PENTAGON BUILDERS LTD, MUMBAI v. DCIT RG 5(2), MUMBAI

ITA 6110/MUM/2009 | 2006-2007
Pronouncement Date: 22-12-2010 | Result: Dismissed

Appeal Details

RSA Number 611019914 RSA 2009
Assessee PAN AABCP8971F
Bench Mumbai
Appeal Number ITA 6110/MUM/2009
Duration Of Justice 1 year(s) 1 month(s) 1 day(s)
Appellant PENTAGON BUILDERS LTD, MUMBAI
Respondent DCIT RG 5(2), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 22-12-2010
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted C
Tribunal Order Date 22-12-2010
Date Of Final Hearing 13-12-2010
Next Hearing Date 13-12-2010
Assessment Year 2006-2007
Appeal Filed On 20-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH MUMBAI BEFORE SHRI R.S. PADVEKAR JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 6045/MUM/2009 (ASSESSMENT YEAR: 2006-07) DCIT - 5 (2) M/S. PENTAGON BUILDERS PVT. LTD. ROOM NO. 571 5TH FLOOR 6TH FLOOR DEEJAY APARTMENT AAYAKAR BHAVAN M.K. ROAD VS. 46 BHULABHAI DESAI ROAD MUMBAI 400020 MUMBAI 400026 PAN AABCP 8971 F APPELLANT RESPONDENT ITA NO. 6110/MUM/2009 (ASSESSMENT YEAR: 2006-07) M/S. PENTAGON BUILDERS PVT. LTD. DCIT - 5 (2) 6TH FLOOR DEEJAY APARTMENT ROOM NO. 571 5TH FLOOR 46 BHULABHAI DESAI ROAD VS. AAYAKAR BHAVAN M.K. ROAD MUMBAI 400026 MUMBAI 400020 PAN AABCP 8971 F APPELLANT RESPONDENT REVENUE BY: SHRI AJIT KUMAR SINHA ASSESSEE BY: SHRI ARUN GANAPA DEVADIGA O R D E R PER B. RAMAKOTAIAH A.M. THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE REV ENUE FOR A.Y. 2006- 07 AGAINST THE ORDER OF THE CIT(A) IX MUMBAI DATED 14.09.2009. 2. THE ISSUE IN THIS IS WITH REFERENCE TO THE TREATMEN T GIVEN TO ASSESSEES PROFIT/GAINS IN PURCHASE AND SALE OF SHARES. THE AS SESSEE HAS SHOWN LONG TERM CAPITAL GAINS OF ` 1 35 85 932/- AND SHORT TERM CAPITAL GAINS OF ` 71 93 075/- AND ALSO CLAIMED BUSINESS LOSS OF ` 16 81 654/-. THE A.O. WAS OF THE VIEW THAT THE ASSESSEE HAS TRADED IN PURCHAS E AND SALE OF SHARES AND ACCORDINGLY THE INCOME FROM THESE TRANSACTIONS IS T O BE TAXED UNDER THE HEAD PROFIT/GAIN OF BUSINESS OR PROFESSION AND NO T UNDER THE HEAD CAPITAL GAIN. HE ALSO RELIED ON THE ORDERS OF THE EARLIER YEARS WHERE SIMILAR ISSUE WAS EXAMINED AND HELD THAT THE ASSESSEE WAS DOING B USINESS AND NOT ITA NOS 6045&6110/2009 M/S. PENTAGON BUILDERS PVT. LTD. 2 INVESTMENT IN A.Y. 2005-06. THE CIT(A) IN A.Y. 2005 -06 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE WHEREAS IN THIS YEA R THE CIT(A) HELD THAT SHORT TERM CAPITAL GAINS ARE TO BE CONSIDERED AS BU SINESS TRANSACTIONS WHEREAS LONG TERM CAPITAL GAINS HAVE TO BE ACCEPTED AS SUCH. THE REVENUE IS AGGRIEVED ON THE DIRECTION OF THE CIT(A) IN TREATIN G PART OF THE TRANSACTIONS AS LONG TERM CAPITAL GAINS WHILE UPHOLDING THE SHOR T TERM CAPITAL GAINS AS BUSINESS INCOME. THEY HAVE RAISED THE FOLLOWING GRO UND WHICH IS SIMILAR TO THE GROUND RAISED IN 2005-06: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD. CIT(A) HAS ERRED IN DIRECTING TO TREAT THE PROF IT OUT OF TRANSACTION IN SHARES AS BUSINESS INCOME AND TO RECOMPUTED THE CAPITAL GAINS ON THE IMPUGNED SHARES THEREBY IGNORING THE FINDING S OF THE ASSESSING OFFICER IN THE ASSESSMENT PROCEEDINGS. 3. THE ASSESSEE IS AGGRIEVED ON THE DIRECTION OF THE C IT(A) IN TREATING THE SHORT TERM CAPITAL GAIN AS BUSINESS INCOME AND RAIS ED THE FOLLOWING TWO GROUNDS: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 9 M UMBAI 1) ERRED IN CONFIRMING PROFIT OUT OF SHORT TERM CAPITA L GAIN OF RS.71 93 075 AS BUSINESS INCOME OF THE ASSESSEE. 2) FAILED TO APPRECIATE THE FACTS THAT THE BOOKS OF AC COUNT OF THE ASSESSEE HAVE ACCOUNTED FOR THESE TRANSACTIONS AS I NVESTMENT IN SHARES AND NOT PART OF THE TRADING STOCK OF THE APP ELLANT. 4. AT THE OUTSET BOTH THE PARTIES HAVE STATED THAT THE ISSUE IS COVERED IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE BY T HE ORDER OF THE ITAT IN ITA NO. 4384/MUM/2008 FOR A.Y. 2005-06 WHEREIN ON T HE GROUND RAISED BY THE REVENUE THE ITAT EXAMINED THE FACTS AND REVERS ED THE ORDER OF THE CIT(A) AND UPHELD THE ACTION OF THE A.O. IN TREATIN G THE INCOME AS BUSINESS INCOME. 5. WE HAVE CONSIDERED THE ISSUE. AS SEEN FROM PARA 2 O F THE ORDER OF THE ITAT THE FACTS IN A.Y. 2005-06 HAVE BEEN STATED AND IN THAT YEAR THE ASSESSEE HAS DISCLOSED AN AMOUNT OF ` 16 53 683/- AS LONG TERM CAPITAL GAINS AND AN AMOUNT OF ` 35 55 875/- AS SHORT TERM CAPITAL GAINS AND THE A.O. TREATED THE ENTIRE INCOME AS BUSINESS INCOME. THE FINDINGS OF THE ITAT IN PARA 5 & 6 ARE AS UNDER: - ITA NOS 6045&6110/2009 M/S. PENTAGON BUILDERS PVT. LTD. 3 5. WE HAVE NOTED THAT AS REGARDS ASSESSEES CONTENT ION THAT INVESTMENTS WERE MADE TO EARN DIVIDENDS A FACTUAL PROPOSITION ON WHICH ALMOST ENTIRE WEB OF ARGUMENT RESTS THE A CTUAL DIVIDEND EARNING DURING ENTIRE YEAR WAS RS 3 28 981 ON AN INVESTMENT OF RS 3 89 24 520. THIS WORKS OUT TO LES S THAN 1% YIELD ON INVESTMENTS AND IT IS THUS DIFFICULT TO A CCEPT ASSESSEES CONTENTION TO THE EFFECT THAT THE INVESTMENTS WERE MADE TO EARN DIVIDEND. WE HAVE ALSO NOTED THAT THE ASSESSEE HAS CONTENDED THAT TO EARN THESE DIVIDENDS THE ASSESSEE HAD USED THE ADVANCES RECEIVED FROM THE CUSTOMERS. IN OUR UNDERS TANDING IT IS CONTRARY TO NORMAL PRACTICES THAT THE COMMITTED FUNDS IN THE NATURE OF CUSTOMER ADVANCES CAN BE USED FOR INVEST MENTS IN SHARES TO EARN DIVIDENDS. IT IS ALSO IMPORTANT TO B EAR IN MIND THE FACT THAT THE ENTIRE GARMENT EXPORTS DURING THE REL EVANT PREVIOUS YEAR WAS ONLY TO THE TUNE OF RS 10.97 LAKHS AND IN VESTMENT IN SHARES WHICH IS SAID TO HAVE BEEN MADE OUT OF ADVA NCES RECEIVED FOR THESE EXPORTS WAS RS 389.24 LAKHS. TH E INVESTMENTS THUS WORK OUT TO OVER 35 TIMES THE ANNU AL EXPORT TURNOVER AND YET IT IS FUNDED OUT OF ADVANCES RECE IVED FOR EXPORTS. IN THIS BACKDROP THE FACTUAL CONTENTIONS OF THE ASSESSEE DO NOT INSPIRE MUCH CONFIDENCE. THE ASSESS EE HAS CLAIMED THAT SINCE SHARES ARE HELD AS INVESTMENTS I N THE BOOKS OF ACCOUNTS IT IS BEYOND DOUBT OR DISPUTE THAT THE SHARES ARE NOT HELD AS STOCK IN TRADE. A LOT OF EMPHASIS IS PL ACED ON THE FACT THAT THE SHARES ARE VALUED AT COST IN THE BALA NCE SHEET WHICH IS DONE ONLY FOR INVESTMENTS AND NOT FOR STOC K IN TRADE AS ALSO THE FACT THAT THE BALANCE SHEET SCHEDULES SHOW THESE SHARE HOLDINGS AS INVESTMENTS. UNDOUBTEDLY THE ACCOUNTIN G TREATMENT IS IN IMPORTANT FACTOR BUT THIS FACTOR PER SE CANNO T BE DECISIVE OF THE QUESTION WHETHER SHARES ARE HELD AS STOCK IN TR ADE OR INVESTMENT. IT IS ALSO USEFUL TO NOTE THAT THE AUD IT REPORT AT PAGE 88 OF THE PAPER BOOK STATES THAT THE ASSESSEE IS DEALING IN SHARES AND FUTURES ETC. IT IS ONLY ELEMENTARY THA T IF A RECEIPT IS TRADING RECEIPT THE FACT THAT IT IS NOT SHOWN IN TH E ACCOUNT OF THE ASSESSEE DOES NOT PREVENT THE ASSESSING OFFICER IN TREATING IT AS TRADING RECEIPT - CHOWRINGHEE SALES BUREAU P. LTD. 87 ITR 548 . ALL THE SURROUNDING FACTORS ARE ALSO TO BE OBJECTIV ELY CONSIDERED WHETHER OR NOT THE SHARES WERE HELD AS INVESTMENTS OR AS STOCK IN TRADE AND THE ACCOUNTING TREATMENT IS NOT CONCLU SIVE FACTOR TO DETERMINE THIS QUESTION. AS A MATTER OF FACT APPLY ING THE TESTS SUGGESTED BY THE ASSESSEE AT THE ASSESSMENT STAGE IT IS CLEARLY NOT A CASE OF INVESTMENT SINCE THE PURPOSE OF THESE INVESTMENTS CANNOT BE TO SIMPLY EARN DIVIDEND INCOME. WE HAVE ALSO NOTED AS EVIDENT FROM A PERUSAL OF STATEMENTS OF LONG TE RM AND SHORT TERM CAPITAL GAINS AT PAGES 14 TO 17 OF THE PAPER B OOK THAT THERE ARE SEVERAL TRANSACTIONS OF SALE AND PURCHASE IN RESPECT OF THE SAME SCRIP WHICH REFLECTS THE SYSTEMATIC ACTIV ITY OF SALE AND PURCHASE FOR THE PURPOSE OF REALIZING GAINS ON PROF ITS. IN SOME OF THE CASES HOLDING PERIOD OF SHARES IS JUST A FEW D AYS (SUCH AS 1 5 6 8 AND 9 DAYS). THERE CAN NOT BE INVESTMENTS FOR SUCH ITA NOS 6045&6110/2009 M/S. PENTAGON BUILDERS PVT. LTD. 4 SHORT PERIOD AND THESE TRANSACTIONS CAN ONLY BE IN THE NATURE OF SHARE TRADING TRANSACTIONS. THE ASSESSEE HAS ALSO U SED BORROWED FUNDS EVEN IF NOT ENTIRELY FOR INVESTMEN TS IN SHARES. THE ASSESSEE IS ALSO ENGAGED IN TRADING IN FUTURES AND OPTIONS WHICH SHOWS THAT THE ASSESSEE WAS ENGAGED IN THE KI ND OF ACTIVITIES WHICH BELONG TO THE SAME GENUS AS THE TR ADING IN SHARES AND SECURITIES. THE PURCHASE OF SHARES OUT OF COMMITTED FUNDS RECEIVED AS CUSTOMER ADVANCES CAN ORDINARILY BE ONLY IN THE NATURE OF DEPLOYMENT OF FUNDS TO MAKE PROFITS B Y DEALING IN SHARES RATHER THAN INVESTING IN SHARES. ALL THESE F ACTORS TAKEN TOGETHER CLEARLY SHOW THAT THE CLAIM OF THE ASSESSE E TO THE EFFECT THAT THESE SHARES WERE HELD AS INVESTMENTS FOR TH E PURPOSES OF EARNING DIVIDENDS CANNOT BE ACCEPTED. ON THE CONTR ARY THESE TRANSACTIONS ARE CLEARLY IN THE NATURE OF TRANSACTI ONS AIMED AT EARNING FROM TRADING IN SHARES. THE CIT(A) HAS THUS CLEARLY ERRED IN BEING GUIDED BY THE ACCOUNTING TREATMENT ALONE AND DISREGARDING ALL THE RELEVANT AND SURROUNDING FACTS SET OF THE CASE. WE THEREFORE SEE MERITS IN THE GRIEVANCE OF THE ASSESSING OFFICER AND UPHOLD THE SAME. 6. FOR THE REASONS SET OUT ABOVE WE DEEM IT FIT AN D PROPER TO VACATE THE RELIEF GRANTED BY THE CIT(A) AND RESTORE THE ORDER OF THE ASSESSING OFFICER. 6. IN VIEW OF THE FACTUAL FINDING HOLDING THAT THE ASS ESSEE HAS INDULGED IN BUSINESS TRANSACTIONS AND NOT AS INVESTMENT WE UPH OLD THE ORDER OF THE CIT(A) TO THE EXTENT OF TREATING SHORT CAPITAL GAIN S AS BUSINESS INCOME AND REVERSE THE DIRECTION OF TREATING LONG TERM CAPITAL GAINS AS SUCH. EVEN THE LONG TERM CAPITAL GAINS OFFERED HAS TO BE ASSESSED AS BUSINESS INCOME AS THE ASSESSEE HAS INVOLVED IN TRADING OF SHARES AS A BUSINESS ACTIVITY. ACCORDINGLY THE ORDER OF THE A.O. IS UPHELD AND CI T(A)S ORDER IS ACCORDINGLY MODIFIED. 7. IN THE RESULT REVENUES APPEAL ALLOWED AND ASSESSE ES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND DECEMBER 2010. SD/- SD/- (R.S. PADVEKAR) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 22 ND DECEMBER 2010 ITA NOS 6045&6110/2009 M/S. PENTAGON BUILDERS PVT. LTD. 5 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) IX MUMBAI 4. THE CIT V MUMBAI CITY 5. THE DR C BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.