DCIT, New Delhi v. M/s. Express Secutities Pvt Ltd., New Delhi

ITA 1255/DEL/2010 | 2006-2007
Pronouncement Date: 30-09-2011 | Result: Dismissed

Appeal Details

RSA Number 125520114 RSA 2010
Assessee PAN AABCE0730B
Bench Delhi
Appeal Number ITA 1255/DEL/2010
Duration Of Justice 1 year(s) 6 month(s) 11 day(s)
Appellant DCIT, New Delhi
Respondent M/s. Express Secutities Pvt Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 30-09-2011
Date Of Final Hearing 22-09-2011
Next Hearing Date 22-09-2011
Assessment Year 2006-2007
Appeal Filed On 19-03-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI RAJPAL YADAV JM AND SHRI K. D. RANJAN AM I. T. APPEAL NO. 1255 (DEL) OF 2010 ASSESSMENT YEAR : 2006-07. DY. COMMISSIONER OF INCOME-TAX M/S. EXPRESS SECURITIES PVT. LTD. C I R C L E : 11 (1) VS. 10A SCI NDIA HOUSE CON. CIRCUS N E W D E L H I. N E W D E L H I. P A N / G I R NO. AAB CE 0730 B. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI A. K. JAIN C. A.; DEPARTMENT BY : SHRI KRISHNA [CIT] D. R.; O R D E R. PER K. D. RANJAN AM : THIS APPEAL BY THE REVENUE FOR ASSESSMENT YEAR 200 6-07 ARISES OUT OF ORDER OF THE LD. CIT (APPEALS)-XIII NEW DELHI. 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS FOLLOWS :- 1. THE ORDER OF THE LD. CIT (APPEALS) IS W RONG PERVERSE ILLEGAL AND AGAINST THE PROVISIONS OF LAW LIABLE TO BE SET ASI DE; 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT (APPEALS) HAS ERRED IN ALLOWING THE CLAIM OF TH E ASSESSEE COMPANY FOR EXEMPTION UNDER SECTION 10(38) OF I. T. ACT ON LONG TERM CAPITAL GAIN OF RS.3 34 65 931/-. 2 I. T. APPEAL NO. 1255 (DEL) OF 2010 3. THE ONLY ISSUE FOR OUR CONSIDERATION RELATES TO ALLOWING THE CLAIM OF THE ASSESSEE FOR EXEMPTION UNDER SECTION 10(38) OF THE ACT ON LONG T ERM CAPITAL GAINS OF RS.3 34 65 931/-. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSE SSEE IS A MEMBER OF BSE DSE & CSE AND IS ENGAGED IN THE BUSINESS OF BROKER OF STOCK SHARES AND OTHER SECURITIES BESIDES DEALING / TRADING IN STOCKS AND SHARES AND OTHER FINANCIAL SECURITIES. IN THE COMPUTATION OF INCOME THE ASSESSEE CLAIMED LONG TERM CAPITAL GAINS OF RS.3 34 65 931/- AS EXEMPT UNDER SECTION 10(38) OF THE ACT. THE ASSESSING OFFICER ON VERIFICATION OF RECORDS OB SERVED THAT THE ASSESSEE HAS EARNED PROFITS ON SALE OF SHARES WHICH WERE HELD AS STOCK IN TRADE T ILL LAST YEAR. THE ASSESSEE HAD CONVERTED THE STOCK IN TRADE AS INVESTMENT AND PLACED A NOTE IN T HE ACCOUNTS AS BELOW:- AT THE BEGINNING OF THE YEAR THE COMPANY HAS CONVERTED PART OF ITS STOCK IN TRADE (SHARES / SECURITIES OF RS.2 49 28 693/-] (PREVIOUS YEAR RS.3 18 38 850/-) INTO INVESTMENTS AT BOOK VALUE / FAIR MARKET VALUE OF SUCH STOCKS. 4. THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO S HOW CAUSE AS TO WHY THE PROFITS ON SALE OF SHARES SHOULD NOT BE TREATED AS TRADING PROFIT. IN RESPONSE THERETO IT WAS SUBMITTED THAT THE ASSESSEE HAD MAINTAINED TWO SETS OF PORTFOLIO I.E. INVESTMENT AND TRADING. THE ASSESSEE HAD CONVERTED PART OF ITS STOCK IN TRADE INTO INVESTMEN T PORTFOLIO AT BOOK VALUE. THE CHANGE IS DULY REFLECTED IN THE NOTES TO ACCOUNTS. IT WAS ALSO SU BMITTED THAT THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT WAS NORMAL PHENOMENON AND ALLOWABLE AS P ER SECTION 45(2) OF THE ACT. THE ASSESSEE THEREFORE CLAIMED THAT THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT IS TO BE ASSESSED UNDER THE HEAD CAPITAL GAINS AND EXEMPTION IS JUS TIFIED. THE AO HOWEVER REJECTED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT ONLY BOOK ENTRIE S HAVE BEEN PASSED WITH THE INTENTION TO AVOID PAYMENT OF TAXES ON TRANSFER OF SUCH SHARES AT A SU BSEQUENT DATE. IT WAS PERTINENT TO POINT OUT THAT ONLY STOCK SOLD ON WHICH CAPITAL GAINS SHOWN A RE SHOWN TO HAVE BEEN CONVERTED FROM STOCK IN TRADE INTO INVESTMENT WHICH CLEARLY SHOWED THE I NTENTION OF THE ASSESSEE NOT TO PAY THE TAXES. THE ASSESSEES ARGUMENT THAT CONVERSION OF STOCK IN TRADE INTO INVESTMENT WAS NORMAL PHENOMENON AND ALLOWABLE AS PER PROVISIONS OF THE I NCOME TAX ACT WAS NOT CORRECT. PROVISIONS OF SECTION 45(2) OF THE ACT DEALS WITH CONVERSION O F ASSETS INTO STOCK IN TRADE AND NOT VICE VERSA. 3 I. T. APPEAL NO. 1255 (DEL) OF 2010 THE ASSESSING OFFICER FURTHER NOTED THAT CONVERSION OF STOCK IN TRADE INTO INVESTMENT IS NOT BONAFIDE BECAUSE IT HAS BEEN DONE AFTER THE INSERTI ON OF SUB SECTION (38) OF SECTION 10 BY THE FINANCE ACT 2004 WITH EFFECT FROM 1/04/2005. AFTE R INSERTION OF SUB SECTION THE ASSESSEE HAD THOUGHT OF A PLAN TO AVOID PAYMENT OF TAXES ON SALE OF SHARES WHICH WERE BEING HELD BY IT AS STOCK-IN-TRADE. THE STOCK IN TRADE WAS CONVERTED I NTO INVESTMENT MERELY WITH AN INTENTION TO MISUSE THE PROVISIONS OF SECTION 10(38) OF THE ACT. THE AO THEREFORE BROUGHT THE AMOUNT OF RS.3 34 65 931/- AS INCOME UNDER THE HEAD BUSINESS AND PROFESSION. 5. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED TH AT THE ASSESSEE PURCHASED SHARES OF GLOBAL TALLY HIMACHAL FUTURISTIC AND NIIT THE BOO K VALUE THEREOF AS ON 31/3/2004 WAS AT RS.3 18 38 850/-. THE PURCHASE OF ABOVE SHARES WAS SHOWN UNDER THE HEAD INVENTORIES AS STOCK IN TRADE AS ON 31 ST MARCH 2004 IN THE AUDITED BALANCE SHEET. THE ASS ESSEE HAD CONVERTED STOCK IN TRADE OF RS.3 18 38 850/- INTO INVESTMENT AS ON 1/ 4/2004 AND SHOWED THE SAME UNDER THE HEAD INVESTMENT IN ITS AUDITED BALANCE SHEET ON 31 ST MARCH 2005 AND A DISCLOSURE WAS MADE IN AUDITED BALANCE SHEETS AS ON 31 ST MARCH 2005 AND AS ON 31 ST MARCH 2006. THE BOARD OF DIRECTORS OF THE COMPANY HAD PASSED RESOLUTION IN THIS REGARD IN ITS BOARD MEETING HELD ON 1/4/2004. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD SOLD SHAR ES BESIDES OTHER SHARES AND DECLARED CAPITAL GAINS ON SALE OF INVESTMENTS. THE ASSESSEE EARNED LONG TERM CAPITAL GAIN OF RS.3 34 65 931/- AND SHORT TERM CAPITAL GAIN OF RS.7 16 711/-. THE ASSE SSEE CLAIMED THE LONG TERM CAPITAL GAINS EXEMPT UNDER SECTION 10(38) IN THE RETURN OF INCOME . IT WAS ALSO SUBMITTED THAT THE ASSESSING OFFICER HAD DISALLOWED THE AMOUNT OF SECURITY TRANS ACTIONS TAX OF RS.80 248/- UNDER SECTION 40(A)(IB) READ WITH SECTION 14A IN RESPECT OF STT P AID ON SALE OF SHARES HELD AS INVESTMENT PORTFOLIO BY THE ASSESSEE SIMULTANEOUSLY NOT ALLOW ING REBATE UNDER SECTION 88-E OF THE ACT. THEREFORE THE ASSESSING OFFICER CANNOT TREAT THE L ONG TERM CAPITAL GAIN ON SALE OF LISTED SHARES AS BUSINESS INCOME OF THE ASSESSEE. THE LD. AR OF THE ASSESSEE PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. JA NHAVI INVESTMENT PVT. LTD. 304 ITR 276 AND THE DECISION OF MUMBAI BENCH OF THE ITAT IN THE CASE OF ACIT VS. BRIGHT STAR INVESTMENT P. LTD. IN ITA. NO. 6374 (MUM.) OF 2004 DATED 2/07/ 2008. 4 I. T. APPEAL NO. 1255 (DEL) OF 2010 8. THE LD. CIT (APPEALS) AFTER CONSIDERING THE FACT S AND SUBMISSIONS MADE BY THE ASSESSEE DELETED THE ADDITION BY OBSERVING AS UNDER:- 5. I HAVE PERUSED THE SUBMISSIONS MADE BY THE APPELLANT THE FACTS OF THE CASE AND THE JUDICIAL DECISIONS RELIED UPON AND HAVE ALSO GONE THROUGH THE ASSESSMENT ORDER AND THE CBDT CIRCULAR NO. 4/2007 DATED 15/08/2007. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE AD DITIONS HAVE BEEN ON THE GROUND THAT THE ASSESSEE HAS THE BUSINESS OF DEALIN G IN STOCKS AND SHARES AND THUS IT CANNOT HAVE SHARES AS INVESTMENTS. AO WAS OF TH E OPINION THAT THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT IS DONE MERELY TO AVOID PAYMENT OF TAXES BECAUSE OF THE INSERTION OF SUB SECTION (38) TO SECTION 10 OF THE I. T. ACT BY FINANCE ACT 2004 W.E.F. 1/04/2005. IN VIEW OF THE ABOVE THE G AIN OF RS.3 34 65 931/- ON SALE OF SHARES CLAIMED EXEMPTED UNDER SECTION 10(38) BY THE ASSESSEE WAS TREATED AS THE BUSINESS INCOME OF THE ASSESSEE AND TAXED AS IN COME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS AND PROFESSION. 5.1 IT IS NOTICED THAT THE ADDITION CANNO T BE MADE MERELY ON THE ASSUMPTION OF THE ASSESSING OFFICER THAT THE CONVERSION OF STO CK IN TRADE INTO INVESTMENT WAS MADE ONLY WITH A VIEW TO AVOID PAYMENT OF TAXES. T HIS ASSUMPTION CANNOT BE ACCEPTED AS IT IS BASED MERELY ON SURMISES AND CONJ ECTURE. IT IS COMMON KNOWLEDGE THAT STOCK MARKET BEING SO VOLATILE NOBOD Y CAN PREDICT ITS MOVEMENT. FROM THE FACTS AS MENTIONED ABOVE IT APPEARS THAT T HE APPELLANT HAD MADE THE INVESTMENTS IN SHARES IN THE MONTH OF MARCH 2004 A ND SAME WAS IMMEDIATELY CONVERTED THE STOCK IN TRADE INTO CAPITAL ASSET IN THE MONTH OF APRIL 2004 (I.E. THE FINANCIAL YEAR 2004-05). IT IS FURTHER NOTICED FRO M THE SUBMISSION OF APPELLANT THAT THE BOARD OF DIRECTOR OF THE APPELLANT COMPANY HAD DECIDED TO HOLD THOSE SHARES FOR LONGER PERIOD AND FOR THE PURPOSE TO EAR N DIVIDEND ON THAT. WHEREIN THE SHARES HELD AS STOCK IN TRADE IS GENERALLY SOLD ON DAY TO DAY BASIS WITHIN VERY SHORT PERIOD OF TIME WITH THE PURPOSE TO EARN QUICK ON TRADING OF THE SAME. IT IS PERTINENT TO NOTE THAT SHARES WERE SOLD MAINL Y IN THE MONTH OF MARCH 2006. 5 I. T. APPEAL NO. 1255 (DEL) OF 2010 THUS OUT OF TOTAL LONG TERM CAPITAL GAIN OF RS.3 34 14 967/- IN THE MONTH OF MARCH 2006 I.E. AFTER THE GAP OF APPROXIMATELY TWO YEARS. THEREFORE IT APPEARS TO BE QUITE IMPROBABLE THAT THE APPELLANT COULD HAV E VISUALIZED AS ON 1/04/2004 THAT IT WILL EARN TAX FREE CAPITAL GAIN OF MORE THA N RS. 3 CRORE AFTER TWO YEARS. 5.2 IN THE PRESENT CASE THE ASSESSING OFFICER HAS HIMSELF ACCEPTED IN PRINCIPLE THAT THE ASSESSEE MAINTAIN TWO SETS OF PO RTFOLIOS WHICH IS OBSERVED FROM THE FOLLOWING FACTS :- A) THAT THE ASSESSING OFFICER HAS NOT OBJECTED TO THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT PORTFOLIO IN THE ASSESSMEN T YEAR 2005-2006 AND EVEN CONVERSION MADE IN THE ASSESSMENT YEAR 2006-20 07 WAS ALSO NOT OBJECTED; B) THAT THE AO HAS ASSESSED THE AMOUNT OF SHORT TE RM CAPITAL GAIN OF RS.7 16 711/- IN THE ASSESSMENT ORDER PASSED FOR TH E ASSESSMENT YEAR UNDER CONSIDERATION AS WELL AS SHORT TERM CAPITAL GAIN IN COME OF RS.97 897/- IN AY 2005-06. C) THE AO HAS DISALLOWED THE AMOUNT OF SECURITIES TRANSACTION TAX (STT) OF RS.80 248/- PAID UNDER SECTION 40(A)(IB) IN RESPECT OF STT PAID ON SALE OF SHARES HELD AS INVESTMENT PORTFOLIO BY THE ASSESSEE SIMULT ANEOUSLY NOT ALLOWING REBATE UNDER SECTION 88-E OF I. T. ACT 1961. FROM THE ABOVE IT IS EVIDENT THAT IN PRINCIPAL THE AO HAS ACCEPTED THAT THE APPELLANT MAINTAIN INVESTMENT PORTFOLIO WHEREVE R IT SUITS TO HIM. 5.3 FROM THE ABOVE FACTS IT IS QUITE CLEAR THAT ASSESSING OFFICER WAS NOT ABLE TO ADDUCE ANY EVIDENCE TO SUGGEST THAT CONVERS ION OF STOCK IN TRADE INTO INVESTMENT WAS MALE FIDE OR PRE DATED. THEREFORE I N THE ABSENCE OF ANY POSITIVE EVIDENCE TO THE CONTRARY I AGREE WITH THE APPELLANT THAT CONVERSION OF STOCK IN TRADE INTO INVESTMENT PORTFOLIO WAS BONAFIDE AND INCOME OF RS.3 34 65 931/- WAS ASSESSABLE UNDER THE HEAD LONG TERM CAPITAL GAI N AND WAS ELIGIBLE 6 I. T. APPEAL NO. 1255 (DEL) OF 2010 FOR EXEMPTION UNDER SECTION 10(38) OF THE I. T. ACT . THIS GROUND OF APPEAL IS ALLOWED. 9. BEFORE US THE LD. SR. DR SUBMITTED THAT THE ASSE SSEE IN ORDER TO AVOID PAYMENT OF TAX HAS SHOWN SOME OF THE SCRIP AS INVESTMENTS. NOWHERE IN THE RESOLUTION PASSED BY THE BOARD OF DIRECTORS CONVERTING THE SHARES FROM STOCK IN TRADE TO INVESTMENT IT HAS BEEN STATED THAT THOSE SHARES WILL BE HELD FOR A LONG PERIOD. THEREFORE THE CONVERSION FROM STOCK IN TRADE TO INVESTMENT IS TO AVOID PAYMENT OF TAX. HE THEREFORE SUPPORT ED THE ORDER OF THE AO. ON THE OTHER HAND THE LD. AR OF THE ASSESSEE SUPPORTED THE ORDER OF THE L D. CIT (APPEALS). 10. WE HAVE HEARD BOTH THE PARTIES. THE ASSESSEE C ONVERTED SHARES OF GLOBAL TELLY HIMACHAL FUTURISTIC AND NIIT HELD AS STOCK IN TRADE UPTO 31 ST MARCH 2004 INTO INVESTMENT AS ON 1/04/2004. THE ASSESSEE HELD THESE SHARES AS INVES TMENT FROM 1/04/2004 TO THE DATE OF SALE DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEA R 2006-07. THE ASSESSEE IN THE BALANCE SHEET HAD SHOWN THESE SHARES AS INVESTMENT. THE ASSESSIN G OFFICER HAD NOT OBJECTED THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT PORTFOLIO IN ASSESSM ENT YEAR 2005-06 AND CONVERSION MADE IN ASSESSMENT YEAR 2006-07 HAS ALSO NOT BEEN OBJECTED TO. THE AO HAS ASSESSED THE AMOUNT OF SHORT TERM CAPITAL GAINS OF RS.7 16 711/- IN ASSESS MENT ORDER PASSED FOR ASSESSMENT YEAR UNDER CONSIDERATION AS WELL AS SHORT TERM CAPITAL GAINS O F RS.97 897/- IN ASSESSMENT YEAR 2005-06. THE ASSESSING OFFICER HAD DISALLOWED THE AMOUNT OF SECU RITIES TRANSACTION TAX OF RS.80 248/- PAID UNDER SECTION 40(A)(IB) IN RESPECT OF STT PAID ON S ALE OF SHARES HELD AS INVESTMENT BY THE ASSESSEE SIMULTANEOUSLY NOT ALLOWING REBATE UNDER SECTION 88-E OF THE ACT. THE LD. CIT (APPEALS) ON THE BASIS OF THESE FACTS HAS RECORDED A FINDING OF FACT THAT THE AO HAD ACCEPTED THAT ASSESSEE MAINTAINED INVESTMENT PORTFOLIO WHEREVER I T SUITED TO THE ASSESSEE. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. JANHAVI INVESTMEN T P. LTD. (SUPRA) HAS HELD THAT THE COST OF ACQUISITION COULD ONLY BE THE COST ON THE DATE OF A CTUAL ACQUISITION. THERE WAS NO ACQUISITION OF SHARES WHEN THEY WERE CONVERTED INTO STOCK IN TRADE TO CAPITAL ASSET. IN THE CASE OF BRIGHT STAR INVESTMENT P. LTD. (SUPRA) THE SHARES WERE HELD AS STOCK IN TRADE AND WERE CONVERTED INTO INVESTMENT AT THE BOOK VALUE SHOWN IN THE BOOKS OF ACCOUNTS. LATER ON SHARES HELD AS INVESTMENT 7 I. T. APPEAL NO. 1255 (DEL) OF 2010 WERE SOLD. THE ASSESSEE OFFERED THE CAPITAL GAIN A CCRUED ON SALE OF SHARES. ITAT IN ORDER TO DETERMINE THE PROFIT ON SALE OF SUCH SHARES OBSERVE D THAT THE PROFIT COULD BE DETERMINED ON THE BASIS OF TWO FORMULAE. ACCORDING TO THE AO THE DIF FERENCE BETWEEN THE BOOK VALUE OF SHARES AND MARKET VALUE OF SHARES ON THE DATE OF CONVERSION SH OULD BE TAKEN AS BUSINESS INCOME AND DIFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND THE MARKET VALUE OF SHARES AS ON DATE OF CONVERSION SHOULD BE TAKEN AS CAPITAL GAINS. ACCOR DING TO THE ASSESSEE THE DIFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND THE COST OF ACQUIS ITION OF SHARES WHICH WAS THE BOOK VALUE ON DATE OF CONVERSION WITH INDEXATION FROM THE DATE OF CONVERSION SHOULD BE COMPUTED AS A CAPITAL GAIN. IN THE ABSENCE OF A SPECIFIC PROVISION OUT OF THESE TWO FORMULAE THE FORMULA WHICH IS FAVOURABLE TO THE ASSESSEE SHOULD BE ADOPTED. FROM THE DECISION OF THE ITAT LOGICALLY IT CAN BE CONCLUDED THAT THE ASSESSEE CAN CONVERT STOCK IN TR ADE INTO INVESTMENTS AND CAN SOLD THEM AS INVESTMENT WHICH HAS BEEN DONE IN THE PRESENT CASE. IN FACT THERE IS NO BAR IN LAW FOR CONVERTING STOCK IN TRADE INTO INVESTMENTS. THE AO HAS NOT OB JECTED TO THE CONVERSION OF SHARES FROM STOCK IN TRADE TO INVESTMENTS IN ASSESSMENT YEAR 2005-06 AND IN ASSESSMENT YEAR 2006-07. HENCE IN OUR CONSIDERED OPINION THE LD. CIT (A) IS JUSTIFIED IN DELETING THE ADDITION MADE BY THE AO TREATING THE PROFIT ARISING ON SALE OF SHARES AS BU SINESS INCOME. 11. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 30 TH SEPTEMBER 2011. SD/- SD/- [ RAJPAL YADAV ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : _30 TH SEPTEMBER 2011 . *MEHTA * 8 I. T. APPEAL NO. 1255 (DEL) OF 2010 COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT 4. CIT (APPEALS) 5. DR ITAT NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR ITAT.