M/s Kemfin Services Pvt. Ltd.,, Bangalore v. ACIT, Bangalore

ITA 380/BANG/2010 | 2005-2006
Pronouncement Date: 07-10-2010 | Result: Dismissed

Appeal Details

RSA Number 38021114 RSA 2010
Assessee PAN DFROM1992T
Bench Bangalore
Appeal Number ITA 380/BANG/2010
Duration Of Justice 6 month(s) 21 day(s)
Appellant M/s Kemfin Services Pvt. Ltd.,, Bangalore
Respondent ACIT, Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 07-10-2010
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 07-10-2010
Date Of Final Hearing 04-10-2010
Next Hearing Date 04-10-2010
Assessment Year 2005-2006
Appeal Filed On 17-03-2010
Judgment Text
ITA.380/BANG/2010 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH 'B' BANGALORE BEFORE DR. O. K. NARAYANAN VICE PRESIDENT AND SMT. P. MADHAVI DEVI JUDICIAL MEMBER I.T.A NO.380BANG/2010 (ASSESSMENT YEAR : 2005-06) M/S. KEMFIN SERVICES PVT. LTD. KEMWELL HOUSE 11 TUMKUR ROAD BANGALORE 560 022 .. APPELLANT V. ASSISTANT COMMISSIONER OF INCOME-TAX CIRCLE - 11(5) BANGALORE .. RESPONDENT APPELLANT BY : SHRI. CHYTHANYA K. K ADVOCATE RESPONDENT BY : SMT. AMRITA RANJAN ADDL.COMMISSIO NER OF INCOME-TAX O R D E R PER DR. O. K. NARAYANAN VICE PRESIDENT : THIS IS AN APPEAL BY THE ASSESSEE FOR THE ASSESSME NT YEAR 2005- 06. THE RELEVANT ASSESSMENT YEAR IS 2005-06. THE APPEAL IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME-TAX(A)- I AT BANGALORE DATED.18.12.2009 AND ARISES OUT OF THE ASSESSMENT C OMPLETED U/S.143(3) OF THE IT ACT 1961. 2. THE ASSESSEE IS A NON-BANKING FINANCIAL CORPORAT ION AND ENGAGED IN THE ACTIVITY OF INVESTMENT IN SHARES. ACCORDING TO THE ITA.380/BANG/2010 PAGE - 2 ASSESSEE THE SHARES ACQUIRED BY THE ASSESSEE COMPA NY FOR THE PERIOD FROM 1992 TO 2002 HAVE BEEN SHOWN AS CAPITAL ASSETS IN THE NATURE OF INVESTMENTS. THE PROFIT OR LOSS ARISING ON TRANSFE R OF THOSE SHARES USED TO BE OFFERED BY THE ASSESSEE AS CAPITAL GAINS. IN THE PREVIOUS YEAR 2002-03 RELEVANT FOR THE ASSESSMENT YEAR 2003-04 THE ASSESSEE COMPANY DESIGNATED AN AMOUNT OF RS.1 CRORE TO IMPRE SS UNDER PORTFOLIO MANAGEMENT SCHEME. IT WAS SHOWN BY THE A SSESSEE COMPANY AS UTILIZED FOR BUSINESS ACTIVITIES. THE SHARES HE LD UNDER THE PORTFOLIO SCHEME WITH M/S. KOTAK SECURITIES WAS SHOWN AS STOC K-IN-TRADE FOR ASSESSMENT YEAR 2003-04. THE SAME POSITION CONTINU ED FOR ASSESSMENT YEAR 2004-05 AS WELL. 3. IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL THE ASSESSEE COMPANY DECIDED TO TERMINATE I TS BUSINESS ACTIVITIES CARRIED ON UNDER PORTFOLIO MANAGEMENT. THE BOARD OF DIRECTORS OF THE ASSESSEE COMPANY PASSED A RESOLUTI ON ON 1ST APRIL 2004 TO THE ABOVE EFFECT. AS A RESULT OF WHICH TH E ASSESSEE COMPANY TREATED THESE SHARES AS INVESTMENTS AGAINST STOCK-I N-TRADE AS TREATED FOR EARLIER TWO ASSESSMENT YEARS. 4. THE SURPLUS ARISING OUT OF THE CONVERSION OF STO CK-IN-TRADE INTO INVESTMENTS WAS OFFERED BY THE ASSESSEE COMPANY UND ER THE HEAD ITA.380/BANG/2010 PAGE - 3 'CAPITAL GAINS'. BUT THE ASSESSING OFFICER FOUND T HAT THESE SHARES WERE TREATED AS STOCK-IN-TRADE FOR EARLIER TWO ASSESSMEN T YEARS AND THEREFORE THE SURPLUS ARISING OUT OF THE CONVERSIO N SHOULD BE TREATED AS BUSINESS INCOME AND NOT CAPITAL GAINS. ACCORDINGLY THE ASSESSING OFFICER TREATED THE SUBJECT INCOME AS BUSINESS INCO ME AND BROUGHT TO TAX. THIS DISPUTE WAS TAKEN IN FIRST APPEAL WHICH HAS BEEN DISMISSED BY THE COMMISSIONER OF INCOME-TAX(A). THEREFORE T HE SECOND APPEAL BEFORE US. 5. WE HEARD SHRI. K. K. CHYTANYA THE LEARNED COUNS EL APPEARING FOR THE ASSESSEE COMPANY. HE ARGUED THE CASE AT LE NGTH. HE STATED THAT SINCE ITS INCEPTION THE ASSESSEE COMPANY HAS BEEN HOLDING SHARES AND SECURITIES AS INVESTMENTS AND THE INCOME OR LOS S ARISING FROM THE TRANSACTIONS HAVE BEEN RETURNED UNDER THE HEAD 'CAP ITAL GAINS. IT IS ONLY FOR THE TWO ASSESSMENT YEARS 2003-04 AND 2004- 05 THE ASSESSEE HAS TREATED A PORTION OF ITS SHARES HELD UNDER THE PORTFOLIO MANAGEMENT WITH M/S. KOTAK SECURITIES AS STOCK-IN-TRADE. AFT ER TREATING THAT PORTION OF SHARES AS BUSINESS ASSETS THE COMPANY F OUND THAT IT WAS NOT IN A POSITION TO CARRY ON THE SAID BUSINESS EVEN UN DER THE PORTFOLIO MANAGEMENT SCHEME. ACCORDINGLY IT WAS DECIDED THAT THE SHARES SHOULD BE HENCEFORTH TREATED AS INVESTMENTS SO THA T THE INCIDENTAL BUSINESS COULD BE TERMINATED. THIS DECISION HAS BE EN REFLECTED IN THE ITA.380/BANG/2010 PAGE - 4 RESOLUTION PASSED BY THE BOARD OF DIRECTORS. IT IS FOR THE ASSESSEE COMPANY TO DECIDE WHETHER TO HOLD SHARES AS INVESTM ENTS OR TO HOLD SHARES AS STOCK-IN-TRADE. THE COMPOSITION OF HOLDI NGS COULD BE CHANGED BY THE ASSESSEE COMPANY ON THE BASIS OF THE DECISIONS TAKEN FROM TIME TO TIME DEPENDING UPON BUSINESS EXIGENCIE S. BUSINESS DECISIONS ARE TO BE TAKEN BY THE ASSESSEE AND NOT B Y THE ASSESSING AUTHORITY. THERE IS NO RULE AGAINST THE ASSESSEE C ONVERTING ITS STOCK-IN- TRADE INTO ASSETS. AS A COMPANY THE ONLY MODALITY TO CONVERT STOCK- IN-TRADE INTO SHARES IS TO PASS AN APPROPRIATE BOAR D RESOLUTION FOLLOWED BY APPROPRIATE ACCOUNTING ENTRIES. ALL THOSE FORMA LITIES HAVE BEEN COMPLIED WITH BY THE ASSESSEE COMPANY. THEREFORE THERE IS NO REASON WHATSOEVER TO TREAT THE SURPLUS AMOUNT ON CONVERSIO N OF STOCK-IN-TRADE INTO INVESTMENTS AS BUSINESS PROFITS. THE CORRECT HEAD SHOULD BE CAPITAL GAINS. 6. WE HEARD SMT. AMRITA RANJAN THE LEARNED ADDL.CI T APPEARING FOR THE REVENUE WHO DEFENDED THE ORDERS OF THE LOWE R AUTHORITIES. SHE CONTENDED THAT FOR THE TWO ASSESSMENT YEARS 2003-04 AND 2004-05 THE ARGUMENT OF THE ASSESSEE WAS ACCEPTED BY THE ASSESS ING AUTHORITY AND THOSE DESIGNATED SHARES WERE TREATED AS STOCK-IN-TR ADE. THE ASSESSEE HAD TAKEN THE ADVANTAGE OF VALUING THE SHARES AT CO ST OR MARKET VALUE WHICHEVER IS LESS. WHEN THE ASSESSEE COMPANY HAD E NTRUSTED CERTAIN ITA.380/BANG/2010 PAGE - 5 AMOUNT WITH M/S. KOTAK SECURITIES FOR DEALING IN SH ARES ON BEHALF OF THE ASSESSEE COMPANY THE POSITION WAS ACCEPTED BY THE REVENUE. BUT THE ASSESSEE IS AGAIN TAKING AN IMMEDIATE TURN BACK FOR WHICH THE REASONS EXPLAINED BY THE ASSESSEE COMPANY ARE NOT A CCEPTABLE TO THE DEPARTMENT AS THOSE EXPLANATIONS ARE NOT CONVINCING . THE ASSESSEE IS PLANNING ITS AFFAIRS FROM TIME TO TIME FOR ITS OWN ADVANTAGE BY USING THESE COLOURABLE DEVICES TO REDUCE THE TAX BURDEN. SHE THEREFORE SUBMITTED THAT THE ORDERS OF THE LOWER AUTHORITIES MAY BE CONFIRMED ON THIS POINT. 7. WE CONSIDERED THE ISSUE IN DETAIL. THE ASSESSEE COMPANY HAD ACQUIRED CERTAIN SHARES UNDER PORTFOLIO MANAGEMENT SCHEME AND THOSE SHARES WERE TREATED BY THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT AS STOCK-IN-TRADE FOR ASSESSMENT YEARS 2003-04 AND 200 4-05. THERE IS NO DISPUTE ON THIS FACT. IN THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR UNDER APPEAL THE ASSESSEE COMPANY CONVERTS THO SE STOCK-IN-TRADE SHARES INTO INVESTMENTS. THE ASSESSEE HAS CHANGED THE CHARACTER OF ITS ASSET. THE CHARACTER HAS BEEN CHANGED FROM STOCK-I N-TRADE TO INVESTMENTS. THE SURPLUS HAS ARISEN IN THE COURSE OF THE CONVERSION OF THE ABOVE STATED SHARES. THE CONVERSION WAS FROM S TOCK-IN-TRADE TO INVESTMENTS. THEREFORE THE POINT OF GENERATION OF THE SURPLUS IS 'STOCK-IN-TRADE'. STOCK-IN-TRADE IS A BUSINESS ASS ET. ANY INCOME ITA.380/BANG/2010 PAGE - 6 ARISING ON ACCOUNT OF STOCK-IN-TRADE IS OBVIOUSLY B USINESS INCOME. THE SURPLUS AROSE TO THE ASSESSEE COMPANY ON CONVER TING THE BUSINESS ASSET INTO INVESTMENTS. THE NEXUS OF INCOME IS WIT H STOCK-IN-TRADE. THE NEXUS IS NOT WITH THE NEWLY ASSUMED CHARACTER O F INVESTMENTS. INCOME ALWAYS ARISES OUT OF AN EXISTING SOURCE AND NOT FROM A POTENTIAL SOURCE. IN THE PRESENT CASE THE EXISTIN G SOURCE IS THE STOCK- IN-TRADE AND NOT THE INVESTMENTS. THE INVESTMENT C OMES INTO PICTURE ONLY WHEN THE STOCK-IN-TRADE CEASED TO EXIST. THE INCOME AROSE TO THE ASSESSEE COMPANY SIMULTANEOUSLY WITH THE CONVERSION OF THE STOCK-IN- TRADE AND NOT THEREAFTER. THEREFORE AS A MATTER O F FACT THE GENESIS OF THE SURPLUS EARNED BY THE ASSESSEE COMPANY ON CONVE RSION OF THE ASSET IS THE SHARES HELD BY THE ASSESSEE COMPANY AS STOCK -IN-TRADE. THEREFORE WE FIND THAT THE ASSESSING OFFICER IS JU STIFIED IN BRINGING THE SURPLUS AMOUNT FOR TAXATION AS BUSINESS INCOME. 8. IN RESULT THIS APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THURSDAY THE 07TH DAY OF OCTOB ER 2010 AT BANGALORE. SD/- SD/- (P. MADHAVI DEVI) (DR. O. K. NARAYANAN) JUDICIAL MEMBER VICE PRESIDENT