Income Tax Appellate Tribunal - Hyderabad
Spectra Shares & Scrips Pvt. Ltd, ... vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
AND SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER
ITA No.293/Hyd/2012 : Assessment year 2006-07
M/s. Spectra Shares & Scrips P. V/s Asst. Commissioner of Income-tax
Ltd., Hyderabad Circle 3(2), Hyderabad
( PAN - AADCS 4013 R )
(Appellant) (Respondent)
Appellant by : Shri Vijay Mehta
Respondent by : Shri Dr M.S.Rao CIT DR
Date of Hearing 30.5.2012
Date of Pronouncement 27.7.2012
ORDER
Per D.Karunakara Rao, Accountant Member:
This is an appeal by the assessee against the order of the CIT(A) IV, Hyderabad dated 15.2.2012 for the assessment year 2006-07.
2. Effective grounds of the assessee in this appeal read as follows-
"1. The learned Commissioner of Income-tax(Appeals) IV Hyderabad (CIT(A)) has erred on facts and in law.
2. The learned CIT(A) is not justified in not applying the provisions of Sec.45(2) of the Income Tax Act on the ground that the previous assessment i.e. the assessment for A.Y. 2005-06 is reopened and therefore the conversion of investments into stock in trade did not take place in the accounting year under appeal.
3. The learned CIT(A) failed to note that the assessment for the A.Y. 2005-06 has not only been not revised but the assessee has not even received the notice of reopening of the assessment of that year. The assessment of that year, if reopened and revised, may not be sustainable in law. The learned Commissioner of Income-tax(Appeals) has failed to appreciate that the issue of application of Section 45(2) has to be decided on the facts obtaining for the A.Y. under appeal and not on hypothetical facts relating to the preceding assessment .2 ITA No.293/Hyd/2012
M/s. Spectra Shares & Scrips P. Ltd., Hyderabad
4. The learned CIT(A) has also erred in holding that the sale of units constituted trading turnover by not appreciating the fact that the units are not a marketable commodity and that the turnover of units constitute turnover of investments."
3. Briefly stated, relevant facts of the case are that the assessee filed the return of income for AY 2006-07 on 25.10.2006 declaring a loss of Rs 48,35,701, which was assessed under S.143(3) vide order dated 15.12.2008 determining its total income at Rs.21,32,002. Subsequently, the CIT issued a show cause notice proposing to review the said order of the AO holding the same as 'erroneous and prejudicial to the interests of the Revenue', and ultimately passed his review order u/s 263 dated 31.3.2011. On appeal to the Tribunal for adjudication on the validity of the proceedings u/s 263 and also on the merits of the said order of CIT, Tribunal held that the assessee's activity of purchases and sale of shares constitute business activity and not as capital gains as claimed by the assessee in the return of income. In fact, the assessee disclosed the capital gains income and claimed exemption in respect of the same under S.10 of the Act.
4. Thus, the ITAT disposed off the appeal of the assessee against the aforesaid order of the CIT u/s 263 of the Act vide its order dated 5th August, 2011, in ITA No.748/Hyd/2011, adjudicating against the assessee both on legal issues as well on merits, thereby confirming the findings of the CIT. A Miscellaneous Application filed by the assessee with a request to recall the above order of the Tribunal was also dismissed by the Tribunal vide its order dated 16th March, 2012 in MA No.193/Hyd/2011. Further, it has been brought to our notice that as of now, the Hon'ble High Court of Andhra Pradesh is seized of the matter on legal and merits of the addition.
5. Consequent to the review order of the CIT u/s 263 of the Act, AO started the fresh assessment proceedings in pursuance of the 3 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad direction of the CIT and passed the impugned order dated 23.8.2011 under S.143(3) read with S.263 of the Act In these proceedings, the assessing officer withdrew the exemption claimed under section 10 of the Act in respect of long term capital gains - LTCG of Rs.18,98,06,611/- and however, the assessee continued to claim the status of short term capital gains Rs.20,70,510/-. However, the AO/CIT/ITAT held the same as 'business income' of the assessee. In effect, the assessed income determined under S.143(3) originally at Rs.21,32,002 vide order of assessment was revised and the total income of the assessee was now determined at Rs.19,19,38,613 vide order dated 23.8.2011 which is passed under S.143(3) read with S.263 of the Act. While making the fresh assessment, effectively, the revenue thrust the event of conversion of the capital asset in the stock in trade of the business and however, the AO did not grant the benefits of section 45(2) of the Act to the assessee. Finally, the tax payable thereon was determined at Rs.10,65,88,026/-. Factually, the AO had the benefit of the said order of the ITAT dated 5th August, 2011, which upheld the views of the revenue on the impugned issue.
6. Aggrieved with the said fresh assessment order of the AO, the assessee filed appeal before the CIT(A) raising the issue relating to correctness of the AO's finding on the change of head of income and taxing the same as 'business income'. Without prejudice, assessee also raised the issue of applicability of the provisions of S.45(2) of the Act, when the AO thrust the conversion of shares into stock in trade.
7. Insofar as the issue relating to the head of income is concerned, the CIT(A) essentially followed the order of the ITAT and upheld the views of the AO held in the assessment order passed under S.143(3) read with S.253 of the Act. In the process, the CIT(A) extracted the relevant conclusions of Commissioner of Income-tax III, Hyderabad, 4 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad from the revision order and also the conclusions arrived at by the Tribunal in its order in the appeal. Further, the CIT(A) discussed various decisions and facts of the present case before concluding that the claims made by the assessee with reference to the long term capital gains and short term capital gains cannot be accepted.
8. As for the other issue raised for the first time before the CIT(A) vide grounds in Form 35, without prejudice on the applicability of the provisions of S.45(2) of the Act, considering the principle of natural justice, the CIT(A) remanded the issue to the file of the AO. After considering the remand report dated 3.2.2012 of the assessing officer, the CIT(A) gave a specific finding that in principle, the provisions of S.45(2) of the Act are applicable to the facts of the present case. However, he denied the benefits of sub-section (2) of S.45, mentioning that assessing officer has failed to provide trading account of shares and units sold during the financial year relevant to assessment year 2005-06. At the end, the CIT(A) dismissed the related ground of the assessee.
9. Aggrieved by the above order of the CIT(A), assessee filed the present appeal before us. Sri Vijay Mehta, Ld Counsel represented the assessee and Shri Dr M.S.Rao CIT DR represented the Revenue.
10. Learned counsel for the assessee mentioned that ground No.4 deals with the decision of the revenue in charging the impugned gains under the head 'business income' against the assessee's claim of 'capital gains' as claimed in the return. Assessee is of the view that the turnover of the assessee should not be treated as a trading turnover, as the shares/units sold are investments, as evident from the entries in the books of account of the assessee. In this regard, learned counsel reiterated various elaborate arguments undertaken by him before the 5 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad various income-tax authorities below and also before the Hon'ble Tribunal during the appeal proceedings in connection with the review order of the CIT. But the fact is that the said arguments were rejected by the said authorities for the reasons mentioned in their respective orders, viz. of the ITAT, CIT, CIT(A) and the AO in various proceedings. Referring to the fact that the matter ie whether the impugned earning in question are capital gains or business income, is now pending with the Hon'ble High Court of Andhra Pradesh, Ld counsel simply relied on the said arguments and mentioned that he has nothing more to add, except to wait for the final verdict of the Hon'ble High Court. However, he fairly submitted that the Hon'ble ITAT will have to follow coordinate bench decision of the Tribunal in treating the earnings as 'business income' for the sake of judicial discipline.
11. Per contra, on the impugned issue of chargeability of the impugned gains under the business head of income, Ld DR for the Revenue heavily relied on the order of the Tribunal dated 5.8.2011 in ITA No.748/Hyd/2011 and dated 16th March, 2012 in MA No 193/Hyd/11 arising there from. In summary, Dr Rao argued submitted that the said orders of the tribunal have to be followed and said earnings on sale of impugned shares have to be assessed under the head of income "profits and gains from business or profession".
12. We heard the parties on both the contentious issues detailed in the preceding paragraphs i.e. (i) correctness of the claim of the earnings on sale of shares/units under head of income of 'capital gains' and (ii) issue raised without prejudice ie on the applicability of the provisions of section 45(2) of the Act, when the AO thrust the conversion of shares from investment into the stock in trade despite the protest by the assessee. In so far as the first issue is concerned, as mentioned by the parties before us, the ITAT had already upheld the views of the 6 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad Revenue and confirmed the views of the CIT given in the review order u/s 263 of the Act. The coordinate Bench of this Tribunal vide order dated 5.8.2011 in ITA No.748/Hyd/2011 on the issue has to be followed and therefore, the impugned gains earned by the assessee has to be assessable as business income of the assessee and not under the head 'capital gains' as originally claimed by the assessee. The Tribunal, while interpreting the meaning of the term 'erroneous' referred to various dictionaries and authorities, and observed in para 29 of its order dated 5.8.2011 as follows-
"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 to affect the merits of the case and thereby cause prejudice to the interest of the revenue."
13. Examining the scope of the powers that may be exercised by the Commissioner in terms of S.263 of the Act, the Tribunal observed further as follows-
"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..............
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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 7 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad 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 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 8 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad 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 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 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."
In the light of the foregoing discussion and further reasons and further reasons discussed in paras 37 to 49 of its order dated 5.8.2011, the 9 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad Tribunal upheld the order of the Commissioner of Income-tax passed under S.263 of the Act, with the following concluding observations-
"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 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."
14. Considering the binding nature of the decision of the coordinate Bench, we find no infirmity in the order of the CIT(A) on this issue. Even though an appeal is claimed to have been preferred by the 10 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad assessee against the said decision of the coordinate Bench of this Tribunal, no order of the Hon'ble High Court, either interim or final, affecting the enforceability of the said order of the Tribunal has been brought to our notice. In this view of the matter, respectfully following the said order of the coordinate Bench of the Tribunal in assessee's own case for the assessment year 2006-07 itself, we uphold the order of the CIT(A) on this issue and accordingly, we dismiss ground No.4 of the assessee.
15. Grounds No.2 and 3 relate to the issue of applicability of provisions of section 45(2) of the Income-tax Act, 1961. Requisite basic facts relevant to this issue were already provided in the preceding paragraphs of this order. In short, the case of the assessee is that the transactions of purchase and sale of share affected in the year under consideration are investment transactions and therefore the earnings are assessable under the head 'capital gains'. Per contra, AO held them as 'business income' and denied the concessional tax rate benefits of the provisions of section 113A of the Act. This view of the revenue was approved by the Tribunal vide the order citied above. Some of the shares which were sold in this year under consideration were the brought forwarded ones from the preceding years, where the revenue did not disturb the 'investment status' of those shares given in the books. In effect, this is the case of 'conversion of shares held as investment into the stock in trade' within the meaning of section 45(2) of the Act.
16. It is in this backdrop of the facts, assessee for the first time raised an alternative issue raised in ground 2 and 3 of the ground extracted above before the first appellate authority ie CIT(A). It is the argument of the assessee that, when such conversion is trust on the assessee despite the protest, the AO ought to have applied the provisions of section 45(2) of the Act and computed the taxable profits. In principle, 11 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad the CIT(A) upheld the applicability of the provisions of section 45(2) of the Act and however, he rejected the alternative claim of the assessee mentioning that the assessment for the preceding year, viz. assessment year 2005-06 is reopened and therefore, conversion of investment into stock in trade did not take place in the accounting year for the year under appeal, viz. 2006-07. In the impugned order, the CIT(A) it was observed that when the investments are converted into stock in trade, the assessment on sale of the of the said stock has to be made making computation in two steps-
(1) Market value as on the date of conversion i.e. 1.4.2005 in the instant case has to be ascertained in respect of the stock sold during the year and the difference between the market value of the said shares and the cost of acquisition should be assessed under the head 'capital gains';
(2) To find out the business income on the sale of the shares/redemption of units. The difference between sale price of the stock and the market price as on 1.4.2005 arrived at and subject the same to the provisions applicable to the income from the head 'profits and gains form business or profession'.
17. It is evident from the orders of the revenue that during the proceedings before them, the AO asked the assessee to file the relevant computation and the assessee filed the details without prejudice to its original claim. In the remand proceedings, the assessing officer strongly objected to the applicability of the provisions of S.45(2) and to the alternative claim of the assessee, by holding that the assessee never actually converted the shares/units into the stock in trade and never treated such stock in the books of account as stock in trade by preparing a trading account, with opening balance, closing stock, etc. In response, the assessee submitted its helplessness and relied on the consistent method of accounting followed by it in the matters of valuation of the stock, bases of valuation, etc. and prayed for no disturbance in the method of accounting followed by it. Considering the above arguments of 12 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad the assessee, the CIT(A) upheld in principle the applicability of the provisions of S.45(2) of the Act. However, he finally denied the assessee's alternative claim in that behalf, for the reasons discussed in para 11.3 and 11.4 of the impugned order, which reads as follows-
"11.3 As regards aground No.3, relating to the application of provisions of sec.45(2) of the Act, it cannot be denied that once the investments are converted into stock in trade, the said section comes into play. Accordingly, upon conversion of investment into stock in trade, firstly the market value as on the date of a conversion has to be ascertained in respect of the shares/units sold during the year and the difference between such market value and their cost of acquisition has to be assessed under the head 'capital gains'. Thereafter, in the second leg, income from sale of shares or redemption of units has to be found out by arriving at the difference between the sale price and the market price as on the date of aforesaid conversion. Accordingly, in principle, the appellant is right in contending that once the activities are considered as in the nature of business or trading shares/units, it would be entitled to the benefit of sec.45(2) on the date of conversion of shares/units held as 'investments' earlier intos tock in trade. However, the question is, as to , what is the point of such conversion. It is seen that in terms of the provisions of sec.45(2), such benefit is available when "the owner of a capital asset" converts or treats such capital asset into "stock in trade of a business carried on by him". In the instant case however, the appellant never conceded that it had converted its capital asset into stock in trade of its business, nor the appellant has treated such investments as the stock in trade of its business by filing any trading account before the Assessing officer or even in the course of the appellate proceedings.
11.4 At the same time, it is seen that the Assessing officer has found that the appellant had engaged in similar business of purchasing and selling of shares and mutual funds in earlier years also. Accordingly, he has reopened the proceedings for A.Y. 2005-06 also by issuing a notice u/s. 148 of the Act. If the appellant had engaged in the activity of trading in shares/units during the financial year relevant to AY 2005-06 also, all the investment held by the appellant in earlier years cannot be conclusively said as converted into stock in trade on 1.4.2005 only. Accordingly, till such time as at which the appellant expressly converts and treats such investments as stock in trade on a particular date, or the date of such conversion is determined after looking into the transactions of the appellant inv arioso scrips in the earlier years, the benefit of Sec.45(20 of the Act cannot be extended to the appellant......"
18. From the above, it is evident that the CIT(A) in principle accepted that the assessee's right in asking for the benefits of S.45(2) on the date of conversion of shares/units held as investments earlier into stock in trade. He however, ultimately could not come to a conclusion on the 'actual date' of such conversion and ultimately observed that the 13 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad assessee never 'conceded' the fact of conversion of such investment into stock in trade, and therefore, in the absence of clarity on conversion, he held that the question of applicability of provisions of S.45(2) does not arise to other facts of the present case. He also discussed the reassessment proceedings initiated under S.148 of the Act for the assessment year 2005-06 and mentioned that, there is need for clarity as to the date of conversion of the shares/units of mutual funds into stock in trade. At the end, the CIT(A) concluded by stating that unless the assessee expressly converts its alleged investments into stock in trade on a particular date, the benefits of S.45(2) cannot be extended to the assessee. It is in this factual background, the assessee raised grounds No.3 and 4 before us. Aggrieved with the above treatment and conclusion of the CIT(A), the assessee is before us with the above grounds.
19. During the proceedings before the Hon'ble Tribunal, Shri Vijay Mehta, the learned counsel for the assessee, referring to the reasoning giving by the CIT(A) in his order, vide ground No.3, Ld counsel submitted that the assessment was neither reopened finally nor revised by the CIT nor the assessee received any notice of reopening for the assessment year 2005-06. In these circumstances, he pleaded that the assessee's alternative claim should have been allowed considering the principle of consistency. Mr Mehta argued stating that the revenue cannot deny the entitled benefits to the assessee merely relying on the future outcome of the likely reassessment proceedings for the AY 2005-
06. Ld counsel read out the provisions of S.45(2) of the Act and explained that normally, the provisions of sub-section (2) comes into play where there is a transfer of capital asset by way of a conversion or the treatment as stock in trade of the business of such capital asset. Explaining the facts of the case, learned counsel mentioned that in the instant case, the assessee has been regularly treating its capital assets as 14 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad investment, the profits and gains earned on transfer of these assets should have been treated as capital gains. But, in this case, the assessing officer made out a case of conversion of investments into the stock in trade, by rejecting the assessee's stand which is regularly followed over the years. It was approved by the Honble Tribunal and in such circumstances; the AO should have fairly applied the said provisions of section 45(2) of the Act. Elaborating the above explanation of the provisions, learned counsel, mentioned that in a case where conversion or treatment is not done by the assessee, and the same was thrust on the assessee by the assessing officer, it is for the assessing officer to apply the provisions of sub-section (2) deeming that such a conversion or treatment as having been done by the assessee. It is the duty of the AO to make assessment as per the provisions of the Act and relied on various judgments to strengthen his argument. Further, he argued stating that by expecting the assessee to prepare the 'financial statements including the trading account' demonstrating the said impugned conversion of shares, and submit the same for availing the benefits of section 45(2) of the Act, it amounts to asking for the impossible. Ld counsel reasoned by asking that how could the assessee alter the entries in the books when he entirely rely on the same entries and more so, when the matter is sub judice?. How could the assessee concede on this issue at this point of time subjecting himself to the double loss ie (i) on account of loss of the original claim of concessional tax rates specified in section 113A of the Act; and (ii) creating an evidence against himself by altering the entries. Elaborating the same, Ld counsel mentioned that when AO disturbed the claim of the assessee, it is for the AO to compute the assessable income as per the applicable provisions of the Act including applying the provisions of section 45(2) of the Act. Ld counsel asserted that it is the duty of the AO to apply the same and in case, he cannot apply the said provisions, rather, the claim of the assessee should not disturbed. Mere non-existence of entry in the books of account reflecting such 15 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad conversion/treatment as stock-in-trade should not result in non- application of the provisos of sub-section (2) of S.45. It is the case of the assessee right from the beginning that impugned profit and gains on sale of shares/redemption of units have to be taxed under the head 'capital gains' and books are accordingly maintained in consonance with the method of accounting consistently followed by the assessee over the years. The assessee cannot change the book entries overnight, when the Revenue authorities do not approve the assessee's stand in the year under appeal. More so, when the assessee contests the action of the Revenue authorities by filing appeal before the Hon'ble High Court of Andhra Pradesh. When the Hon'ble High Court is thus seized of the matter, any change in the entries in the books of account, as expected by the Revenue authorities, would be contradictory to its stand from the beginning and before the Hon'ble High Court and it would be self- defeating, and that being the position, the assessing officer should understand that the assessee is not in a position to take a stand with reference to the conversion or treatment of the impugned transactions. Elaborating the above, he mentioned that it is the duty of the assessing officer to make proper assessment by applying the provisions of the Act, granting all the benefits due to the assessee, who may or may not ask for the same. In this regard, learned counsel relied on the decision of the Bombay High Court in the case of Ciba of India Ltd. V/s. CIT (202 ITR 1), wherein, vide relevant portion of the head-note of the Reports(202 ITR), it has been held as follows-
"The powers of the Appellate Tribunal are expressed in the widest possible terms as is evident from the use of the expression 'pass such orders thereon as it thinks fit" in section 254(1). ...... Where the Tribunal turns down the claims of the assessee for deduction of a particular amount by way of revenue expenditure and holds it to be a capital expenditure, it is the duty of the Tribunal, even without an alternative submission, to pass necessary consequential orders suo motu to give such further directions in the matter as the situation may warrant."16 ITA No.293/Hyd/2012
M/s. Spectra Shares & Scrips P. Ltd., Hyderabad
20. Without prejudice to the above arguments, he mentioned that the denial of deduction for want of clarity on the cost of acquisition and likely multiple rectification orders, assessee cannot be denied the benefit of the said sub-section (2) of s.45 of the Act. The learned counsel further summed up by saying that in the facts of the case, where the assessee raised an alternative ground without prejudice to the entries in the books of account and when the assessee supplied the computation detailing the manner in which the provisions of S.45(2) of the Act should be applied, the assessee cannot be denied the benefit for want of failure to furnish trading account, which is not the requirement of law. Further, he argued stating that for any reason, the law cannot be applied to the facts of a case, when under the procedural law it is not possible to compute the income applying the said provision, the stand taken by the assessing officer that the transactions in question are not the business transactions does not stand the legal scrutiny of the proceedings, meaning thereby that the claim of the assessee made in the return of income must be accepted without any disturbance.
21. Per contra, the Learned Departmental Representative for the Revenue, Dr M.S.Rao, at the outset relied on the orders of the revenue and proceeded to rely on the said provision of S.45(2)of the Act. Further, he mentioned that the assessee is not eligible for the benefits of the provisions of said section. As per his arguments, the said provision come into play when there is conversion of investment into the stock in trade or treatment of the same as stock in trade and it should be done only by the assessee and not by the AO for availing the benefit of the said provisions.
22. Regarding the Market value as on the date of conversion i.e. 1.4.2005, if adopted as submitted by the assessee without prejudice, Ld DR mentioned that there is requirement of passing of multiple rectification orders as date 1.4.2005 cannot be taken as the date of 17 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad conversion in view of the intended reopening of the proceedings under S.148 of the Act for the preceding AY 2005-06. Therefore, the benefits of S.45(2) are rightly denied by the CIT(A), and therefore, the impugned order of the CIT(A) does not call for any interference.
23. During the rebuttal time, the learned counsel for the assessee mentioned that assessee has already furnished required computation of income applying the provisions of S.45(2) without prejudice to its original position that the transactions in question are to be decided as per the provisions relating to the capital gains and not under the head 'business or profession'. He also mentioned that when the matter can be set aside to the file of the assessing officer with a direction to apply the provisions of S.45(2) of the Act, which was in principle agreed to by the CIT(A) against when there was no appeal by the Revenue.
24. We heard both the parties and perused the papers available before us, including the orders of the Revenue authorities and the case- laws cited before us. The undisputed facts relating to the issue of applying the provisions of section 45(2) of the Act are that the assessee consistently that the impugned earnings on sale of the shares/units are assessable to tax under the head 'capital gains'; whereas the revenue concluded that they are taxable under the 'profits and gains from business or profession'. This view is upheld by this Tribunal and the matter is pending before the Hon'ble High Court. Impugned shares/MF are shown as 'investments' in the Books of accounts of the assessee. It is undisputed fact that the AO thrust on the assessee 'conversion' of shares so held as 'investment' and refused to apply the provisions of section 45(2) on the reasoning that the assessee has neither conceded the said conversion nor made necessary entries in the books to that effect. Further, it is an undisputed fact that the in principle, the CIT(A) upheld the applicability of the said provisions and however, rejected the claim on 18 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad the reasoning that the assessee neither conceded the said conversion nor made necessary entries in the books. Further reasoning given by the CIT(A) is that the conversion date of 1.4.2005 for the purpose of determining the FMV of the said shares is subjected to the alterations in view of the proposed proceedings u/s 148 of the Act. FMV value as on the date of conversion is needed to determine the 'capital gains' in accordance with the provisions of subsection (2) of section 45 of the Act. Therefore, the limited dispute, which is required to be adjudicated by us now is if the revenue is prevented from adopting the 1.4.2005 as the conversion date in view of the proposed and inconclusive reassessment proceedings. Further, as an associated issue, we need to decide if the AO is not duty bound to apply the said provisions having thrust on the assessee successfully the act of conversion of shares declared as 'investment' into the stock in trade.
25. For answering the same, first we proceed to explain the said provisions of section 45(2) of the Act and the same read as under:
Explaining of the provisions of section 45(2):
"45. (1)....
(2) Notwithstanding anything contained in sub-section (1), the profits or gains arising from the transfer by way of conversion by the owner of a capital asset into, or its treatment by him as, stock-
in-trade of a business carried on by him shall be chargeable to income-tax as his income of the previous year in which such stock- in-trade is sold or otherwise transferred by him and, for the purposes of section 48, the fair market value of the asset on the date of such conversion or treatment shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset."
The above sub-section deems that the conversion by the owner of or treatment of, capital asset into/as stock-in-trade generates profits or gains. Such conversion or treatment has to be done by the assessee and not by anybody else. These profits or gains are taxable in the AY, in 19 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad which the said stock in trade of the business is sold. Date of conversion is deeded as the date of transfer for the purpose of section 48 of the Act. Full value of consideration is the FMV of the share on the said date of conversion.
26. The above provisions provide for the computation and it is done in two steps. Firstly, the market value as on the date of conversion has to be ascertained in respect of the shares/units sold during the year. The difference between the market value of the shares and their cost of acquisition has to be assessed under the head 'capital gains'. The second step is to find out business income on sale of shares/redemption of units for finding out the difference between the sale price and the market price on the date of conversion of the stock in trade. There is no dispute on the above interpretation of the provisions between the parties.
27. In the instant case, admittedly the assessee, the owner of the capital asset, neither converted the capital asset into stock in trade nor treated the same into the stock in trade of the business of the assessee. However, the conclusions drawn by the AO and the CIT(A) are now approved by this Tribunal and as of now, said conversion is now a legal reality. Therefore, the provisions of section 45(2) of the Act cannot be made inapplicable to the instant case merely for the reason that the assessee, the owner of the capital asset, has neither converted into nor treated the impugned investment as the stock in trade voluntarily. In denial of the same to the assessee, the Revenue authorities have adopted the principle of 'literal interpretation' which must not have been done by the revenue in order to avoid the absurdity of interpretation as rightly held by the CIT(A) probably in view of the ratio of the Apex Court in the case of K P Verghese (131 TTR 597). The relevant paras are as follows:
20 ITA No.293/Hyd/2012M/s. Spectra Shares & Scrips P. Ltd., Hyderabad "A strictly literal reading of a statutory provision ignores several vital considerations which must always be borne in mind while interpreting such provision. The task of interpretation of a statutory enactment is not a mechanical task. It is more than a mere reading of mathematical formulae because few words possess the precision of mathematical symbols. It an attempt to discover the intent of the Legislature from the language used by it and it must always be remembered that language is at best an imperfect instrument for the expression of human thought and as pointed out by Lord Penning, it would be idle to expect every statutory provision to the "drafted with divine prescience and perfect clarity." It is now a well-settled rule of construction that where the plain literal interpretation of a statutory provision produces a manifestly absurd and unjust result which could never have been intended by the Legislature, the Court may modify the language used by the Legislature or even "do some violence" to it, so as to achieve the obvious intention of the Legislature and produce a rational construction vide Luke vs. IRC (1963) AC 557. The Court may also in such a case read into the statutory provision a condition which, though note expressed, is implicit as constituting the basis assumption underlying the statutory provision. It is a well recognised rule of construction that a statutory provision must be so construed, if possible, that absurdity and mischief may be avoided."
28. Therefore, AO is duty bound to make the assessment in accordance with the provisions of the Act including the provisions of section 45(2) of the Act. Reliance is placed on the judgment of the Bombay High Court in the case of Ciba of India Ltd vs CIT 202 ITR 1, which was in fact decided in the context of ITAT's failure to issue directions. The CIT(A) appreciated the claim of the assessee and upheld the applicability of the provisions of section 45(2) of the Act, with which we agree. Now, we shall take up the procedural issues connected to the computation of the impugned capital gains and to examine if the CIT(A) is justified in rejecting the benefits of section 45(2) of the Act.
29. Date of conversion for the shares sold in AY 2006-07: We have explained above the manner of computation of the capital gains and the role of the 'date of conversion or treatment by the assessee...'. It is the case of the assessee the said date of conversion in respect of the shares/units sold in the year under consideration (ie AY 2006-07) is 1.4.2005. Revenue does not accept the same as the date of conversion for the purpose of adopting the FMV of the said shares /units on the reasoning that they have proposal to reopen the assessment for the AY 21 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad 2005-06 and for this AY, the date of conversion ought to be 1.4.2004 instead. For this objection of the revenue, the assessee's counter arguments are that the revenue has not successfully reopened the assessment, which is legally sustainable. The proceedings are not completed as on the date of this order. Revenue cannot deny the rightful benefits of section 45(2) of the Act to the assessee. In fact, it is the duty of the AO to apply the said provisions and in case the capital gains cannot be computed for any reasons of that kind, the AO must not disturb the claim of the assessee as done in this case.
30. This debate arises in view of the peculiar position of this case, where the proceedings for reopening of assessment under S.148 were initiated for assessment year 2005-06. It is the apprehension of the Revenue authorities that 1.4.2004 may turn out to be the date of conversion in respect of some assets considering the fact of reopened assessment proceedings for the assessment year 2005-06. The contention of the assessee in this regard is that every assessment year is specific and date of conversion can be different for different assessment years depending on the date of sale of shares/units.
31. It is an undisputed fact that the assessee did not furnish the trading account as demanded by the assessing officer and he could not have rightly furnish considering the sub-judice nature of the issue. Similarly, the assessee could not have made necessary entries in the books of accounts too. Therefore, it is not fair on part of the revenue to deny the otherwise entitled benefits to the assessee either in view of the computational difficulties or and also to make book entries in such a way that the impugned transactions are treated as business transactions, we find that the same is not fair. This is so for the reason that the assessee has been consistently following a method of accounting showing the impugned investments as capital assets and not business assets or stock 22 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad in trade. The stand of the assessee right from the beginning, and even now in its contest before the Hon'ble High Court, is that the capital assets in question are its investments and any gain on sale of the same is assessable as capital gains and not as business income. The claim of the assessee, in the meanwhile, for relief under S.45(2) of the Act, springs as a consequence of rejection of its stand by the revenue authorities, who treated the gain on sale of shares as business income. When the assessee persists with its stand and contests the rejection of its claim with regard to assessment of capital gains in appeal before the Hon'ble High Court, it would be unfair for the Revenue authorities to expect the assessee to change the entries in its books of account, so as to consider the claim of the assessee for relief under S.45(2) of the Act. It is so because, such alteration of the entries in the books would be contradictory to its own stand from the beginning, and self defeating for the assessee in the appellate proceedings before the Hon'ble High Court, as such this claim relating to S.45(2) is raised only by way of alternative ground without prejudice to the original grounds raised. In case, the stand of the assessee has been ultimately approved by the Hon'ble High Court, this whole exercise based on the claim relating to the applicability of provisions of S.45(2) becomes wasteful exercise, for which the assessee need not alter the entries in the books of account, as demanded/insisted upon by the Department. This kind of concessions, if given by the assessee to the revenue, would be counterproductive to the assessee's method of accounting and in no case entries in the books shall be altered, as made out by the learned counsel for the assessee. In our opinion, the assessee cannot be put to loss on both the counts -one on account of change in the head of income in respect of the impugned short term capital gains; and (2) on account of denial of benefits of S.45(2). The approach of literal interpretation of the provisions of the Act by the Revenue authorities cannot be appreciated considering the fact that conversion/treatment thrust on the assessee by the Revenue authorities, 23 ITA No.293/Hyd/2012 M/s. Spectra Shares & Scrips P. Ltd., Hyderabad by itself, must be construed as conversion into stock in trade by the owner.
32. Regarding the date of conversion, it is trite law that every assessment year is an unit of an assessment. Any transaction can be accounted by applying accounting entries, arriving at the cost of acquisition of shares or market price or their fair market value is not impossible considering the availability of material on record. So far as the capital gain relatable to the capital asset so converted for the assessment year 2006-07, 1.4.2005 has to be taken as the date of conversion, which cannot be altered in respect of the capital assets sold in the relevant previous year. If any other assets are sold in the preceding assessment year 2005-06, assessment for which is allegedly reopened, about which there is no clarity before us, the date of conversion would be 1.4.2004. Depending on the outcome of the reopened assessment, rectification order may be passed, but on the ground of apprehension of the reopening or the outcome of the re-assessment, assessee cannot be deprived of the benefit of S.45(2) of the Act even for the year under appeal. Since the asset which would be treated as a capital gains would have been sold in the corresponding previous year. Therefore, the date of conversion is specific to the AY in which the impugned capital asset is sold. Hence, the assessing officer ought to note the date of conversion is always capital asset specific depending on the date of sale of the said capital asset. In the instant case, the dispute is restricted now to 'investments' purchased in the year relevant for the AY 2005-06 only ie short term investments held by the AO/CIT(A)/ITAT as business income, as there is no dispute on nature of the investment of long term nature. Therefore, date of conversion in the case ought to be 1.4.2005. AO shall grant the benefits of the provisions of section 45(2) of the Act. Accordingly, the grounds raised are allowed.
24 ITA No.293/Hyd/2012M/s. Spectra Shares & Scrips P. Ltd., Hyderabad
33. However, there is need for data for determining the assessable capital gains upto the date of conversion and the business income upto the date of sale of the impugned capital asset. For this purpose, the assessee shall provide relevant details necessary for the assessing officer to work out the computation of capital gains and the business income, as the case may be, for arriving at proper taxable 'capital gains' and the 'business income' within the meaning of the said provisions. For this limited purpose determination and computation, we set aside the impugned order of the CIT(A), and restore the matter to the file of the assessing officer for computation of the income of the assessee in accordance with law and after giving reasonable opportunity of hearing to the assessee. Accordingly, the issues are decided pro-tanto.
34. In the result, assessee's appeal is partly allowed.
Order pronounced in the Court on 27th July, 2012
Sd/- Sd/-
(Asha Vijayaraghavan) (D.Karunakara Rao)
Judicial Member. Accountant Member.
Dt/- 27th July, 2012
Copy forwarded to:
1. M/s. Spectra Shares & Scrips P. Ltd., 104/105 Pancom Business Centre, Ameerpet, Hyderabad 500 073
2. Asstt. Commissioner of Income-tax Circle 3(2), Hyderabad
3. Commissioner of Income-tax(Appeals)-IV, Hyderabad
4. Commissioner of Income-tax III, Hyderabad
5. Departmental Representative ITAT, Hyderabad B.V.S.