ACIT (OSD) 1(3), MUMBAI v. DHARAMYUG INVESTMENTS LTD, MUMBAI

ITA 3383/MUM/2009 | 2005-2006
Pronouncement Date: 28-05-2010 | Result: Dismissed

Appeal Details

RSA Number 338319914 RSA 2009
Assessee PAN AAACD1346D
Bench Mumbai
Appeal Number ITA 3383/MUM/2009
Duration Of Justice 1 year(s) 6 day(s)
Appellant ACIT (OSD) 1(3), MUMBAI
Respondent DHARAMYUG INVESTMENTS LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 28-05-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted D
Tribunal Order Date 28-05-2010
Date Of Final Hearing 22-03-2010
Next Hearing Date 22-03-2010
Assessment Year 2005-2006
Appeal Filed On 22-05-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH D MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SMT. ASHA VIJAYARAG HAVAN (JM) ITA NO. 3383/MUM/2009 ASSESSMENT YEAR-2005-06 THE ACIT (OSD)1(3) AAYAKAR BHAVAN MUMBAI-400 020 VS. M/S. DHARAMYUG INVESTMENTS LTD. TIMES OF INDIA BLDG. DR. D.N. ROAD MUMBAI-400 001 PAN - AAACD1346D (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI PEEYUSH JAIN RESPONDENT BY: SHRI V. MOHAN SHRI S. VENKATARAMAN O R D E R PER SMT. ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED A GAINST THE ORDER DT. 9.3.2009 PASSED BY THE LD. CIT(A)-XXI MUMBAI F OR THE ASSESSMENT YEAR 2005-06. 2. THE ONLY GROUND RAISED BY THE REVENUE READS AS UNDER: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LEARNED CIT(A) IS JUSTIFIED IN DIRECTING T HE AO TO TREAT THE PROFIT ON SALE OF INVESTMENTS IN UNITS OF MUTUAL FU NDS AS CAPITAL GAINS AND ALLOW DEDUCTION U/S 54EC WITHOUT APPRECIA TING THE FACT THAT AO HAS RIGHTLY TREATED THIS PROFIT AS BUS INESS PROFIT SINCE THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING RATHER THAN INVESTMENT. 3. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SOLICITING MUTUAL FUND INVESTMENTS FOR VARIOUS ASSET MANAGEMEN T COMPANIES. IT IS ITA NO. 3383M/09 2 REGISTERED UNDER THE GUIDELINES OF SEBI WITH THE AS SOCIATION OF MUTUAL FUNDS IN INDIA. THE ASSESSEE COMPANY EARNS INCOME BY WAY OF BROKERAGE FROM ASSET MANAGEMENT COMPANIES. THE ASSE SSEE HAS ALSO INVESTED ITS FUNDS IN MUTUAL FUNDS AND EQUITY SHARE S. SUCH INVESTMENTS ARE REFLECTED IN ITS BALANCE SHEET UNDER THE HEAD INVESTMENTS AND HENCE ARE NOT TREATED AS STOCK IN TRADE. THE ASSE SSEE COMPANY EARNED RS.2 34 08 990/- BY WAY OF BROKERAGE ON SALE OF UNI TS DURING THE YEAR. THE ASSESSEE COMPANY ALSO SOLD SOME MUTUAL FUNDS. T HESE UNITS WERE SHOWN AS LONG TERM CAPITAL ASSETS BY THE ASSESSEE S INCE THESE HAD BEEN HELD BY THE ASSESSEE COMPANY FOR MORE THAN 12 MONTH S. THE ASSESSEE COMPANY INVESTED THE NET GAIN IN APPROVED INVESTMEN TS U/S 54EC OF THE I.T. ACT AND CLAIMED EXEMPTION THERE UNDER. 4. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE CO MPANY HAS SHOWN PROFIT ON SALE OF INVESTMENTS FOR A TOTAL AMOUNT OF RS.29 40 989/- AND OF WHICH RS.49 789/- IS CLAIMED AS SHORT TERM CAPITAL GAIN AND THE REST IS BOOK PROFIT FROM LOANS AND CAPITAL GAIN. A TOTAL A MOUNT OF RS.16 32 967/- HAS BEEN SHOWN AND CLAIMED BY THE AS SESSEE AS NET AMOUNT OF LONG TERM CAPITAL GAINS. ASSESSING OFFICE R CONCLUDED THAT THE BASIC NATURE OF THE BUSINESS OF ASSESSEE (RELATING TO STOCKS AND SECURITIES MARKET) IS TRADING RATHER THAN INVESTMENTS. THE C APITAL GAINS CLAIMED TO HAVE BEEN EARNED BY THE ASSESSEE ARE OUT OF THE SALE OF UNITS AND MUTUAL FUNDS WHICH WERE MOSTLY PURCHASED AND SOLD W ITHIN A PERIOD OF LITTLE MORE THAN ONE YEAR EXCEPTING A FEW EXCEPTIO NS. THE NATURE OF THESE ASSETS WAS THEREFORE TRADING AND NOT CAPITAL IN NATURE. THE AO OBSERVED THAT IT IS EVIDENT FROM ANNEXURE-I APPENDE D TO THE RETURN OF INCOME THE ASSESSEE MADE SUBSTANTIAL SPECULATIVE G AIN OF RS.29 40 989/- BY CONSTANTLY PURCHASING AND SELLING THE UNITS OF PRUDENTIAL ICICI LIQUID (PILP) PILP CUMULATIVE OPTI ON PRUDENTIAL ICICI INCOME PLAN-GROWTH (PIIP-GROWTH) AND OTHERS. ITA NO. 3383M/09 3 5. THE ASSESSING OFFICER RELIED ON THE DECISION OF THE AUTHORITY OF ADVANCE RULINGS AAR IN ITS JUDGMENT 207 CTR (AAR) 297 (2007) WHEREIN THE ISSUE WAS AS FOLLOWS: THE GERMANE QUESTION IN ALL THESE APPLICANTS IS WHETHER SECURITIES WHICH ARE THE SUBJECT MATTER OF PURCHASES AND SALES BY THE APPLICANTS ARE HELD BY THE APPLICA NT BY WAY OF STOCK-IN-TRADE SO AS TO GIVE RISE TO BUSINESS IN COME OR INVESTMENT IN CAPITAL ASSETS SO AS TO YIELD CAPITAL GAINS. THE AAR HAS LAID DOWN THESE PRINCIPLES. 1. FREQUENCY AND MAGNITUDE OF TRANSACTIONS 2. SUBSTANTIAL NATURE OF TRANSACTIONS 3. RATIO BETWEEN PURCHASE AND SALES. 6. THE AO FOUND THAT ALL THESE POINTS AND PRINCIPLE S ARE APPLICABLE IN THE ASSESSEES CASE. IN THE LIGHT OF THE ABOVE HE H ELD THAT THE UNITS OF MUTUAL FUND SOLD BY THE ASSESSEE IN THE F.Y 2004-05 WERE IN FACT TRADING ASSETS AND THE PROFIT EARNED ON THEM WAS BU SINESS INCOME RATHER THAN CAPITAL GAINS INCOME. HE FOUND THAT THE ASSES SEE RE-INVESTED THE DIVIDEND INCOME RECEIVED FROM HDFC BANK ON 27.5.200 4 PRUDENTIAL ICICI MUTUAL FUND FOR RS.8900000/- ON 28.5.04. 7. THE AO HELD AS FOLLOWS: THIS ONLY REFLECTS THAT VELOCITY OF SHARE TRANSACT IONS BY THE ASSESSEE CHARACTERISTIC OF PERPETUALITY IN SHARE TR ADE. 8. IN THE LIGHT OF THE ABOVE THE ASSESSEE WAS ASKE D TO SHOW CAUSE ON 7.11.07 WHY THE ENTIRE PROFIT OF RS.2940989/- ON S ALE OF INVESTMENT ITA NO. 3383M/09 4 SHOULD NOT BE TREATED AS BUSINESS INCOME OF THE ASS ESSEE LIABLE TO TAX AS PER THE LAW. ON THE SAID DATE I.E. ON 07.11.07 THE ASSESSEES REPRESENTATIVE REPLIED THAT THE PROFIT ON SALE OF I NVESTMENT WAS CAPITAL GAINS AND BE TREATED AS SUCH ON THE GROUND THAT THE Y WERE HELD FOR INVESTMENT ON LONG TERM BASIS. BUT THE ASSESSING O FFICER DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE. ACCORDING TO THE AO THE NATURE OF THE UNITS WAS NOT AS THAT HELD FOR INVESTMENT AND EARN INGS DIVIDENDS. THESE WERE TRADING ASSETS ON WHICH BUSINESS INCOME OF RS. 29 40 989/- WAS RECEIVED. THEREFORE THE PROFIT ON SALE OF INVESTME NT (CAPITAL GAINS) OF RS.29 40 989/- WAS ASSESSED AS BUSINESS INCOME OF T HE ASSESSEE. 9. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE LD. CIT(A). THE LD. A.R. OF THE ASSESSEE STATED THAT THE A.OS CONCLUSION IS ERRONEOUS TO THE EXTENT THAT HE HAS HELD THE ASSESSEE COMPANY TO BE TRADING IN UNITS OF MUTUAL FUNDS AND THUS TAXED THE ENTIRE PR OFIT ON SALE OF INVESTMENTS AGGREGATING TO RS.29 40 989/- AS BUSINE SS INCOME. THE UNITS ARE ALL HELD ONLY AS INVESTMENTS OF THE COMPA NY AS IS APPARENT FROM THE BALANCE SHEET OVER THE YEARS. THE HOLDING PERIOD OF THESE UNITS RANGES FROM 13 MONTHS TO 67 MONTHS AND AT NO POINT OF TIME THEY ARE HELD AS STOCK IN TRADE. THE LD. A.R. OF THE ASSESS EE ALSO STATED THAT EVERY TIME THE INVESTMENT WAS MADE IN THE UNITS OF MUTUAL FUNDS A BOARD RESOLUTION HAS BEEN PASSED FOR TREATING THEM AS INV ESTMENT. 10. THE LD. A.R. OF THE ASSESSEE FURTHER SUBMITTED THAT THE COMPANY HAD INVESTED RS.25 36 000/- IN 1 69 100.577 UNITS OF PR UDENTIAL ICICI LIQUID PLAN IN MAY 2003. OUT OF THESE UNITS THE ASSESSE E COMPANY SOLD 1 54 944 502 UNITS IN THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2004-05 AND OFFERED THE INCOME UNDER THE HEAD CAP ITAL GAINS WHICH HAS BEEN ACCEPTED BY THE A.O. IN HIS ORDER U/S 143( 3) OF THE I.T. ACT DATED 30.11.2005. THE BALANCE OF 14 156 075 UNITS W ERE SOLD IN THE ITA NO. 3383M/09 5 PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2005-06 A ND THE SURPLUS WAS OFFERED TO TAX UNDER THE HEAD CAPITAL GAIN WHICH H AS BEEN ERRONEOUSLY TREATED AS BUSINESS PROFIT. 11. SIMILAR EXPLANATION WAS OFFERED BY THE LD. A.R. OF THE ASSESSEE IN RESPECT OF INVESTMENT IN 31 580 7440 UNITS OF HDFC INCOME FUND CASH GROWTH IN SEPTEMBER 2001. ACCORDINGLY THE LD. A. R CLAIMED THAT HAVING ACCEPTED THE PROFIT AS TAXABLE UNDER THE HEAD CAPI TAL GAIN FOR THE ASSESSMENT YEARS 2003-04 & 2004-05 THE A.O. HIMSEL F HAS ACCEPTED THAT THE UNITS ARE CAPITAL ASSETS. THEREFORE HE CA NNOT TREAT THE VERY SAME CAPITAL ASSET AS BUSINESS ASSET IN THE SUBSEQU ENT YEARS. 12. THE LD. A.R. OF THE ASSESSEE ALSO SUBMITTED THA T ALL THE INVESTMENTS AS ON 31.3.2005 WERE HELD BY THE ASSESSEE COMPANY F OR MORE THAN 10 YEARS. HE ALSO RELIED ON INSTRUCTION NO.1827 DATED 31.8.1989 AND CIRCULAR NO.4/2007 DATED 15.6.2007 ISSUED BY CBDT L AYING DOWN BROAD PRINCIPLES AND GUIDELINES FOR DISTINCTION BETWEEN T HE INVESTMENT AND STOCK IN TRADE. 13. THE LD. CIT(A) AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSEE ALLOWED THE CLAIM BY OBSERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MAD E BY THE LD.A.R. OF THE ASSESSEE IN RELATION TO ISSUE RAISED IN THE ASSESSMENT ORDER. IT IS A FACT THAT THE UNITS SOLD DURING THE YEAR UNDER CONSIDERATIO N WERE ACQUIRED WAY BACK IN 2001 AND 2003. A PART OF THES E UNITS WERE SOLD BY THE ASSESSEE COMPANY IN EARLIER YEARS AND TAXED AS CAPITAL GAINS. IRRESPECTIVE OF THIS POSITION THE FACT ALSO REMAIN S THAT THE ASSESSEE IS NOT INDULGING IN ANY DAY TO DAY TRANSACTION IN SHAR ES. THE TREATMENT OF ALL PURCHASES AS INVESTMENTS IS ALSO BACKED BY T HE COMPANYS RESOLUTION IN THIS REGARD. IN FACT IT IS A CASE W HERE ALL PURCHASES AND SALES HAVE BEEN MADE ONLY FOR LONG TERM INVESTMENTS WHICH HAS RESULTED INTO LONG TERM CAPITAL GAINS. THE A.O. IS ACCORDINGLY DIRECTED TO TREAT THE GAINS AS CAPITAL GAINS AND ALLOW DEDUC TION U/S 54EC IN ITA NO. 3383M/09 6 RESPECT OF INVESTMENTS MADE IN THE BONDS OF NABARD & NHB GROUNDS NO.1 & 2 ARE THUS ALLOWED. 14. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. IN OUR OPINION THE DEPARTMENT HAS ACCEPTED THE FACT THAT THE INVESTMEN TS IN UNITS OF MUTUAL FUNDS WERE HELD AS AND SHOWN AS INVESTMENTS BY TH E ASSESSEE ALL THESE YEARS. FURTHER PROFIT ON SALE OF PART OF THE VERY S AME TYPE OF UNITS HAVE BEEN ASSESSED AS CAPITAL GAINS IN THE EARLIER YEARS . THEREFORE THERE IS NO CHANGE IN THE CIRCUMSTANCES IN THIS YEAR TO TREAT T HE SALE OF THE VERY SAME TYPE OF UNITS AS BUSINESS PROFITS THIS YEAR. 15. THE MUMBAI TRIBUNAL IN THE CASE OF BOMBAY GHYMK HANA VS ITO 115 TTJ 639 WHEREIN IT HAS BEEN HELD AS FOLLOWS: IT IS A SETTLED LEGAL POSITION BY NOW THAT ENTRIES IN BOOKS ARE NOT CONCLUSIVE BUT THERE SHOULD BE A FIRM BASIS TO TAKE A DIFFERENT VIEW FROM ENTRIES IN BOOKS OF ACCOUNT. IN THE PRES ENT CASE THE AO HAS TAKEN A DIFFERENT VIEW CONTRARY TO BOOKS OF ACC OUNT ON THE BASIS OF MAGNITUDE AND NUMBER OF TRANSACTIONS WITHOUT BRI NGING ANYTHING ELSE ON RECORD THAT PURCHASES OF UNITS OF MUTUAL FU ND WERE MADE ON ACCOUNT OF DEALING IN SHARES AND NOT ON ACCOUNT OF INVESTMENTS. WE THEREFORE ARE OF THE CONSIDERED OPINION THAT IN THE PRESENT CASE THE INCOME ON SALE OF UNITS OF MUTUAL FUNDS HAS TO BE A SSESSED AS CAPITAL GAIN AS DECLARED BY ASSESSEE. 16. FURTHER IN THE CASE OF CIT VS GOPAL PUROHIT (20 10) 228 CTR (BOM) 582 IT HAS HELD THAT IT IS OPEN TO THE ASSESSEE TO MAINTAIN TWO SEPARATE PORTFOLIOS ONE RELATING TO INVESTMENT IN SHARES AN D ANOTHER RELATING TO BUSINESS ACTIVITIES INVOLVING DEALING IN SHARES. TH E ASSESSEE HAS BEEN TREATING THE INVESTMENT IN UNITS AS INVESTMENTS I N ITS BOOKS OF ACCOUNTS ALL THESE YEARS. SALE OF SOME OF THESE UNITS HAVE BEEN CONSIDERED AS CAPITAL GAIN AND ACCEPTED BY THE DEPARTMENT IN EARL IER YEARS. THE FACTS AND CIRCUMSTANCES BEING IDENTICAL IN THE CASE OF TH E SAME ASSESSEE IN THE SUBSEQUENT YEAR THE PRINCIPLE OF CONSISTENCY I S TO BE FOLLOWED. ITA NO. 3383M/09 7 THEREFORE WE UPHOLD THE ORDER OF THE LD. CIT(A) TR EATING THE HOLDING OF THE UNITS AS INVESTMENTS AND PROFIT ON SALE OF THE UNITS SHOULD BE ASSESSED AS CAPITAL GAINS. 17. IN THE RESULT THE APPEAL FILED BY THE REVENU E IS DISMISSED. ORDER PRONOUNCED ON THIS 28 TH DAY OF MAY 2010 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED 28 TH MAY 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR D BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR I.T.A.T MUMBAI ITA NO. 3383M/09 8 DATE INITIALS 1 DRAFT DICTATED ON: 10.5.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 1 2 . 5 .2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/ PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______