inquiries or not examining the claim of the assessee in accordance with law that per se renders the resultant order erroneous and prejudicial to the interest of the revenue. Nothing else is required to be established in such a case to show that the order sought to be revised is erroneous and prejudicial to the interests of the revenue.
36. We are unable to accept the submission of the learned Counsel for two other reasons also. First reason is that the view so taken by the Assessing Officer without making the requisite inquiries or examining the claim of the assessee will per se be an erroneous view and hence will be amenable to revisional jurisdiction under Section 263. Second reason is that it is not taking of any view that will take the matter under the scope of Section 263. The view taken by the Assessing Officer should not be a mere view in vacuum but a judicial view. It is well established that the Assessing Officer being a quasi- judicial authority cannot take a view, either against or in favour of the assessee / revenue, without making proper inquiries and without proper examination of the claim made by the assessee in the light of the applicable law. As already stated earlier, we are not able to appreciate on what material was placed before the Assessing Officer at the assessment stage to take such a view. The assessee has also not been able to lead enough evidence to show to us that any inquiry was made by the Assessing Officer in this regard. Therefore mere 28 29 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad allegation that the Assessing Officer has taken a view in the matter will not put the matter beyond the purview of Section 263 unless the view so taken by the Assessing Officer is a judicial view consciously based upon proper inquiries and appreciation of all the relevant factual and legal aspects of the case. The judicial view taken by the Assessing Officer may perhaps place the matter outside the purview of Section 263 unless it is shown that the view so taken by the Assessing Officer contains some apparent error of reasoning or of law or of fact on the face of it.
37. The learned Counsel has strongly relied upon the following observations made in the case of Malabar Industrial Co. Ltd. (supra) and submitted that the learned Commissioner was not justified in substituting his view for that of the Assessing Officer:
"... Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income-tax Officer is unsustainable in law."
38. We have carefully gone through the aforesaid observations. "Adopting" one of the courses permissible in law necessarily requires the Assessing Officer to consciously analyse and evaluate the facts in the light of relevant law and bring them on record. It is only then that he can be said to have "adopted" or chosen one of the courses permissible in law. The Assessing Officer cannot be presumed or attributed to have "adopted" or chosen a course permissible in law when his order does not speak in that behalf. Similarly, "taking" one view where two or more views are possible also necessarily imports the requirement of analysing the facts in the light of applicable law. Therefore, proper examination of facts in the light of relevant law is a necessary concomitant in order to say that the Assessing Officer has adopted a permissible course of law or taken a 29 30 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad view where two or more views are possible. It is only after such proper examination and evaluation has been done by the Assessing Officer that he can come to a conclusion as to what are the permissible courses available in law or what are the possible views on the issue before him. In case he comes to the conclusion that more than one view is possible then he has necessarily to choose a view, which is most appropriate on the facts of the case. In order to apply the aforesaid observations to a given case, it must therefore first be shown that the Assessing Officer has "adopted" a permissible course of law or, where two views are possible, the Assessing Officer has "taken" one such possible view in the order sought to be revised under Section 263. This requires the Assessing Officer to take a conscious decision; else he would neither be able to "adopt" a course permissible in law nor "take" a view where two or more views are possible. In other words, it is the Assessing Officer who has to adopt a permissible course of law or take a view where two or more views are possible. It is difficult to comprehend as to how the Assessing Officer can be attributed to have "adopted" a permissible course of law or "taken" a view where two or more views are possible when the order passed by him does not speak in that behalf. We cannot assume, in order to provide legitimacy to the assessment order, that the Assessing Officer has adopted a permissible course of law or taken a possible view where his order does not say so. The submissions made by the learned Counsel, if accepted, would require us to form, substitute and read our view in the order of the Assessing Officer when the Assessing Officer himself has not taken a view. It could have been a different position if the Assessing Officer had "adopted" or "taken" a view after analysing the facts and deciding the matter in the light of the applicable law. However, in the case before us, the Assessing Officer has not at all examined as to whether only one view was possible or two or more views were possible and hence, the question of his adopting or choosing one view in preference to the other does not arise. The aforesaid observations of the Hon'ble Supreme Court do not, in our view, help the assessee; and rather they are against the assessee.
30 31 ITA No.748/H/2011 and SA No.50/Hyd/2011M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad
39. In the case of Padmasundara Rao v. State of Tamil Nadu (255 ITR 147), the Hon'ble Supreme Court has held that "... There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Harrington v. British Railways Board [1972] 2 WLR 537 (HL). Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases...." Therefore, the observations of the Hon'ble Supreme Court in Malabar Industrial Co. Ltd's case (supra) on which reliance has been placed by the learned Counsel cannot be read in isolation. The judgment deserves to be read in its entirety to cull out the law laid down by the Hon'ble Supreme Court. If so read, it is quite evident that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue. If the order sought to be revised under Section 263 suffers from any of the aforesaid vices, it cannot be said that the Assessing Officer has "adopted", in such an order, a course permissible in law or "taken" a view where two or more views are possible."
40. It was next contended by the learned Authorised Representative that the Assessing Officer had considered all the relevant aspects of the case carefully while passing the order. According to him, the mere fact that the assessment order passed by the Assessing Officer was short would neither mean failure on his part in not examining the matter carefully nor would render his order erroneous so long as the view taken by him was a possible view. In our view, the aforesaid submission of the assessee must fail for the reasons already explained in the foregoing paras of this order as the order, which is sought to be revised under Section 263 reflects no proper application of mind by the Assessing Officer and thus be amenable to revision under Section 263. In this case before us, the assessment order passed by the Assessing Officer lacks judicial strength to stand. It is not a case where the order is short but is not supported by judicial strength. It is in this view of the matter that we feel that the 31 32 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad learned Commissioner has correctly exercised his revisional jurisdiction under Section 263.
41. In our opinion, the Assessing Officer has been entrusted the role of an investigator, prosecutor as well as adjudicator under the scheme of the Income- tax Act. If he commits an error while discharging the aforesaid roles and consequently passes an erroneous order causing prejudice either to the assessee or to the State Exchequer or to both, the order so passed by him is liable to be corrected. As mentioned earlier, the assessee can have the prejudice caused to him corrected by filing an appeal; as also by filing a revision application under Section 264. But the State Exchequer has no right of appeal against the orders of the Assessing Officer. Section 263 has therefore been enacted to empower the Commissioner to correct an erroneous order- passed by the Assessing Officer which he considers to be prejudicial to the interest of the revenue. The Commissioner has also been empowered to invoke his revisional jurisdiction under Section 264 at the instance of the assessee also. The line of difference between Sections 263 and 264 is that while the former can be invoked to remove the prejudice caused to the State the later can be invoked to remove the prejudice caused to the assessee. The provisions of Section 263 would lose significance if they were to be interpreted in a manner that prevented the Commissioner from revising the erroneous order passed by the Assessing Officer, which was prejudicial to the interest of the revenue. In fact, such a course would be counter productive as it would have the effect of promoting arbitrariness in the decisions of the Assessing Officers and thus destroy the very fabric of sound tax discipline. If erroneous orders, which are prejudicial to the interest of the revenue, are allowed to stand, the consequences would be disastrous in that the honest tax payers would be required to pay more than others to compensate for the loss caused by such erroneous orders. For this reason also, we are of the view that the orders passed on an incorrect assumption of facts or incorrect application of law or without applying the principles of natural justice or without application of mind or 32 33 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad without making requisite inquiries will satisfy the requirement of the order being erroneous and prejudicial to the interest of the revenue within the meaning of Section 263.
42. Further the assessee's counsel taken a plea that consistency has to be followed. In our opinion, in the case of income tax matters each assessment year is an independent assessable distinct unit in which principles of res judicata are not applicable. The income of each assessment year and admissible expenses are determined in each year considering the facts and circumstances of the case prevailing during the year. As per the facts and circumstances of the case if there is a change in the facts and circumstances, a different view as per the changed facts and circumstances is required to be taken, In this case, on enquiry the CIT came to conclusion that the assessee is engaged in the business of buying and selling of shares and income arising out of these transactions has to be considered as income from business instead of considering the same as income from capital gain. Accordingly, we do not find any infirmity in the order of the CIT. The same is confirmed. .
43. Now we will turn to the merit of the case with regard to treatment of the income arising out of buying and selling of shares. For this purpose, we have to see the nature of the activity carried on by the assessee which is enumerated herein below Purchased Sold during during S.N. Name of the Scrip 2005-06 2005-06 (No. of (No. of times) times) 1 Andhra Sugars Ltd 26 29 2 Amara Raja Batteries 12 25 3 Blow Plast Ltd. 33 1 4 Coromandel Fertilizers 1 15 5 Kirloskar Cummins Ltd 3 13 6 Dabur India Ltd. 3 13 7 Gujarat NRE Coke 25 36 33 34 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad 8 Hindal Co. 28 13 9 Indian Hotels 1 12 10 ITC Ltd. 15 10 11 IPCL 12 9 12 Jain Irrigation 0 30 13 L&T Ltd. 3 16 14 LIC Housing 11 3 15 Matrix Labs 4 29 16 NALCO 26 13 17 Reliance Industries 33 12 18 SAIL 12 13 19 TELCO (Tata Motors) 9 31 20 TISCO (Tata Steel) 18 19 21 VIP Industries 14 1
44. Further, the assessee sold 2 lakhs unquoted shares of M/s Hindustan Cocoa cola Beverage Ltd. and received Rs.2,66,08,493/-. The assessee has invested in 6,95,000 share of 1$ each of its subsidiary company formed in USA Viz. Vijaya Finvest Inc. amounting to Rs.3,36,72,409/-. The assessee has also purchased and sold shares of Andhra Sugar Ltd. which are as follows:
PURCHASE OF SALE OF SHARES OF ANDHRA SUGARS LIMITED Andhra Opening Sugar EQ balance 163000 S.No Date No.of scrips No. of scrips purchased sold (Credit) (Debit) 1 1/9/2005 2000 2 2/9/05 413 3 29/9/05 1000 4 10/1/06 587 5 12/1/06 1000 6 12/1/06 2000 7 13/1/06 1000 8 16/1/06 1500 9 18/1/06 4000 10 20/1/06 1500 11 21/1/06 10123 12 24/1/06 2377 13 25/1/06 15500 14 31/1/06 1500 34 35 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad 15 31/1/06 1000 16 1/2/06 1000 17 2/2/06 18000 18 3/2/06 2000 19 3/2/06 2000 20 4/2/06 2000 21 7/2/06 10000 22 8/2/06 1000 23 18/2/06 5000 24 18/2/06 400 25 18/2/06 5444 26 18/2/06 1678 27 22/2/06 3210 28 22/2/06 3000 29 23/2/06 1000 30 1/3/06 20000 31 6/3/06 10000 32 8/3/06 20000 33 9/3/06 2000 34 9/3/06 110000 35 10/3/06 9900 36 10/3/06 1000 37 10/3/06 100 38 11/3/06 10000 39 13/3/06 12000 40 13/3/06 10000 41 16/3/06 5618 42 16/3/06 5000 43 17/3/06 10000 44 21/3/06 2000 45 21/3/06 5000 46 22/3/06 5382 47 22/3/06 2000 48 23/3/06 5000 49 23/3/06 6500 50 25/3/06 9000 51 28/3/06 13768 52 28/3/06 11000 53 31/3/06 350 TOTAL:149500 54 31/3/06 100 55 31/3/06 19550 Total: Balance 158000 158000 35 36 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad
45. A careful analysis of the statement shows that the assessee is buying and selling shares in the same year very frequently. For example on 31.1.2006 the assessee bought 15500 shares and sold 1500 shares on the same day. Similarly on 1.2.2006 the assessee bought 1000 shares and sold the same on the next day. The assessee bought 20000 shares on 3.2.2006 and sold 2000 shares on the same day, 2000 on the next day and 10,000 shares on the fifth day. Similarly there was sale of 20000 shares on 1.3.2006 and 20000 shares purchased on 8.3.2006. There was a sale of 13000 shares on 9.3.2006, the next day and purchase of 11000 shares the very next day. Such correlation of buying and selling day after day can be seen from the above table of huge number of shares of the same scrip. Similar pattern was found on analysis of purchase and sale of several other scrips which are not reproduced here for brevity.
46. A sample study of the shares purchased and sold in April, 2005 and February, 2006 was done as furnished by the assessee. The data shows that during April, 2005, the assessee purchased 64476 shares of 28 listed companies for Rs. 1,39,82,193 and in the same month sold 29910 shares for Rs. 33,80,617. Similarly during the month of February, 2006, the assessee purchased 56769 shares of 45 companies for Rs. 1,01,40,444 and sold during the same month 118806 shares for Rs. 3,14,16,760. This data shows that each month the assessee is buying and selling over 60,000 shares of over Rs. 3 crores. In order to see the trend of purchases and sales made on a single day the data of two dates was compiled as follows:
Details of purchase and sale of shares made on 27.03.2006 & 28.03.2006 Purchase of shares on 27.03.2006 Sale of shares on 27.03.2006 Name of the scrip Quantity Name of the scrip Quantity Andhra Sugars Ltd. 20300 Amara Raja Batteries 1464 Gujarat NRE Coke Ltd. 2000 Cummins India Ltd. 3500 KSB Pumps Ltd. 500 Hindustan Aluminium Co. 3000 Ltd.
L & T Ltd. 600 Indian Petro Chemicals 8000 36 37 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad ONGC 580 Reliance Industries Ltd. 750 Tata Steel Ltd. 1000 TELCO 10313 Total 23400 Total 28607 Purchase of shares on 28.03.2006 Sale of shares on 28.03.2006 Name of the scrip Quantity Name of the scrip Quantity Blow Plast India Ltd. 1500 Hindustan Aluminium Ltd. 3000 Cummins India Ltd. 11700 National Alluminium Co. 1500 GAIL 4500 Tata Steel 250 Gruh Finance Ltd. 1000 Gujarat NRE Coke 1000 GVK Power & Infra 900 Murudeeswara Ceramics 1000 Reliance Communications 500 Ltd. Reliance Industries Ltd. 750 Reliance Natural 5000 Resources Ltd. TELCO 10250 Varun Shipping Ltd. 1000 VIP Industries Ltd. 1000 Amara Raja Batteries 1000 VIP Industries Ltd. 240 KSB Pumps Ltd. 500 Matrix Labs Ltd. 1500 Total 43340 Total 4750
47. Further, the assessee-company has carried out substantial activity of purchase and sale of units of Mutual Funds. During the year, it has sold units of 121 Mutual Funds. The details of units sold during the year are as under:
Sl.
Details Amount (Rs.)
No.
(i) No. of Mutual Funds Traded in 121
(ii) No. of units sold 9704511
(iii) Net sale consideration received 21,21,98,996
(iv) Long term capital gains claimed 5,41,58,133
(v) Short term capital gains claimed 8,27,498
(vi) Short term gain in Debt Funds 3,81,297
37
38 ITA No.748/H/2011 and SA No.50/Hyd/2011
M/s. Spectra Shares & Scripts (P)Ltd.,
Hyderabad
48. The assessee-company had repeatedly purchased and sold Mutual Fund units of the same fund throughout the year. Few instances of repetitive purchase and sale of units are as under:
No. of MF units Date Particulars sold/purchased 26011 8.3.2006 Franklin India Prima Fund 9030 22116 10.3.2006 Franklin India Prima Fund 52734 35659 33814 10.3.2006 Tata Equities Opportunities Fund 97252 65221 19586 3.10.2003 Franklin India Prima Fund 20000 20000
49. It is noted that on 27.03.2006, the assessee purchased through one broker 23400 shares and sold 28607 shares. Similarly on 28.3.2006, it brought 43340 shares of 17 companies and sold 4750 shares of four companies. Per day more than 50 trade orders are executed on the stock exchanges covering purchases and sales. A study of the above data reveals that the assessee has been regularly buying and selling shares and mutual fund units though very high volume of transactions throughout the year. The fact that the assessee-
company is doing buying and selling of shares on day to day basis shows that it is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions. The assessee's earning dividend income is incidental to the trading activity as stocks held by it through rolling at any given point of time is so huge that on the record dates the assessee has been able to receive dividend income also. The activity of buying and selling shares in a systematic and regular manner with high frequency and volumes, repetitive purchases and sales of the same scrip as shown above shows trading in shares to earn profit.
38 39 ITA No.748/H/2011 and SA No.50/Hyd/2011M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad
50. Looking into the volume, frequency, continuity and regulatory of the transactions of purchase and sales in shares, it can be inferred that these transactions must have been entered into by the assessee with a profit motive. The assessee might have intention thereby to carry on business. It cannot be said that these transactions were entered into only for the purpose of investment and there was no motive of the assessee to earn profit. Though the word 'business' has not been defined in the taxing statute at it postulates the existence of certain elements in the activity of an assessee which would invest it with the character of business. According to well established interpretation of word 'business' as found in taxing statutes it is the sense of an occupation or profession which occupies the time, attention and labour of a person normally with the object of making profit. To record an activity as business there must be of course of dealing either actually continued or contemplated to be continued with a profit motive and not for support or plier.
51. In our opinion, whether or not a person carried on business in a particular commodity must depend upon volume, frequency, continuity and regularity of transactions of purchase and sale in a class of goods and the transaction must ordinarily be entered into with a profit motive. Such motive must pervade the whole series of transaction effected by the person in the course of his activity. To infer from a course of transactions that is intended thereby to carry on business ordinarily the characteristics of volume, frequency and regularity indicating an intention to continue the activity of carrying on the transaction must exist. Looking into the volume, frequency, continuity and regularity of transactions of purchase and sale in shares by the assessee, it cannot be said that the assessee entered into this activity not with a profit motive. Therefore, only inference which can be drawn is that the income earned by the assessee out of sale and purchase of these shares was an income under the head 'profit and gains of business or profession'. We see no justification in lengthy argument of the assessee's counsel that the profit arising to assessee on sale 39 40 ITA No.748/H/2011 and SA No.50/Hyd/2011 M/s. Spectra Shares & Scripts (P)Ltd., Hyderabad of shares acquired by it was assessable as income from 'capital gain'. In our considered opinion, after considering the cumulative effect of the facts and circumstances of the case, the CIT is justified in treating the profit arising out of sale of shares acquired by the assessee as income from business.
52. In view of the above, the appeal filed by the assessee is dismissed.
S.A.No.50/Hyd/2011 (in ITA No.748/Hyd/2011) A.Y. 2006-07:
53. Since the very appeal of the assessee giving rise to the present stay application has been disposed off in the foregoing paras of this order, Stay Application of the assessee has become infructuous. It is disposed off accordingly.
Order pronounced in the Court on 5th August, 2011.
Sd/- sd/-
(G.C. Gupta) (Chandra Poojari)
VICE PRESIDENT ACCOUNTANT MEMBER
Hyderabad, dated the _5th August, 2011
Copy forwarded to:
1. M/s. Spectra Shares & Scripts (P)Ltd., 104/105 Pancom Business Centre, Ameerpet, Hyderabad
2. Dy. Commissioner of Income-tax Circle 3(2), Hyderabad
3. Commissioner of Income-tax-III, Hyderabad.
4. The D.R., ITAT, Hyderabad.
B.V.S/Np 40