NEHA BUSINESS & INVESTMENT P.LTD, MUMBAI v. ITO 2(2)(3), MUMBAI

ITA 1791/MUM/2010 | 2006-2007
Pronouncement Date: 23-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 179119914 RSA 2010
Assessee PAN HSEPT2011D
Bench Mumbai
Appeal Number ITA 1791/MUM/2010
Duration Of Justice 1 year(s) 6 month(s) 16 day(s)
Appellant NEHA BUSINESS & INVESTMENT P.LTD, MUMBAI
Respondent ITO 2(2)(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 23-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 23-09-2011
Date Of Final Hearing 05-09-2011
Next Hearing Date 05-09-2011
Assessment Year 2006-2007
Appeal Filed On 08-03-2010
Judgment Text
1 ITA NO. 1791 & 2638/M/2010 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH MUMBAI BENCHES MUMBAI BEFORE SHRI R S SYAL AM & SHRI VIJAY PAL RAO JM ITA NO. 1791/MUM/2010 (ASST YEAR 2006-07) NEHA BUSINESS & INVESTMENT P LTD 11/13 BOTWALA BUILDING HRNIMAN CIRCLE FORT MUMBAI23 VS THE INCOME TAX OFFICER WARD 2(2)(3) MUMBAI (APPELLANT) (RESPONDENT) ITA NO. 2638/MUM/2010 (ASST YEAR 2006-07) THE INCOME TAX OFFICER WARD 2(2)(3) MUMBAI VS NEHA BUSINESS & INVESTMENT P LTD 11/13 BOTWALA BUILDING HRNIMAN CIRCLE FORT MUMBAI23 (APPELLANT) (RESPONDENT) PAN NO. AACN 7247B ASSESSEE BY SHRI KULIN V MUNIM REVENUE BY SHRI P C MAURYA DT.OF HEARING 5 TH SEPT 2011 DT OF PRONOUNCEMENT 23 SEPT 2011 PER VIJAY PAL RAO JM THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 1.2.2010 OF THE CIT(A) FOR THE ASSESSMENT YEAR 2006-07. 2 THE ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE G ROUNDS IN THIS APPEAL: I)ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE CIT(A) WAS NOT JUSTIFIED IN RETAINING ADDITIONS OF RS.2 43 995/- (AFTER DEDUCTING DEPRECIATION OF RS. 27 100/- FROM THE CAPITALIZED AMO UNT OF RS. 2 71 105/) ON ACCOUNT OF REPAIRS TO TENANTED OFFICE PREMISES. II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE CIT(A) WAS NOT JUSTIFIED IN HOLDING THAT AFTER THE CONVERSI ON OF C LOSING STOCK OF SHARES 2 ITA NO. 1791 & 2638/M/2010 AND SECURITIES INTO INVESTMENT ON 1.4.2005 THE DAT E OF ACQUISITION OF CERTAIN SHARES SOLD IS THE DATE OF CONVERSION I.E. 1.4.2005 AND NOT THE ORIGINAL DATE OF ACQUISITION BY THE APPELLANT. III) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE CIT(A) WAS NOT JUSTIFIED IN RETAINING THE DISALLOWANCE OF B AD DEBTS OF RS. 41 700/- ON THE GROUND THAT THE IRRECOVERABLE AMOUNT WAS NOT ADVA NCED IN THE COURSE OF APPELLANTS BUSINESS OF MONEY LENDING. IV) THE APPELLANT PRAYS TO YOUR HONOURS THAT THE ADDI TION OF RS. 2 43 995/ ON ACCOUNT OF REPAIR & RS. 41 700/- ON ACCOUNT OF BAD DE BTS B DELETED AND FURTHER THAT THE DATE OF ACQUISITION OF SHARES SOLD BE TAKEN AS THE ORIGINAL DATE OF ACQUISITION AND NOT THE DATE OF CONVERSION OF CL OSING STOCK INTO INVESTMENT. 3 GROUND NO.1 IS REGARDING REPAIRS AND MAINTENANCE OF TENANTED OFFICE PREMISES. 3.1 THE ASSESSEE IS ONE OF THE VARIOUS OCCUPANTS OF THE BUILDING CALLED BOTAWALA OWNED BY A TRUST. THE CONDITION OF THE BUILDING WA S OLD AND DILAPIDATED. WHEN THE LANDLORD/OWNER OF THE BUILDING DID NOT CARRY OUT TH E REPAIR WORKS THE OCCUPANTS OF THE BUILDING INCLUDING THE ASSESSEE HAVE DECIDED TO CARRY OUT THE NECESSARY REPAIRS FOR THEIR SAFETY AND AT THEIR OWN COST. THE ASSESS EE HAD PAID ITS SHARE OF REPAIRS AND MAINTENANCE COST OF RS. 2 71 105/-. THE ASSESSING O FFICER TREATED THE SAID EXPENDITURE AS CAPITAL IN NATURE AND ALLOWED THE DE PRECATION THEREON. 3.2 ON APPEAL THE CIT(A) CONFIRMED THE DISALLOWANC E MADE BY THE ASSESSING OFFICER . 4 BEFORE US THE LD AR OF THE ASSESSEE HAS SUBMITTE D THAT THE REGISTERED OFFICE OF THE OFFICE OF THE ASSESSEE COMPANY IS SITUATED IN T HE SAID BUILDING WHICH IS VERY OLD AND IN DILAPIDATED CONDITION. HE HAS FURTHER SUBMIT TED THAT IN SPITE OF SEVERAL PERSUASIONS BY THE OCCUPANTS OF THE BUILDING TO THE LANDLORD TRUST IT DID NOT CARRY OUT THE REPAIR WORKS WHICH WERE IMMEDIATELY REQUIR ED TO SAVE THE BUILDING ESPECIALLY IN VIEW OF THE COMING MONSOON SEASON. UNDER THESE CIRCUMSTANCES THE OCCUPANTS OF THE BUILDING WHO HAD FORMED THEIR ASS OCIATION AND DECIDED TO CARRY 3 ITA NO. 1791 & 2638/M/2010 OUT THE URGENT AND NECESSARY REPAIR WORKS AT THEIR OWN COST. THE LD AR OF THE ASSESSEE HAS REFERRED THE MINUTES OF THE MEETING OF THE ASSOCIATION AND THE CIRCULAR DATED 25.3.2005 WHEREBY THE MINUTES WERE CIRCULATED AMONG THE OCCUPANTS FOR CARRYING OUT THE REPAIR WORK. THUS THE LD AR HAS SUBMITTED THAT THE EXPENDITURE INCURRED TOWARDS ITS SHARE OF REPAIR COST IS CLAIME D AS REVENUE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSES. H E HAS RELIED UPON THE FOLLOWING DECISIONS: I) COMMISSIONER OF INCOME-TAX V. ASHER TEXTILES LT D. 240 ITR 483 II) COMMISSIONER OF INCOME-TAX V. JAWAHAR MILLS LTD . (NO. 2)226 ITR 230 III) ALLIED METAL PRODUCTS V. COMMISSIONER OF INCOM E-TAX137 ITR 689 IV) NATIONAL DIARY DEVELOPMENT BOARD VS ACIT 310 IT R 379 4.1 ON THE OTHER HAND THE LD DR HAS RELIED UPON TH E ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE EXPENSES INCURRE D BY THE ASSESSEE WERE NOT ON THE CURRENT REPAIRS AND THEREFORE THE SAME IS NOT ALLOWABLE UNDER THE HEAD REPAIRS & MAINTENANCE. HE HAS FURTHER POINTED OUT THAT SIN CE THE EXPENDITURE WAS FOR RENOVATION OF THE DILAPIDATED BUILDING WHICH HAS G IVEN AN ENDURING BENEFIT TO THE ASSESSEE; THEREFORE THE EXPENDITURE IS IN THE NATU RE OF CAPITAL. 5 WE HAVE CONSIDERED THE RIVAL CONTENTION AND CAREF ULLY PERUSED THE RELEVANT MATERIAL ON RECORD. FROM THE FACTS AND CIRCUMSTANC ES OF THE CASE IT IS CLEAR THAT THE REPAIRS WORK WAS CARRIED BY THE OCCUPANTS OF THE BU ILDING BECAUSE OF THE DILAPIDATED CONDITION OF THE OLD BUILDING AND DUE T O OVERDUE REPAIRS FOR A LONG PERIOD. THEREFORE IT IS NOT A CASE OF CURRENT REP AIRS AND CANNOT BE ALLOWED U/S 30 & 31 OF THE I T ACT. IT IS AN UNDISPUTED FACT THAT TH E EXPENDITURE WAS INCURRED FOR ACCUMULATED REPAIRS OF EARLIER YEARS THEREFORE THI S EXPENDITURE DOES NOT FALL UNDER THE PROVISIONS OF SEC. 30 & 31 OF THE ACT AS CURREN T REPAIRS. THERE IS A DIFFERENCE BETWEEN THE REPAIRS AND CURRENT REPAIRS. CURRENT RE PAIRS MEAN ONLY SUCH REPAIRS AS 4 ITA NO. 1791 & 2638/M/2010 REINITIATED BY THE DAY TO DAY WEAR AND TEAR DURING THE PREVIOUS YEAR ONLY. WHEREAS THE REPAIRS INCLUDES AND MEANS ACCUMULATED REPAIRS OF THE SEVERAL YEARS. THEREFORE WHEN THE EXPENDITURE IS NOT UNDER ANY CURRENT REPAI RS THEN THERE IS NO QUESTION OF APPLYING THE PROVISIONS OF SEC. 30. 5.1 HOWEVER KEEPING IN VIEW THE FACT THAT THE ASS ESSEE IS NOT THE OWNER OF THE PROPERTY IN QUESTION AND THE ASSESSING OFFICER DISA LLOWED THE EXPENDITURE BY TREATING THE SAME AS CAPITAL IN NATURE WOULD CERTA INLY MAKE OUT A CASE OF CLAIM U/S 37 OF THE I T ACT. IN THIS VIEW OF THE MATTER TH E REASONS GIVEN BY THE CIT(A) DOES NOT HOLD-GOOD. THOUGH THE ASSESSEE IS NOT UNDER ANY OBL IGATION TO CARRY OUT THE REPAIR WORKS OF THE DILAPIDATED BUILDING; BUT FOR THE REAS ONS OF COMMERCIAL EXPEDIENCY THE ASSESSEE HAS INCURRED THE EXPENDITURE ON REPAIR S AS IT WAS NECESSARY AND FOR THE SAFETY OF THE OCCUPANTS OF THE BUILDING THEN THE C LAIM REQUIRES TO THE CONSIDERED U/S 37 OF THE I T ACT. 6 HAVING FOUND THAT THE EXPENDITURE WAS INCURRED WH OLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE; NOW THE OTHER CONDITIONS U/S 37 IS THAT THE EXPENDITURE SHOULD NOT BE CAPITAL IN NATURE. THE DE TAILS AND THE ITEMS OF THE EXPENDITURE HAVE BEEN GIVEN BY THE ASSESSEE IN THE LETTER DATED 25.3.2009 WHICH IS PLACED AT PAGE 32 OF THE PAPER BOOK AS UNDER: I) ATTENDING TO THE CRACK IN THE WALLS AND PLASTER ING THE SAME II) ATTENDING TO THE LEAKAGES IN EACH OFFICE PREMI SES III) REPAIRING OF THE TOILETS IV) MAINTENANCE OF THE PLUMBING AND SEWAGE LINES V) ANNUAL MAINTENANCE OF THE LIFT AND WATER PUMP VI) PAINTING OF THE INTERNAL STAIRCASE AND EXTERNA L WALLS VII) MAKING OF MONSOON SHED IN THE ENTRANCE AND FO YER VIII) ANNUAL CLEANING AND REPAIRING OF THE WATER T ANKS. 5 ITA NO. 1791 & 2638/M/2010 7 FROM THE ABOVE DETAILS IT IS CLEAR THAT THE EXPE NDITURE DOES NOT BRING INTO ANY NEW ASSET OR GIVE ANY ENDURING BENEFIT TO THE ASSES SEE BUT WAS INCURRED TO MAINTAIN THE OFFICE IN A WORKING CONDITION. ACCORDINGLY WE ALLOW THE CLAIM OF THE ASSESSEE AS BUSINESS EXPENDITURE. 8 GROUND NO.2 IS REGARDING CONVERSION OF CLOSING ST OCK OF SHARES AND SECURITIES INTO INVESTMENT TREATMENT OF INCOME FROM SALE OF T HE SAME BY THE ASSESSING OFFICER AS BUSINESS INCOME AND DATE OF ACCUSATION OF SHARES SOLD. 8.1 THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SHA RES TRADING TILL AY 2005-06 BUT IT HAS DISCONTINUED THE BUSINESS OF DEALING IN SHAR ES AND SECURITIES W.E.F 1.4.2005. ACCORDINGLY THE CLOSING STOCK OF RS. 29 11 486/- A S ON 31.3.2005 WAS CONVERTED INTO INVESTMENT. THE ASSESSEE SOLD CERTAIN SHARES DURING THE YEAR AND HAS ADMITTED LONG TERM CAPITAL GAINS (EXEMPT FROM TAX) AS WELL AS SHO RT TERM CAPITAL GAINS. THE ASSESSING OFFICER QUESTIONED THE ACT OF CONVERSI ON OF THE STOCK IN TRADE INTO INVESTMENT AND HELD THAT IT IS NOTHING BUT DELIBERA TE TAX AVOIDANCE WHICH IS NOT PERMISSIBLE IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MCDOWELL AND CO. LTD. V. CTO REPORTED IN 154 ITR 14 8. ACCORDINGLY THE ASSESSING OFFICER ASSESSED THE CAPITAL GAINS AS BUSINESS INCO ME. 9 ON APPEAL THE CIT(A) BY FOLLOWING THE DECISION O F THE TRIBUNAL IN THE CASE OF ACIT VS BRIGHT STAR INVESTMENTS P LTD REPORTED IN 24 SOT 288 HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TREATING THE CAPITAL GAIN AS BUSINESS INCOME. HOWEVER THE CIT(A) HELD THAT THE HOLDING PERIOD OF THE SHA RES FOR THE PURPOSE OF CAPITAL GAIN TO BE RECKONED FROM 1.4.2005 I.E. THE DATE OF CONV ERSION AND NOT THE ORIGINAL DATE OF ACQUISITION OF SHARES BEING STOCK IN TRADE. AC CORDINGLY THE CIT(A) GRANTED PART RELIEF TO THE ASSESSEE ON THIS ISSUE. AGGRIEVED FR OM THE IMPUGNED ORDER OF THE CIT(A) THE ASSESSEE AS WELL AS THE REVENUE PREFERRED APPE AL BEFORE US. 6 ITA NO. 1791 & 2638/M/2010 10 THE REVENUE HAS RAISED THE ONLY GROUND IN ITA NO . 2638/MUM/2010 AS UNDER: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD CIT(A) HAS ERRED IN HOLDING THAT AN AMOUNT OF RS. 11 74 324 /- BEING PROFIT ON SALE OF SHARES IS TAXABLE AS SHORT TERM CAPITAL GAIN AS OPP OSED TO PROFITS OF BUSINESS AS HELD BY THE ASSESSING OFFICER WHO HAD GIVEN A CL EAR FINDING IN THE ASSESSMENT ORDER THAT THE ACT OF CONVERSION OF SHAR ES HELD AS STOCK IN TRADE INTO INVESTMENTS WAS A COLOURABLE TRANSACTION INTEND ED TO MINIMIZE THE TAX LIABILITY. 10.1 SINCE THIS GROUND IS COMMON BEING GROUND NO2 O F THE APPEAL OF THE ASSESSEE AND THE ONLY GROUND IN REVENUES APPEAL; THEREFORE WE DISPOSE OF THE SAME IN A COMPOSITE FINDING. 11 THE LD AR OF THE ASSESSEE HAS SUBMITTED THAT SE C 45(2) IS NOT APPLICABLE TO THE ASSESSEE IN VIEW OF THE FACT THAT THE ASSESSEE HAS NOT CONVERTED ANY CAPITAL ASSET INTO STOCK IN TRADE BUT IT IS THE OTHER WAY R OUND WHERE THE ASSESSEE HAS CONVERTED THE STOCK IN TRADE INTO INVESTMENT. THER E IS NO PROVISION IN THE I T ACT AS TO WHAT METHOD IS TO BE FOLLOWED IN SUCH A CASE; THERE FORE THE METHOD ADOPTED BY THE ASSESSEE HAS TO BE ACCEPTED. THE ASSESSING OFFI CER CANNOT IMPOSE UPON THE ASSESSEE ANY METHOD OF HIS CHOICE. THE LD AR HAS FU RTHER SUBMITTED THAT THE TRIBUNAL IN THE CASE OF BRIGHT STAR INVESTMENTS P LTD (SUPR A) HAS DECIDED IDENTICAL ISSUE IN FAVOUR OF THE ASSESSEE AND HELD THAT CAPITAL GAIN ARISING FROM SALE OF SHARES CONVERTED FROM STOCK IN TRADE INTO INVESTMENT CANNO T BE TREATED AS BUSINESS INCOME. HE HAS FURTHER CONTENDED THAT THE DATE OF A CQUISITION SHOULD BE THE DATE WHEN THE ASSESSEE HAS ORIGINALLY PURCHASED THE SHAR ES IN QUESTION AND NOT THE DATE ON WHICH THE STOCK IN TRADE WAS CONVERTED INTO INVE STMENT. ACCORDINGLY THE LD AR HAS SUPPORTED THE ORDER OF THE CIT(A) TO THE EXTENT OF TREATING THE SURPLUS ON SALE OF SHARES AND SECURITIES AS CAPITAL GAIN; BUT CHALLENG ED THE ORDER OF THE CIT(A) FOR NOT ACCEPTING THE DATE OF ACQUISITION AS THE ORIGINAL D ATE OF PURCHASE OF THE SHARES AND SECURITIES. 7 ITA NO. 1791 & 2638/M/2010 11.1 ON THE OTHER HAND THE LD DR HAS SUBMITTED THA T THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF SHARE TRADING FOR THE LAST SEVER AL YEARS AND BECAUSE OF THE DIFFERENTIAL TAX RATE THE ASSESSEE HAS CONVERTED T HE STOCK IN TRADE INTO INVESTMENT TO TAKE BENEFIT OF LOWER RATE OF TAX APPLICABLE TO SHO RT TERM CAPITAL GAINS AND TAX EXEMPTION TO LONG TERM CAPITAL GAINS. HE HAS FURTH ER SUBMITTED THAT AS PER THE PROVISIONS OF SEC. 2(14) OF THE I T ACT STOCK IN T RADE CANNOT BE INCLUDED IN THE CAPITAL ASSET AND IN THE ABSENCE OF ANY PROVISIONS INCOME TAX ACT THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT IS NOT PERMISSIBLE. ON T HE POINT OF DATE OF ACQUISITION HE HAS RELIED UPON THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SPLENDOR CONSTRUCTIONS P LTD VS ITO REPORTED IN 27 SOT 39. 12 WE HAVE CONSIDERED THE RIVAL CONTENTION AND PERU SED THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS DISCONTINUED THE BUSINE SS IN DEALING IN SHARES AND UNDERTOOK SILVERWARE BUSINESS W.E.F 1.4.2005 AS DE CIDED IN THE BOARD OF DIRECTORS MEETING HELD ON 22.12.2004 AND 17.3.2005. THEREFORE AS FAR AS THE CONVERSION OF STOCK IN TRADE INTO INVESTMENT AND CONSEQUENT ADMIS SION OF CAPITAL GAIN TREATED BY THE ASSESSING OFFICER AS BUSINESS INCOME IS CONCERN ED IT IS TO BE NOTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDERED AND ADJUDICATED BY THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BRIGHT STAR INVESTMENTS P LTD (SUPRA) AND THE TRIBUNAL HAS HELD IN PARA 6 AS UNDER: 6. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM CARE FUL PERUSAL OF THE RECORD WE FIND THAT THE SHARES HELD IN STOCK-IN-TRADE WERE CONVERT ED INTO INVESTMENT AT THE BOOK VALUE SHOWN IN THE BOOKS OF ACCOUNT. LATER ON THE SHARES HELD IN INVESTMENT WERE SOLD AND THE ASSESSEE OFFERED THE CAPITAL GAIN ACCR UED ON THE SALE OF SHARES. ADMITTEDLY THE PROVISIONS OF S. 45(2) OF THE IT AC T DEALS WITH THE ISSUE OF CAPITAL GAIN WHERE THE INVESTMENT IS CONVERTED INTO STOCK-IN-TRA DE. ACCORDING TO THIS SECTION THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY O F 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 TAX AS THE INCOME FROM THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM AND FOR THE PURPOSE OF S. 48 FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVE RSION OR TREATMENT SHALL BE 8 ITA NO. 1791 & 2638/M/2010 DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF TRANSFER OF THE CAPITAL ASSET. WHILE INCORPORATING THE SUB-S. (2) TO S. 45 THE LEGISLATURE HAS NOT VISUALIZED THE SITUATIONS IN OTHER WAY ROUN D WHERE THE STOCK-IN-TRADE IS TO BE CONVERTED INTO THE INVESTMENTS AND LATER ON THE INV ESTMENT WAS SOLD ON PROFIT. IN THE ABSENCE OF A SPECIFIC PROVISION TO DEAL WITH THIS T YPE OF SITUATION A RATIONAL FORMULA SHOULD BE WORKED OUT TO DETERMINE THE PROFITS AND G AINS ON TRANSFER OF THE ASSET. WE ARE ALSO CONSCIOUS ABOUT THE JUDGMENTS IN THE CASES OF SIR KIKABHAI PREMCHAND (SUPRA) AND DHANUKA & SONS (SUPRA) IN WHICH IT HAS BEEN HELD THAT THERE CANNOT BE AN ACTUAL PROFIT OR LOSS OF SUCH TRANSFER WHEN NO T HIRD PARTY IS INVOLVED AND THE ITEMS ARE KEPT IN A DIFFERENT ACCOUNT OF THE ASSESSEE HIM SELF. THE QUESTION OF GAIN OR LOSS WOULD ARISE ONLY IN FUTURE WHEN THE STOCK TRANSFERR ED TO THE INVESTMENT ACCOUNT MIGHT BE DEALT WITH BY THE ASSESSEE. IF SUCH SHARES BE DI SPOSED OF AT A VALUE OTHER THAN THE VALUE AT WHICH IT WAS TRANSFERRED FROM THE BUSINESS STOCK THE QUESTION OF CAPITAL LOSS OR CAPITAL GAIN WOULD ARISE. IN THE ABSENCE OF A SP ECIFIC PROVISION TO DEAL WITH THE PRESENT SITUATION TWO FORMULAE CAN BE EVOLVED TO W ORK OUT THE PROFITS AND GAINS ON TRANSFER OF THE ASSETS. ONE FORMULA WHICH HAS BEEN ADOPTED BY THE ASSESSING OFFICER I.E. DIFFERENCE BETWEEN THE BOOK VALUE OF THE SHAR ES AND THE MARKET VALUE OF THE SHARES ON THE DATE OF CONVERSION SHOULD BE TAKEN AS A BUSINESS INCOME AND THE DIFFERENCE BETWEEN THE SALE PRICE OF THE SHARES AND THE MARKET VALUE OF THE SHARES ON THE DATE OF CONVERSION BE TAKEN AS A CAPITAL GA IN. THE OTHER FORMULA WHICH IS ADOPTED BY THE ASSESSEES I.E. THE DIFFERENCE BETWE EN THE SALE PRICE OF THE SHARES AND THE COST OF ACQUISITION OF SHARE WHICH IS THE BOOK VALUE ON THE DATE OF CONVERSION WITH INDEXATION FROM THE DATE OF CONVERS ION SHOULD BE COMPUTED AS A CAPITAL GAIN. IN THE ABSENCE OF A SPECIFIC PROVISIO N OUT OF THESE TWO FORMULAE THE FORMULA WHICH IS FAVOURABLE TO THE ASSESSEE SHOULD BE ACCEPTED. WE THEREFORE OF THE VIEW THAT CIT(A) HAS PROPERLY EXAMINED THIS ISS UE IN THE PRESENT SITUATION AND DIRECTED THE AO TO ACCEPT THE CAPITAL GAIN OFFERED BY THE ASSESSEE. WE ACCORDINGLY CONFIRM HIS ORDER. 12.1 THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF BRIGHT STAR INVESTMENTS P LTD (SUPRA) WE DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE. 13 AS REGARDS THE QUESTION OF HOLDING PERIOD OF SHA RES FOR THE PURPOSE OF CAPITAL GAIN AS RAISED BY THE ASSESSEE IN ITS APPEAL IT IS DISCERNIBLE FROM THE COMBINED READING OF SEC 2(14) 2(29A) AND 2(42A) OF THE I T ACT THAT SHORT TERM CAPITAL ASSET OR LONG TERM CAPITAL ASSET IS DETERMINED ON THE BASIS OF PERIOD FOR WHICH THE CAPITAL ASSET IS HELD BY THE ASSESSEE BEFORE THE DATE OF TR ANSFER. SEC 2(42A) READS AS UNDER; 9 ITA NO. 1791 & 2638/M/2010 SEC. 2(42A) SHORT-TERM CAPITAL ASSET MEANS A CAPITAL ASSET H ELD BY AN ASSESSEE FOR NOT MORE THAN 4 [THIRTY-SIX] MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER :] 5 [ PROVIDED THAT IN THE CASE OF A SHARE HELD IN A COMPANY 6 [OR ANY OTHER SECURITY LISTED IN A RECOGNISED STOCK EXCHANGE IN INDIA OR A UNIT OF THE UNIT TRUST OF INDIA ESTABLISHED UNDER THE UNIT TRUST OF INDIA ACT 1963 (52 OF 1963) OR A UNIT OF A MUTUAL FUND SPECIFIED UNDER CLAUSE ( 23D ) OF SECTION 10] 7 [OR A ZERO COUPON BOND] THE PROVISIONS OF THIS CLAUSE SHALL HAVE EFFECT AS IF FOR THE WORDS THIRTY-SIX MONTHS THE WORDS TWELVE MONTHS HAD BEEN SUBSTIT UTED.] 8 [ EXPLANATION 1 ].( I ) IN DETERMINING THE PERIOD FOR WHICH ANY CAPITAL A SSET IS HELD BY THE ASSESSEE ( A ) IN THE CASE OF A SHARE HELD IN A COMPANY IN LIQUI DATION THERE SHALL BE EXCLUDED THE PERIOD SUBSEQUENT TO THE DATE ON WHICH THE COMP ANY GOES INTO LIQUIDATION ; ( B ) IN THE CASE OF A CAPITAL ASSET WHICH BECOMES THE PROPERTY OF THE ASSESSEE IN THE CIRCUMSTANCES MENTIONED IN 9 [SUB-SECTION (1)] OF SECTION 49 THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE ASSET WAS HELD BY THE PREVIOUS OWNER REFERRED TO IN THE SAID SECTION ; 10 [( C ) IN THE CASE OF A CAPITAL ASSET BEING A SHARE OR S HARES IN AN INDIAN COMPANY WHICH BECOMES THE PROPERTY OF THE ASSESSEE IN CONSI DERATION OF A TRANSFER REFERRED TO IN CLAUSE ( VII ) OF SECTION 47 THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE SHARE OR SHARES IN THE AMALGAMATING COMPA NY WERE HELD BY THE ASSESSEE ;] 11 [( D ) IN THE CASE OF A CAPITAL ASSET BEING A SHARE OR ANY OTHER SECURITY (HEREAFTER IN THIS CLAUSE REFERRED TO AS THE FINANCIAL ASSET) SUB SCRIBED TO BY THE ASSESSEE ON THE BASIS OF HIS RIGHT TO SUBSCRIBE TO SUCH FINANCIAL A SSET OR SUBSCRIBED TO BY THE PERSON IN WHOSE FAVOUR THE ASSESSEE HAS RENOUNCED H IS RIGHT TO SUBSCRIBE TO SUCH FINANCIAL ASSET THE PERIOD SHALL BE RECKONED FROM THE DATE OF ALLOTMENT OF SUCH FINANCIAL ASSET ; ( E ) IN THE CASE OF A CAPITAL ASSET BEING THE RIGHT T O SUBSCRIBE TO ANY FINANCIAL ASSET WHICH IS RENOUNCED IN FAVOUR OF ANY OTHER PERSON T HE PERIOD SHALL BE RECKONED FROM THE DATE OF THE OFFER OF SUCH RIGHT BY THE COM PANY OR INSTITUTION AS THE CASE MAY BE MAKING SUCH OFFER ;] 12 [( F ) IN THE CASE OF A CAPITAL ASSET BEING A FINANCIAL ASSET ALLOTTED WITHOUT ANY PAYMENT AND ON THE BASIS OF HOLDING OF ANY OTHER FI NANCIAL ASSET THE PERIOD SHALL BE RECKONED FROM THE DATE OF THE ALLOTMENT OF SUCH FINANCIAL ASSET ;] 13 [( G ) IN THE CASE OF A CAPITAL ASSET BEING A SHARE OR SH ARES IN AN INDIAN COMPANY WHICH BECOMES THE PROPERTY OF THE ASSESSEE IN CONSI DERATION OF A DEMERGER THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE SH ARE OR SHARES HELD IN THE DEMERGED COMPANY WERE HELD BY THE ASSESSEE ;] 14 [( H ) IN THE CASE OF A CAPITAL ASSET BEING TRADING OR CL EARING RIGHTS OF A RECOGNISED STOCK EXCHANGE IN INDIA ACQUIRED BY A PERSON PURSUA NT TO DEMUTUALISATION OR CORPORATISATION OF THE RECOGNISED STOCK EXCHANGE IN INDIA AS REFERRED TO IN CLAUSE ( XIII ) OF SECTION 47 THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE PERSON WAS A MEMBER OF THE RECOGNISED STOCK EXCHANG E IN INDIA IMMEDIATELY PRIOR TO SUCH DEMUTUALISATION OR CORPORATISATION; ( HA ) IN THE CASE OF A CAPITAL ASSET BEING EQUITY SHARE OR SHARES IN A COMPANY ALLOTTED PURSUANT TO DEMUTUALISATION OR CORPORATISATION OF A RECOGNISED STOCK EXCHANGE 10 ITA NO. 1791 & 2638/M/2010 IN INDIA AS REFERRED TO IN CLAUSE ( XIII ) OF SECTION 47 THERE SHALL BE INCLUDED THE PERIOD FOR WHICH THE PERSON WAS A MEMBER OF THE REC OGNISED STOCK EXCHANGE IN INDIA IMMEDIATELY PRIOR TO SUCH DEMUTUALISATION OR CORPORATISATION;] 15 [( HB ) IN THE CASE OF A CAPITAL ASSET BEING ANY SPECIFI ED SECURITY OR SWEAT EQUITY SHARES ALLOTTED OR TRANSFERRED DIRECTLY OR INDIRECTLY BY THE EMPLOYER FREE OF COST OR AT CONCESSIONAL RATE TO HIS EMPLOYEES (INCLUDING FORME R EMPLOYEE OR EMPLOYEES) THE PERIOD SHALL BE RECKONED FROM THE DATE OF ALLOT MENT OR TRANSFER OF SUCH SPECIFIED SECURITY OR SWEAT EQUITY SHARES;] ( II ) IN RESPECT OF CAPITAL ASSETS OTHER THAN THOSE MEN TIONED IN CLAUSE ( I ) THE PERIOD FOR WHICH ANY CAPITAL ASSET IS HELD BY THE ASSESSEE SHALL BE DETERMINED SUBJECT TO ANY RULES WHICH THE BOARD MAY MAKE IN THIS BEHALF.] 16 [ EXPLANATION 2. FOR THE PURPOSES OF THIS CLAUSE THE EXPRESSION S ECURITY 17 SHALL HAVE THE MEANING ASSIGNED TO IT IN CLAUSE ( H ) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT 1956 (42 OF 1956).] 18 [ EXPLANATION 3. FOR THE PURPOSES OF THIS CLAUSE THE EXPRESSIONS SPECIFIED SECURITY AND SWEAT EQUITY SHARES SHALL HAVE THE MEANINGS RESPECTIVELY ASSIGNED TO THEM IN THE EXPLANATION TO CLAUSE ( D ) OF SUB-SECTION (1) OF SECTION 115WB ;] 13.1 A PLAN READING OF THE ABOVE PROVISION MAKES I T CLEAR THAT HOLDING PERIOD OF CAPITAL ASSET IS RELEVANT AND NOT THE HOLDING PERI OD OF TRADING ASSET. THEREFORE HOLDING PERIOD OF ASSET BEING CAPITAL IN NATURE IS MATERIAL AND SIGNIFICANT FOR DETERMINATION OF CHARACTER OF ASSET AS LONG TERM OR SHORT TERM. IN THE CASE IN HAND THE SHARES HAVE BEEN RECOGNIZED AS CAPITAL ASSET ON LY ON 1.4.2005 AND PRIOR TO THAT IT WAS A TRADING ASSET. FURTHER THE DEFINITION OF CAPITAL ASSET U/S 2(14) EXPRESSLY EXCLUDES STOCK IN TRADE. ACCORDINGLY HOLDING PERIO D AS CONTEMPLATED U/S 2(42A) COULD BE COUNTED ONLY FROM THE DATE OF CONVERSION O F STOCK IN TRADE INTO INVESTMENT. IN OTHER WORDS THE DURATION FOR WHICH THE CAPITAL ASSET WAS KEPT BY THE ASSESSEE BEFORE TRANSFER WOULD BE THE HOLDING PERIOD FOR THE PURPOSE OF DETERMINING THE CHARACTER OF SHORT TERM OR LONG TERM CAPITAL ASSET. 14 A SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF SPLENDOR CONSTRUCTIONS P LTD REPORTED IN 27 SOT 39 IN PARA 11 & 12 AS UNDER: 11. AS IS EVIDENT FROM THE DEFINITIONS GIVEN ABOVE A CAPITAL ASSET HELD BY AN ASSESSEE FOR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING T HE DATE OF ITS TRANSFER IS A SHORT- TERM CAPITAL ASSET WHEREAS A CAPITAL ASSET HELD BY AN ASSESEE FOR 36 MONTHS OR MORE 11 ITA NO. 1791 & 2638/M/2010 IS REGARDED AS LONG-TERM CAPITAL ASSET. THE EXPRESS ION USED IN BOTH THESE DEFINITIONS IS CAPITAL ASSET WHICH CLEARLY ENVISAGES THAT FOR AS CERTAINING AS TO WHETHER IT IS A SHORT- TERM CAPITAL ASSET OR A LONG-TERM CAPITAL ASSET TH E PERIOD FOR WHICH THE SAID ASSET IS HELD BY THE ASSESSEE AS CAPITAL ASSET ALONE HAS TO BE RECKONED. THE CLAIM OF THE ASSESSEE IN THE PRESENT CASE IN THIS REGARD IS THAT THE ASSET IN QUESTION I.E. THE LAND WAS ACQUIRED BY IT IN THE FINANCIAL YEAR 1998-99 AN D ALTHOUGH THE SAME WAS HELD BY IT AS STOCK-IN-TRADE UPTO 31ST MARCH 2002 AND CONVERT ED INTO INVESTMENT ONLY ON 1ST APRIL 2002 THE PERIOD OF HOLDING IT AS STOCK-IN-T RADE ALSO HAS TO BE RECKONED FOR THE PURPOSE OF ASCERTAINING AS TO WHETHER IT WAS A SHOR T-TERM CAPITAL ASSET OR A LONG-TERM CAPITAL ASSET. WE FIND IT DIFFICULT TO ACCEPT THIS CLAIM OF THE ASSESSEE. 12. AS RIGHTLY HELD BY THE AO AS WELL AS BY THE LEA RNED CIT(A) 'CAPITAL ASSET' IS DEFINED IN S. 2(14) AS PROPERTY OF ANY KIND HELD BY THE ASS ESSEE WHETHER OR NOT CONNECTED WITH HIS BUSINESS OR PROFESSION BUT THE SAME DOES NOT I NCLUDE INTER ALIA ANY STOCK-IN-TRADE CONSUMABLE STORES OR RAW MATERIALS HELD FOR THE PUR POSE OF HIS BUSINESS OR PROFESSION. IN THE PRESENT CASE THE PROPERTY IN QUESTION I.E. LAND WAS HELD BY THE ASSESSEE COMPANY UPTO 31ST MARCH 2002 AS THE STOCK-IN-TRADE FOR THE PURPOSE OF ITS BUSINESS AND THIS BEING SO WE ARE OF THE VIEW THAT THE PERI OD FOR WHICH THE SAID PROPERTY WAS HELD BY THE ASSESSEE COMPANY AS STOCK-IN-TRADE OF I TS BUSINESS COULD NOT BE RECKONED FOR ASCERTAINING AS TO WHETHER IT WAS A LONG-TERM C APITAL ASSET OR A SHORT-TERM CAPITAL ASSET WITHIN THE MEANING GIVEN IN SS. 2(29A) AND 2( 42A) AS THE SAME WAS NOT HELD BY IT AS A CAPITAL ASSET. IT IS ONLY WHEN THE SAME WAS CO NVERTED BY THE ASSESSEE COMPANY INTO INVESTMENT I.E. W.E.F. 1ST APRIL 2002 THAT T HE SAME WAS HELD BY IT AS CAPITAL ASSET AND AS THE SAME WAS HELD BY IT FOR NOT MORE THAN 36 MONTHS IMMEDIATELY PRECEDING THE DATE OF ITS TRANSFER I.E. 12TH DEC. 2002 IT WAS A SHORT-TERM CAPITAL ASSET AS DEFINED IN S. 2(42A) AND THE CAPITAL GAIN ARISING FROM THE SALE THEREOF WAS CHARGEABLE TO TAX AS SHORT-TERM CAPITAL GAIN AS DEFINED IN S. 2(42B ). IN THAT VIEW OF THE MATTER WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF THE LEARNED C IT(A) UPHOLDING THE ACTION OF THE AO IN TREATING THE PROFIT ARISING FROM THE SALE OF THE SAID PROPERTY AS SHORT-TERM CAPITAL GAIN AND UPHOLDING THE SAME WE DISMISS THIS APPEAL FILED BY THE ASSESSEE. 15 IN VIEW OF THE ABOVE DISCUSSION AS WELL AS THE D ECISION OF THE DELHI BENCH OF THE TRIBUNAL (SUPRA) WE DECIDE THIS ISSUE AGAINST T HE ASSESSEE. ACCORDINGLY WE UPHOLD THE ORDER OF THE CIT(A) ON THE COMMON ISSUE RAISED BY THE ASSESSEE AND THE REVENUE. 15 GROUND NO.3 REGARDING BAD DEBTS. THE RELEVANT FA CTS AS RECORDED BY THE AO IN PARA 3 OF HIS ORDER ARE AS UNDER: THE ASSESSEE HAD DURING THE COURSE OF MONEY LENDING BUSINESS ADVANCED RS 1 01 700/- BY CROSSED ACCOUNT PAYEE CHEQUE TO KOD OS BUSINESS LTD OUT OF WHICH KUDOS BUSINESS LTD REPAID RS. 10 000/- ON 7.7. 02 BY CHEQUE LEAVING A 12 ITA NO. 1791 & 2638/M/2010 BALANCE OF RS. 91 700/- RECOVERABLE ON 31.3.04. IN SPITE OF SEVERAL REMINDERS & PERSUASIONS ON EMAIL & TELEPHONE THE PARTY DID NO T PAY THE BALANCE OF RS. 91 700/-. HENCE ASSESSEE DECIDED TO WRITE OFF RS. 50 000/- IN AY 05-06 16 AFTER CONSIDERING THE EXPLANATION OF THE ASSESSE E THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT LOAN WAS NOT GIVEN DURING THE ORDINARY COURSE OF BUSINESS AND THE INCOME WAS NEVER ACCOUNTED FOR. 16.1 ON APPEAL THE CIT(A) CONCURRED WITH THE VIEW TAKEN BY THE ASSESSING OFFICER. 17 BEFORE US THE LD AR OF THE ASSESSEE HAS SUBMITT ED THAT THE INTEREST ON ADVANCE WAS TAKEN INTO ACCOUNT. HE HAS REFERRED TH E LEDGER ACCOUNT OF THE PARTY FOR THE AY 2002-03 AT PAGE 39 OF THE PAPER BOOK AN D SUBMITTED THAT THE PRINCIPLE OUTSTANDING AMOUNT OF ADVANCE WAS ONLY RS. 90 000 /- AND THE INTEREST DUE THEREUPON WAS RS. 11 700/-. THUS THE TOTAL OUTSTAN DING AMOUNT WAS RS. 1 01 700/-. THE MONEY WAS ADVANCED DURING THE COURSE OF MONEY L ENDING BUSINESS OF THE ASSESSEE; THEREFORE THE ASSESSING OFFICER HAS GIVE N A CONTRADICTORY FINDING TO THE ADMITTED FACTS OF THE CASE. HE HAS FURTHER CONTENDE D THAT THE PARTY HAS REPAID THE PART OF THE LOAN OF RS. 10 000/- AND SINCE THE PART Y WAS IN THE FINANCIAL CRISES; THEREFORE COULD NOT REPAY THE BALANCE OF THE DUE A MOUNT IN SPITE OF SEVERAL PERSUASIONS IN THE FORM OF SENDING E-MAIL CORRESPON DENCE. HENCE THE ASSESSEE DECIDED TO WRITE OFF OF RS. 50 00 0/- ON 31.3.2005 IN THE HOPE THAT THE PARTY WOULD PAY THE BALANCE AMOUNT. THE SAID WRITTEN OFF AMOUNT OF RS. 50 000/- AS BAD DEBT FOR THE AY 2005-06 WAS ALLOWED BY THE ASSESSIN G OFFICER . WHEN THERE WAS NO CHANCE OF RECOVERY FROM THE PARTY THE ASSESSEE WRI TTEN OFF THE BALANCE AMOUNT OF RS. 41 700/- FOR THE YEAR UNDER CONSIDERATION AND T HUS THE CONDITIONS U/S 36(1)(VII) AND 36(2) ARE FULFILLED. HE HAS RELIED UPON THE DE CISION OF THE HONBLE SUPREME COURT IN THE CASE OF T. R. F. LTD. V. COMMISSIONER OF INCOME-TAX REPORTE D IN 323 ITR 397. 13 ITA NO. 1791 & 2638/M/2010 17.1 ON THE OTHER HAND THE LD DR SUPPORTED THE ORD ERS OF THE LOWER AUTHORITIES. 18 HAVING CONSIDERED THE RIVAL CONTENTION RELEVANT MATERIAL ON RECORD AND THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT T HE LOAN WAS GIVEN IN THE COURSE OF MONEY LENDING BUSINESS AND THE INTEREST WAS TAKE N INTO ACCOUNT AS EVIDENT FROM THE RECORD. THEREFORE VERY BASIS OF DISALLOWANCE BY THE ASSESSING OFFICER IS CONTRARY TO THE RECORD AND FACTS AS RECORDED IN PARA 3 OF TH E ASSESSMENT AND REPRODUCED BY US IN THE FOREGOING PARAGRAPH. FURTHER IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF TRF LTD (SUPRA) AND AS PER THE AMEND ED PROVISIONS OF SEC. 36(1)(VII) IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THA T THE DEBT IN FACT HAS BECOME IRRECOVERABLE TO CLAIM THE DEDUCTION IN REGARD TO B AD DEBTS. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNT S OF THE ASSESSEE. ACCORDINGLY IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD (SUPRA ) WE ALLOW THE CLAIM OF THE ASSESSEE. 19 IN THE RESULT THE APPEAL OF THE REVENUE IS DISM ISSED WHEREAS THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THE 23 RD DAY OF SEPT 2011. SD/- SD/- ( R S SYAL ) ACCOUNTANT MEMBER ( VIJAY PAL RAO ) JUDICIAL MEMBER PLACE: MUMBAI : DATED: 23 RD SEPT 2011 RAJ* 14 ITA NO. 1791 & 2638/M/2010 COPY FORWARDED TO: 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR ITAT MUMBAI