$~11, 14 & 15
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of decision: 09.02.2018
+ ITA 146/2018 & CM APPL. 5059/2018
ITA 149/2018
ITA 150/2018 & CM APPL. 5080/2018
PRINCIPAL COMMISSIONER OF INCOME TAX-7..... Appellant
Through Mr. Sanjay Kumar, Adv.
versus
PAVITRA COMMERCIAL LTD. ..... Respondent
Through None.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A. K. CHAWLA
HON'BLE MR. JUSTICE S. RAVINDRA BHAT (ORAL)
%
In these appeals, the questions of law urged for various years
are, as follows :
1) Whether the decision of the ITAT affirming the
Appellate Commissioner's view with respect to the
assessee's claim of capital gain rather than business
income as held by the Assessing Officer is justified?
2) Whether the ITAT was justified in holding that under
the mercantile system of accounting, interest income
accrued on basis of the assessee's contention that
recovery as well as interest (on such deposits) is
doubtful?
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2. On the first question, this Court notices that the AO brought to
tax substantial amount for the concerned Assessment Year rejecting
the assessee's claim of capital gains. The assessee was engaged in the
business of investment and securities and had at the relevant time
maintained a distinct portfolio in respect of stock in trade and
investment. For the particular year, the assessee acquired shares in
certain companies that underwent amalgamation. Those companies,
which had investment portfolio containing shares of the companies in
which the assessee had holdings, were treated as stock in trade. The
assessee shifted some of the shares to its investment account and later
sold them during the Assessment Year. The AO rejected the assessee's
claim and held the profits to be business income. In doing so, the AO
relied upon the judgment of the Supreme Court in Dalhousie
Investment Trust Co. Ltd. v. CIT, Central Calcutta, (1968) 68 ITR
486 (SC) and other rulings. The CIT(A) upon re-appraisal of the facts
and consideration of the authorities, held as follows :
"4.3 I have carefully considered the facts of the case, order
of the AO and submissions made by the ld. AR. The central
point of dispute in this ground of appeal is regarding the
head of income under which the profit earned on
shares/mutual funds is taxable. The appellant has
vehemently claimed that as per the regular consistently
followed policy of the company, the appellant had certain
share portfolio under the category of investments on which
long term and short terms capital gains have been
disclosed, whereas on the sale of shares held as stock in
trade profit earned have been disclosed as business income.
On the other hand the AO is of the view that the entire
income earned by the appellant on sale of shares and
mutual funds is taxable as business income. It is noted that
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ITA 146/2018 & connected appeals
the finding of the A0 is primarily based on the notes of
audit, wherein it is stated that during the year the appellant
company has acquired the amalgamating companies which
were engaged in the trading of shares. The appellant is
pleading that the observation of the ld. AO is misconceived
as it is a matter of record that the companies which have
been amalgamated the appellant company were also
holding these shares as investment. It is further emphasized
by the ld. AR that the AO has misinterpreted the general
terminology of the notes of the accounts/audit wherein even
the sale of investments are termed as trading in shares.
After considering the rival submissions and various case
laws quoted by the AO as well as relied upon by the ld. AR,
I am of the considered view that in the facts and
circumstances of the instant case the view taken by the AO
does not appear correct, it is seen from the records of the
appellant that the appellant company had distinct portfolio
of shares and mutual funds under two categories i.e
investments and stock in trade. The contention of the ld. AR,
that it is not open for the AO to summarily reject the
decisions of the Board of directors of the company as it is
their prerogative to decide as to whether the company
would earn income under the head capital gains or
business income from sale of shares, also appears correct.
In the instant case during the last few years too, the
appellant company had followed the same practice of
holding certain shares under the head investments and
some shares as stock in trade. Therefore, under these
circumstances the action of the AO treating the entire
income as business income is not justified, hence addition
made by him on this account is deleted."
3. The ITAT's findings are, as follows :
"12. From the above observations by Ld. CIT(A)
observed that Ld. AO has based his opinion on the basis
of Notes to audited account. Two distinct portfolio
maintained by assessee in respect of shares held for the
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ITA 146/2018 & connected appeals
purposes of trading and for investment has not been
observed by him.
13.........The summary of reconciliation of shares has
been reproduced hereunder:
"PAVITRA COMMERCIALS LTD
ASSESSMENT YEAR 2005-06
RECONCILIATION OF SHARES HELD AS STOCK IN TRADE
PARTICULARS NO. OF SHARES AMOUNT (In
Rs.)
Opening Stock (Refer 8,056,059.710 117,602,153.77
Annexure-I)
Add :
Shares of Vindhyachal 4,889,109.883 54,007,145.72
Holdings transferred on
amalgamation
Total stock of shares after 12,945,169.593 171,609,299.49
amalgamation
Purchase of Shares 85,926.000 2,393,674.01
Stock of Shares 13,031,095.593 174,002,973.50
Less:
Shares held as stock 2,078,066.000 32,767,348.61
converted into investment
(of Pavitra Commercials
Ltd.) transferred to Capital
Reserve (Refer Annexure-2)
Transferred to Capital 287,500.000 662,500.00
Reserve on Amalgamation
Sale of Shares (on cost) 2,244,050.254 41,425,034.89
(Refer Annexure-3)
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ITA 146/2018 & connected appeals
Closing stock of Shares held 8,421,487.000 99,149,290.00
as Stock (Refer Annexure-4)
14. There is absolutely no allegation by Ld. AO
regarding these facts as observed by Ld. CIT(A). We are
therefore, of considered opinion that Ld. AO proceeded
to compute sale of shares as business income merely on
the basis of notes provided to Audited Accounts. We have
perused the account at page 19 of paper book. From
these Notes, it is clear that nature of business in respect
of amalgamating companies has been held to be purchase
and sale of shares, debentures stocks, properties and
other similar activities. Ld. CIT(A) on the basis of these
factual observation deleted the addition. We, therefore,
do not find any infirmity in findings of ld. CIT(A) .
On the basis of the above discussion, we dismiss
this ground raised by revenue."
4. The decision of Revenue as to whether the claim of the assessee
with respect to the income reported by it and whether it constitutes
business income, is dependent on the entirety of the circumstances.
The decisions of the Court have emphasized five broad tests whether
the income bears the character of business income or capital gain
firstly, whether the company or concern is authorized in its
Memorandum of constituting documents to deal with shares; (2)
whether the entity had shown the shares under the head "Investment";
(3) whether the assessee/entity utilized its own funds and had not
borrowed funds for the purpose of acquiring shares; (4) whether the
nature of infrastructure whether it is small, represents investment
activity rather than the trading activity that would require larger
infrastcuture; and lastly, whether the behaviour of the assessee is such
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as to disclose income/earning has objective i.e. "obtaining dividend"
rather than trading.
5. This Court notes that all the tests and the relevant rulings were
noticed by both the authorities below, who had applied their mind and
held that the AO's approach in singular fixing scrutiny to the shifting
and regulations of some shares to treat as business income, was
erroneous. In the opinion of the Court, these findings are not only
factual but sound, as they are based upon appreciation of facts at two
levels and application of the settled law. No error of law is apparent;
no question of law arises.
6. As far as the question with respect to reporting of mercantile
interest of doubtful debts is concerned, the question is covered by the
decision of this Court in Commissioner of Income Tax Vs. Vasisth
Chay Vyapar Ltd. (ITA 552/2005 and connected cases decided on
29.11.2010). The Court had applied "real income" principle to uphold
the assessee's contention. Those observations are squarely applicable
in the present case.
7. The appeals are dismissed. All the pending applications also
stand disposed off.
S. RAVINDRA BHAT, J
A. K. CHAWLA, J
FEBRUARY 09, 2018
rc
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