Delhi High Court
Commissioner Of Income Tax vs Pnb Finance & Industries Ltd. on 18 October, 2010
Author: Dipak Misra
Bench: Chief Justice, Manmohan
* THE HIGH COURT OF DELHI AT NEW DELHI
Judgment Reserved on: 8th September, 2010
% Judgment Pronounced on: 18th October, 2010
+ ITA No.306/2010
COMMISSIONER OF INCOME TAX ..... Appellant
Through: Ms. Sonia Mathur, Adv.
versus
PNB FINANCE & INDUSTRIES LTD. ..... Respondent
Through: Ms. Kavita Jha and Ms. Akanksha
Aggarwal, Advs.
CORAM:
HON'BLE THE CHIEF JUSTICE
HON'BLE MR. JUSTICE MANMOHAN
1. Whether reporters of the local papers be allowed to see the judgment? Yes
2. To be referred to the Reporter or not? Yes
3. Whether the judgment should be reported in the Digest? Yes
DIPAK MISRA, CJ
In this appeal preferred under Section 260A of the Income Tax Act,
1961 (for brevity „the Act‟), the revenue, calling in question the legal
substantiality of the order dated 17th December, 2008 in ITA
No.3640/Del/2007 pertaining to the assessment year 2003-04 passed by the
Income Tax Appellate Tribunal, Delhi Bench „F‟ (for short `the tribunal‟),
has sought to raise the following substantial questions of law:-
(a) Whether on the facts of the present case, the ITAT was
justified in law in holding that the income earned by the
assessee from sale of shares and securities was liable to be
assessed as income from business as against long term
capital gain declared by the assessee?
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(b) Whether if answer to the above question is in favour of
Revenue, whether the Tribunal was justified in deleting the
addition of Rs.2,65,77,430/- made by the Assessing Officer
by disallowing set off of income against long term capital
loss of earlier year?
(c) Whether in the context of facts of the present case, the
Tribunal has correctly interpreted the principle of law laid
down by the Hon‟ble Apex Court in the judgments relied
upon?
(d) Whether the order passed by the ITAT is vitiated by
perversity on account of non-application of mind to the
specific observations made by the Assessing Authority?
2. The basic facts which are requisite to be stated for adjudication of this
appeal are that the assessee-respondent is a company engaged in the business
of sale and purchase of shares. It filed its return declaring an income of
Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/-
and long term capital gain at NIL after set-off of long term capital loss of
previous years amounting to Rs.2,08,24,174/-. The return was processed
under Section 143(1) of the Act. Thereafter, the case was selected for
scrutiny and a notice under Section 143(2) of the Act was issued. In the
course of assessment proceedings, the assessing officer observed that in
computation of the income filed, the assessee had shown long term capital
gain at Rs.2,08,24,174/-which had been set off against the long term capital
loss of the assessment year 1995-96 amounting to Rs.2,02,45,035/- and of
the assessment year 1996-97 at Rs.5,79,139/-. On a query being raised by
the assessing officer as to why sale of investment be not treated as business
or trading receipts as the assessee is an investment company having main
ITA No. 306/2010 Page 2 of 14
business of purchase and sale of shares, it was submitted by the assessee that
it was registered as an investment and finance company having its main
activity of investing its funds in long term securities like shares, debt and
equity mutual funds, etc for generating dividend, interest and profit and loss
on sale of investments and all the investments of the company are of long
term nature and had not been held as stock-in-trade since the financial year
1999-2000 in which year all the investments held as stock-in-trade were
transferred to the investment portfolio. It was contended on behalf of the
assessee that the said practice of taking all its securities under the investment
head had since then been followed and the revenue had never raised any
query on that score. The assessing officer perused the clarification given by
the assessee, referred to the Memorandum of Association and the decisions
rendered in CIT V. Sutlej Cotton Mills Supply Agency Ltd, (1975) 100 ITR
706 (SC), Raja Bahadur Visheshwar Singh v. CIT, (1961) 41 ITR 685
(SC), Dalhousie Investment Trust Co. Ltd. v. CIT, (1968) 68 ITR 486 (SC),
Fidelity Advisor Series VIII, 271 ITR 1 and came to hold as follows:-
"In view of the above the income from the transactions of sale
and purchase of shares was business income of the assessee
company and were in fact purchased not for investment
purposes but for the purpose of sale at a profit are liable to be
taxed under the head business income and not under the head
capital gain as declared by the assessee company."
On the basis of aforesaid reasoning, the assessing officer assessed the
tax at Rs.3,25,82,805/- and initiated penalty proceedings under Section
271(1)(c)and directed charge of interest under Section 234B/234D
accordingly.
ITA No. 306/2010 Page 3 of 14
3. Being dissatisfied with the aforesaid order, the assessee preferred an
appeal before the CIT(A). It was contended before the first appellate
authority that the assessee company was incorporated on 19 th May, 1894
under the Companies Act and the „Objects Clause‟ of the Memorandum of
Association has a large number of objects and not one of these objects could
be said to be the principal object of the company. It was put forth that the
company was not trading in shares in the year under consideration but, in
fact, the company discontinued purchase and sale of shares in the said
instruments many years ago and after 31st March, 1996, there had been no
purchase of shares as stock-in-trade of the company. The company invested
in the Times Bank Ltd., as a long term investment, a sum of Rs.100.35 lakhs
in the year 1996 and Rs.201.15 lakhs in the year 1997 and, therefore, the
said investment in the Times Bank Ltd are long term investments as per the
resolution of the Board. On 5th May, 2000, the Times Bank Ltd got merged
with HDFC Bank and in lieu of 30 lakhs equality shares of Times Bank Ltd
held by the company, it received 5,21,739 converted equity shares of HDFC
bank after the merger. The company adopted a policy of liquidating its
equity investments and buying debt mutual funds and the said action of the
company would clearly reflect that the company is not a trader in equity
shares and it is doing no business of buying and selling of shares. It was set
forth that after 1st April, 1997, no purchase of any equity shares had taken
place except the management shares of the group companies. The shares
were purchased on 27th January, 1996 and had been held for a period of
ITA No. 306/2010 Page 4 of 14
more than 7 years and, therefore, it is to be treated as long term capital gain
under Section 2(42A) of the Act.
4. It is worth noting that various facts that were highlighted before the
first appellate authority to establish that the investment was long term capital
asset are : that the company had purchased Times Bank shares which were
later converted into HDFC shares on amalgamation as long term investment
vide resolution passed by the company; that the assessee-company from the
year of purchase, i.e., the financial year 1995-96 -assessment year 1996-97
had classified the investment under the head „investments-long term‟ and the
classification as per the audited balance sheet and books of accounts would
go a long way to show that it is a long term investment; that the company in
the year under consideration had sold 89,996 shares and had a balance of
4,31,743 shares as balance shares and the company continued to hold the
said shares as on date and earned dividends on the same; that the company
had earned handsome dividends from the investment in HDFC Bank and the
same have been declared and assessed by the assessing officer even during
the year under consideration; that the company had not borrowed any
amount and the investments were made in the year 1996 and hence, it is not
a business where large amounts of monies are borrowed for investment in
stock-in-trade and sale thereof; that as per the balance sheet, no purchase of
equity shares had taken place in the year under consideration and all
holdings remain the same except for the sale of 89,996 shares; that there has
been no activity of purchase and sale of shares for the purpose of profit
whatsoever and whenever shares have been purchased in group companies,
ITA No. 306/2010 Page 5 of 14
the same was for the purpose of long term investment and hence, the entire
profit is capital gain on sale of long term investment and that in the year
under consideration, the ratio of long term investment in shares to
debentures, bonds, mutual funds and similar other debt instruments is
27.27%, i.e., the majority of the investment is in instruments other than
equity instruments and the same would show that the assessee is not a dealer
in shares; that the accounts of the company had not been rejected in the
assessment year and there is no material to show that the assessee at any
point of time indulged in trading of these shares and stocks in the year under
consideration; that the order passed by the assessing officer is vulnerable
inasmuch as he, at one place, opined that the Memorandum of Association is
not the sale indicator while, on the other hand, relied on the same for the
purpose of adjudication; that the Memorandum of Association has not been
appositely appreciated which has made the order of the assessing officer
indefensible; that incorporation of clause relating to investment in shares in
the Memorandum of Association does not clothe the company with the
characteristics of dealer in shares unless other circumstances like activities
of the company are proved; that whether the assessee had invested in a long
term investment or was dealing with shares would always depend upon
facts; that on similar transactions of sale and long term investment in
previous years, the assessing officer had himself accepted the same to be in
the nature of long term assets giving rise to long term loss or profit; and,
therefore, acceptance of the classification year after year is a strong factor in
ITA No. 306/2010 Page 6 of 14
favour of the assessee though the doctrine of res judicata may not strictly
apply.
5. The first appellate authority, on consideration of the submissions
raised by the assessee, came to hold that the assessee company was not
engaged in the trading of shares in the year under consideration as the said
activity was discontinued several years ago as is evident from the fact that
after 31st March, 1996, the assessee had not engaged in the purchase of
shares; that the said submission gets supported from the fact that the
assessee-company invested in the Times Bank Ltd (now HDFC Bank) a sum
of Rs.100.35 lakhs as a long term investment in the year 1996 and further
sum of Rs.201.15 lakhs in the year 1997; that there is no dispute that the
assessee is not a trader in equity shares and no business of buying and
selling of shares had been carried on after 1 st April, 1997; that apart from the
shares of HDFC Bank, all others are debt mutual funds which have been
sold by the assessee during the year; that the assessee is not a dealer in the
debt mutual funds and, therefore, the same is to be treated as short term
capital gain to be assessed under the head „Capital Gains‟ as far as the said
aspect is concerned; that as regard the sale of shares of HDFC Bank, the said
shares were purchased on 27th January, 1996 and had been held for a period
of more than 7 years before being sold during the year under consideration
and the Board resolution clearly shows that the shares when purchased were
treated as the company‟s investment and they have been classified under the
head „Investment-Long Term‟ in the audited balance sheets from the year of
purchase upto the year under consideration and, therefore, the sale of shares
ITA No. 306/2010 Page 7 of 14
of HDFC Bank during the year cannot be treated as business activity of
trading in shares, since such a decision should be based on the consideration
of facts as a whole and not merely one clause which finds mention in the
Memorandum of Association; that the entire gamut of facts reveal that the
assessee company did not engage in any purchase and sale of shares and,
therefore, the very intention of investment in these shares was for long term
investment purposes.
6. Being of the aforesaid view, the CIT(A) came to hold that the profit
arising on the sale of shares has to be treated as long term capital gains and,
accordingly, the addition of Rs.2,65,77,430/- was deleted and the assessing
officer was directed to recompute the total income of the assessee company
by treating the profit on sale of shares as long term capital gains.
7. Being grieved by the aforesaid order, the revenue preferred an appeal
before the tribunal. There were two appeals being ITA No.3640/Del/2007
and ITA 2872. The ITA 3640 dealt with the assessment year 2003-04 where
the question arose whether the first appellate authority had acted
appropriately in deleting the addition of Rs.2,65,77,430/- made by the
assessing officer on account of treatment of capital gains on sale of shares as
profits and gains of business. The tribunal, after referring to the submissions
of the parties, came to hold as follows:-
"We find that the Assessing Officer in the present case has
assessed the income in question as income from business on the
basis of the object clause of Memorandum of Association of the
assessee company as per which the assessee can deal in shares.
The Assessing Officer has placed reliance on various judgments
but as per para No.3 and 3.2 of his order, Ld CIT(A) has noted
that all these judgments are distinguishable. Ld DR of the
ITA No. 306/2010 Page 8 of 14
revenue could not point out any defect in this finding of Ld
CIT(A). In para No.3 and 3.1, a clear finding is given by Ld
CIT(A) that the shares in question were sold by the assessee in
the present year being shares of HDFC Bank were purchased by
the assessee on 27.1.1996 and have been held for a period of
more than seven years before being sold during the year under
consideration. In para No.3.3 of his order, it is also noted by Ld
CIT(A) that the assessee has no business of buying and selling
of shares after 1.4.1997. It is also noted by Ld CIT(A) in para
No.3.3 of his order that apart from the shares of HDFC Bank,
all others are debt mutual funds which have been sold by the
assessee during the year and on the basis of these facts, a clear
finding is given by Ld CIT(A) that the assessee is not a dealer
in the debt mutual fund and therefore income arising on sale of
these investments are to be assessed as short term capital gain
and income arising on sale of shares of HDFC bank is
assessable under the head long term capital gains. While
deciding this issue, Ld CIT(A) has followed the judgment of
Hon‟ble Apex Court rendered in the case of Madan Gopal
Radhey Lal (supra) and in the case of Schedule Investment Co.
Ltd. (supra). Considering all these facts of the present case, we
find no reason to interfere in the order of Ld CIT(A) because
neither the Assessing Officer nor the Ld DR of the revenue,
could bring anything on record to show that the assessee was
engaged in the business of purchase and sale of shares on
regular basis and hence merely because as per the object clause
of the Memorandum of Association, the assessee can deal in
shares, it cannot be held that any transaction by the assessee for
purchase of shares or for sale of shares, purchased in earlier
years is a business transaction."
8. We have heard Ms. Sonia Mathur, learned counsel for the appellant,
and Ms. Kavita Jha and Ms.Akaknsha Aggarwal, learned counsel for the
respondent.
9. The question that emerges for consideration is whether in the
obtaining factual matrix, it should be construed that the assessee was a
dealer in shares or regard being had to the nature of investment, it is to be
construed that the said security constitutes an investment for the purpose of
gaining the status of long term capital gain. In this context, we may refer to
ITA No. 306/2010 Page 9 of 14
a passage from the decision in Commissioner of Income Tax, U.P v. Madan
Gopal Radhey Lal, [1969] 73 ITR 652 (SC) :
"A trader may acquire a commodity in which he is dealing for
his own purposes, and hold it apart from the stock-in-trade of
his business. There is no presumption that every acquisition by
a dealer in a particular commodity is acquisition for the purpose
of his business; in each case the question is one of intention to
be gathered from the evidence of conduct and dealings by the
acquirer with the commodity."
[Emphasis supplied]
10. In this regard, it is profitable to refer to the decision in Vijaya Bank
Ltd. v. Additional Commissioner of Income-tax, Bangalore, AIR 1991 SC
239 wherein the Apex Court was dealing with the fact situation where the
assessee, a banking company, had received certain amounts on securities
purchased from another banking company as well as in the open market.
The two amounts were brought to tax by the assessing officer despite the
assertion of the assessee that the same were deductible. The order of the
assessing officer was confirmed by the first appellate authority but the
tribunal held that the interest earned from the securities was deductible under
Sections 19, 20 and 37 of the Act. The High Court, on a reference, observed
that the amount expended by the assessee for the purchase of securities were
in the nature of capital outlay and they could not be set off as expenditure
against income accruing on the securities. In that context, their Lordships
have held thus: -
"In the instant case, the assessee purchased securities. It is
contended that the price paid for the securities was determined
with reference to their actual value as well as the interest which
had accrued on them till the date of purchase. But the fact is,
whatever was the consideration which prompted the assessee to
ITA No. 306/2010 Page 10 of 14
purchase the securities, the price paid for them was in the nature
of a capital outlay, and no part of it can be set off as
expenditure against income accruing on those securities.
Subsequently when these securities yielded income by way of
interest, such income was attracted by Section 18.
Claim for deduction can be sustained only when the assessee is
in a position to show that any reasonable expenditure had been
incurred for the purpose of realising the interest on securities.
The amounts claimed by the assessee for deduction are not
shown to have been expended for the purpose of realising the
interest, and are therefore not allowable as deductible
expenditure."
[Emphasis added]
11. In Commissioner of Income Tax v. N.S.S. Investments (P) Ltd.,
[2005] 277 ITR 149 (Madras), the question that was referred to was whether
on the facts and in the circumstances of the case, the appellate tribunal is
right in law in holding that the profit on sale of shares is to be treated as
capital gains instead of business income. The Bench referred to paragraph
15 of the order of the tribunal and expressed the view as follows: -
"The finding of fact recorded in para 15 of the order of the
Tribunal is that the shares in question were never treated by the
assessee as stock-in-trade and they were held for earning
dividend only. A company can hold some shares as stock-in-
trade for the purpose of doing business of buying and sale of
such shares, while at the same time it can also hold some other
shares as its capital for the purpose of earning dividend income.
Here the shares in question were held as the assessee's capital
and not as stock-in-trade. Hence, there would be capital gain
and not business income. Hence, we answer the question
referred in the affirmative i.e., in favour of the assessee and
against the Department."
12. In Commissioner of Income Tax v. Gulmohar Finance Ltd., [2008]
170 Taxman 483 (Delhi), this Court was dealing with the issue whether the
shares held as an investment of the assessee and profit earned by the
ITA No. 306/2010 Page 11 of 14
assessee on the sale of the shares should be treated as capital gains or as a
business income. In that context, the Bench has held thus: -
"It was noted by the Tribunal that in earlier assessment years,
the assessee had shown the shares held in BT Tech Net Ltd. as
investment right from the date of purchase and this was shown
as such in the balance sheet of the assessee, which was filed
along with the return of income. No objection was taken to this
position in the earlier years. However, the Commissioner has
now decided that it was not an investment without there being
any change in facts and therefore, the Tribunal held that there
was no occasion for the Commissioner to take a contrary view
than what was disclosed and accepted on earlier occasions.
Even on merits, the Tribunal came to the conclusion that the
shares held by the assessee in BT Tech Net Ltd were an
investment and therefore, any profit earned on the sale thereof
is required to be treated as capital gains. Whether the shares
were held by the assessee as an investment or stock-in-trade is a
matter of fact and we do not find any perversity in the view
taken by the Tribunal that the shares were held as an
investment."
13. At this juncture, we may refer with profit to the Circular issued by the
Central Board of Direct Taxes (CBDT) on 15th June, 2007. In the said
circular, the CBDT dealt with the shares held as stock-in-trade and
investments and what should be the test for such a distinction. The Board
referred to the decisions in Commissioner of Income-tax (Central, Calcutta
v. Associated Industrial Development Co. (P) Ltd., [1971] 82 ITR 586 (SC)
and Commissioner of Income-tax, Bombay v. H. Holck Larsen, [1986] 160
ITR 67 (SC), the Authority for Advance Rulings (AAR) (288 ITR 641) and
after reproducing certain passages therefrom, gave the following guidelines:
"10. CBDT also wishes to emphasise that it is possible for a
taxpayer to have two portfolios, i.e., an investment portfolio
comprising of securities which are to be treated as capital assets and a
trading portfolio comprising of stock-in-trade which are to be treated
as trading assets. Where an assessee has two portfolios, the assessee
ITA No. 306/2010 Page 12 of 14
may have income under both heads, i.e., capital gains as well as
business income.
11. Assessing Officers are advised that the above principles should
guide them in determining whether, in a given case, the shares are
held by the assessee as investment (and therefore giving rise to capital
gains) or as stock-in-trade (and therefore giving rise to business
profits). The Assessing Officers are further advised that no single
principle would be decisive and the total effect of all the principles
should be considered to determine whether, in a given case, the shares
are held by the assessee as investment or stock-in-trade."
14. The present factual scenario is to be tested on the anvil of the above
principles. In the case at hand, the assessee had purchased the shares on 27 th
January, 1996 and the same were held for a span of 7 years and were sold
during the year under consideration. The assessee had not involved himself
in the business of buying and selling shares after 1st April, 1997. The
assessee had not engaged himself as a dealer in debt mutual funds. Nothing
has been brought on record to show that the assessee was engaged in the
selling of shares. The object incorporated in the Memorandum of
Association only refers to the fact that the assessee can deal with shares but,
there was no regular activity on that score. The nature of activity, intention
and conduct has significance. They play a pivotal role in the entire gamut of
transaction. As per the circular issued by the CBDT, a tax payer can have
two portfolios, that is, an investment portfolio comprising of securities
which are to be treated as capital assets and a trading portfolio comprising of
stock-in-trade which are to be treated as trading assets. The assessee is
entitled to have income from both heads, namely, capital gains as well as
business income. On a proper scanning of the facts that have been brought
ITA No. 306/2010 Page 13 of 14
on record, there can be no iota of doubt that the shares that was made by the
assessee as an investment gave rise to capital gains. Therefore, the concept
of business income does not arise and hence, we are inclined to think that the
findings recorded by the first appellate authority as well as by the tribunal
stand on terra firma.
15. In view of our preceding analysis, we do not perceive any merit in this
appeal and, accordingly, the same stands dismissed without any order as to
costs.
CHIEF JUSTICE
MANMOHAN, J.
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