IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH `J' BENCH
BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND
SHRI RAJENDRA (ACCOUNTANT MEMBER)
ITA No.3588/Mum/2010
Assessment Year: 2005-06
Income Tax Officer 7(2)(4), M/s. Swain River Financial Services Ltd.,
Mumbai. Kalyan Bhavan, 1st floor, 183, J.S.S.Road,
Opp: Gaiwadi, Girgaon, Mumbai-004
Vs.
PA No.AAACS 9228 B
(Appellant) (Respondent)
C.O.No.75/Mum/2011
(arising out of ITA No.3588/Mum/2010)
Assessment Year: 2005-06
M/s. Swain River Financial Services Income Tax Officer 7(2)(4),
Ltd., Mumbai.
Kalyan Bhavan, 1st floor, 183,
J.S.S.Road, Opp: Gaiwadi, Girgaon, Vs.
Mumbai-004
PA No.AAACS 9228 B
(Appellant) (Respondent)
Revenue by : Rajashri Dwivedi
Respondent by: Shri B.V.Jhaveri
Date of hearing: 6.9.2012
Date of pronouncement: 14 .9.2012
ORDER
Per B.R.Mittal, JM:
The department has filed this appeal for assessment year 2005-06 against order
dated 4.1.2010 of ld CIT(A)-13, Mumbai on the following grounds:
"1. "Whether on the facts and circumstances of the case the CIT(A) erred
in law in holding that the income from sale of shares was in the nature of
short term capital gains when the shares were being held as stock-in-
trade ever since 31 .03.2002 as shown in the Balance Sheet of the earlier
years"?
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C.O.No.75/M/2011
Assessment Year: 2005-06
2. Whether on the facts and circumstances of the case the CIT(A) erred
in law in not appreciating the fact that there was no provision in the
Income Tax Act to convert stock into investments and an item if once
shown as stock has to continue as stock"?
3. Whether on the facts and circumstances of the case the CIT(A) erred
in law in not appreciating fact that the shares sold were treated as
investments only to avoid tax by resorting to colourful devices which
according to the Supreme Court cannot be part of tax planning"?
2. The assessee has filed cross objection on the following ground:
"The CIT(A) erred in holding that the profits on sale of shares amounting
to Rs.14,75,063 is to be taxed as `short term capital gains' and not as
`long term capital gains' even though the facts on record clearly show
that the shares sold by the assessee company in the previous year
relevant to assessment year 2005-06 were held prior to 31.3.2002."
3. The relevant facts are that assessee is a private limited company engaged in the
business of granting and arranging loans & advances and carrying out activities in
shares. Assessee is a Non-banking finance company (NBFC) registered with Reserve
Bank of India.
4. During the assessment year under consideration, assessee company has
converted stock-in-trade as on 1.4.2004 of 59 scrips out of 60 scrips into investment
by passing a resolution, copy placed at pages 12 and 13 of PB and credited the
difference between the cost and market price of Rs.38,974 to profit and loss account as
under:
:A: Shares stated at lower of cost or market value : Rs.1930251
Less: Adjusted for shares of Rushabh Precision
continuing as stock-in-trade : Rs. 7920 Rs.1922331
B: Actual cost of the above shares(new held as
Investments) : Rs.1969225
Less: Adjusted for shares of Rushabh Precision
amounting as stock-in-trade : Rs. 7920 Rs.1961305
C: Difference of A&B credited to P&L a/c
Under "shares stock adjustment" account for
The y.r. 31.3.05. Rs. 38974
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Assessment Year: 2005-06
5. 29 scrips out of the said 59 scrips were subsequently sold by the assessee during
the year on 29.1.2.2004 and the profit arising therefrom of Rs.14,75,053 was shown as
long term capital gain and claimed exempt under section 10(38) of the Act. AO held
that said scheme adopted by the assessee was to avoid tax and cannot be accepted at
face value. The form of the transaction as adopted by the assessee is not binding on
revenue authorities and the substance has to be seen. AO did not accept the contention
of assessee that the taxing authorities cannot go beyond the form of transaction, look
into the substance and reveal the real intention. Accordingly, AO considered the said
profit arising out of such sale of shares of Rs.14,75,053 as business income being share
trading profit. Accordingly, claim of the assessee that said profit is arising out of sale of
shares as long term capital gain and reduced the same from net profit for computing the
book profit u/s.115JB of the Act was also rejected because the said profit was
considered by the AO as share trading profit. Being aggrieved, assessee filed appeal
before the first appellate authority.
6. Ld CIT(A) after considering the submissions of assessee has held that shares
were held by the assessee for a period less than 12 months from the date they were
converted into investments and, accordingly, considered profit/gain on sale of shares as
short term capital gain. Hence, this appeal by the department disputing the order of ld
CIT(A) to treat as short term capital gain as against business profit considered by the
AO.
7. Assessee has also filed cross objection disputing the order of ld CIT(A) to treat
the profit on sale of shares as short term capital gain instead of long term capital gain.
8. During the course of hearing, ld D.R. supported the action of AO and submitted
that assessee is a NBFC and is dealing in business of shares. He submitted that
assessee passed a resolution on 1.4.2004 to segregate its stock in trade of shares into
investment and some of the shares were kept as stock in trade. He referred pages 12 &
13 of PB, which is a copy of resolution passed by the Board of Directors of assessee
company to treat the stock-in-trade of shares as investment w.e.f. 1.4.2004 and
submitted that no reasons or scientific method has been adopted by the assessee while
converting few of the shares held in stock-in-trade as investment. He submitted that a
4 ITA No.3588/Mum/2010
C.O.No.75/M/2011
Assessment Year: 2005-06
colourable device has been adopted to void tax. He submitted that assessee held
shares only for a period of nine months and, without prejudice to above, even if
scheme of the assessee is accepted to treat the conversion of stock-in-trade into
investment, the profit could be considered only as short term capital gain and not long
term capital gain.
9. On the other hand, ld A.R. made his submissions stating that the Board of
Directors of the assessee company took a conscious decision to covert its stock-in-trade
as on 31.3.2004 as investment by considering the value of shares at lower of cost or
market value and the difference between the cost of shares held as stock-in-trade and
difference of Rs.38,974 was credited to the profit and loss account. He submitted that
there was no tax avoidance scheme adopted by the assessee. He submitted that said
shares were purchased prior to 31.3.2002 though shown under the head "stock-in-
trade" but had not been traded and continued to be held as investment only. He
submitted that said shares were sold by the assessee company, considering market
condition. He submitted that the period of holding prior to conversion of stock-in-trade
to investment has to be considered while computing the period of holding and placed
reliance of ITAT in the case of ACIT vs. Bright Star Investment Pvt Ltd., 24 SOT
288(Mum). He submitted that Hon'ble Bombay High Court has also considered in the
case of Keshavji Karsanji vs CIT, 207 ITR 737(Bom) and Hon'ble Madras High Court in
the case of Nachiappan M vs. CIT, 230 ITR 98(Mad) that the period of total holding has
to be considered irrespective to the fact as to whether the said asset is held as stock-in-
trade or as investment and the date of acquisition at the time of sale is to be
considered. He submitted that similar issue was also considered in the case of CIT vs.
Janhavi Investments Pvt Ltd, 304 ITR 276, wherein, it was held that costs of acquisition
can only be the cost on the date of the actual acquisition and, therefore is no acquisition
of shares when the same were converted from stock-in-trade to a capital asset. Ld A.R.
submitted that the entire profit has to be considered as long term capital gain and,
accordingly, cross objection filed by the assessee should be allowed.
10 We have considered submissions of ld representatives of parties and orders of
authorities below. We have also considered the reliance placed by ld A.R.
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Assessment Year: 2005-06
11. We observe that shares of 59 scrips were held by the assessee as stock-in-trade
as on 31.3.2004. Assessee is a NBFC and is carrying on trading in shares. On perusal
of Board resolution, copy placed at pages 12 & 13 of PB, we observe that assessee has
passed a resolution stating that the amount of Rs.19,22,313 being the value of various
shares as per details given therein is considered as stock-in-trade as on 31.3.2004 be
transferred to investment account, wherein, the name of the company and value as on
31.3.2004 has been stated. We observe that in the said resolution, there is no such
mention as to why the said stock-in-trade is converted into investment. The said
resolution does not indicate intention of the assessee that it was done with the motive
to hold the said shares as an investment.
12. The Hon'ble Bombay High Court in the case of Holck Larsen vs CIT, 85 ITR 285
(Bom), which was affirmed by Hon'ble Supreme Court, reported in 160 ITR 67((SC) held
that whether transaction of sale and purchase of shares were trading transactions or
they were in the nature of investment is a mixed question of law and facts. Further,
Hon'ble Supreme Court has held in the case of Ramnarain Sons (P) Ltd. v.
Commissioner of Income-tax, 41 ITR 534(SC) held that the intention of the
assessee at the time of acquisition of the asset, whether the purchase is for the
purposes of long term investment or for the purposes of dealing in shares is the
dominant factor for determining the nature of asset. As mentioned hereinabove, from
the said resolution passed by the Board of Directors of assessee company as on
1.4.2004, there is no such purpose, which could be revealed as to why assessee has
transferred shares kept in stock-in-trade to investment. Even if we go into the
averments of the assessee that assessee decided to hold the said shares as an
investment, the said intention of the assessee is not fortified by the subsequent act of
the assessee as assessee sold the shares within a period of 9 months from the date they
were converted from stock in trade to investment. Considering the facts of the case in
entirety, we are of the considered view that AO is justified to treat the conversion of
shares by the assessee from stock-in-trade to investment as a scheme to avoid payment
of tax. In view of above, the cases cited by ld A.R. do not require any consideration.
Hence, we reverse the order of ld CIT(A) and confirm the action of AO that the said
profit to the assessee company is the share trading profit from its share trading activities
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Assessment Year: 2005-06
and not out of its investment. In view of our said finding, cross objection of the
assessee is dismissed and grounds of appeal taken by department are allowed.
13. In the result, appeal filed by department is allowed and cross objection of
assessee is rejected.
Pronounced in the open court on 14th September, 2012
Sd/- Sd/-
(RAJENDRA) (B.R. MITTAL)
Accountant Member Judicial Member
Mumbai, Dated 14th September, 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),13, Mumbai
4. Commissioner of Income Tax, 7 , Mumbai
5. Departmental Representative, Bench `J' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI
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