Commissioner of Income Tax-III vs Sukarma Finance Limited

This matter is taken up today as 14.04.2015 was declared a holiday.

The only question which is sought to be urged by the Revenue in its appeal against the order of the ITAT dated 2.5.2014 is with respect to the assessee''s claim of short term capital gain for AY 2007-08. It is urged that in the circumstances of the case, the sum of Rs. 41,46,235/- ought to have been treated as business income rather than short term capital gain as claimed by the assessee.

The assessee is involved in investment business and had during the AY 2005-06 converted a part of its stock in trade into investment and maintained a separate account on that score. The realisation on account of its investment was offered in capital gains under two heads, i.e., long term capital gain and short term capital gain. For the assessment year in question, the claim for long term capital gain was accepted by the Assessing Officer but the claim for short term capital gain was disallowed. The Assessing Officer reasoned in this regard as follows: -

"4.5 In the instant case, except one condition i.e. utilizing own funds all other conditions are against the assessee. The assessee was a trader in the past and in order to take tax rate advantage the transactions are shown as STCG thus raising a question mark on the intention of the assessee. A large number of transactions have been made, purchase and sale transactions worth more than 14 crores have been made and hence volume of transactions is high. The activity was not only incidental in nature but the stock was converted into investment to take advantage of concessional tax rate. It is also pertinent to recall the that in his audit report the auditor has also described the business of the assessee company as ''share trading'' and not an investor. Therefore, in the light of above discussion there is no doubt that the profits earned by the assessee in the year were to be assessed as business income and nor short term capital gain. Accordingly, I treat the income of Rs. 41,46,235/- shown by the assessee as short term capital gain as business income. I am satisfied that by showing business income to the extent of Rs. 41,46,235/- as short term capital gain the assessee has furnished inaccurate particulars of his income for which penalty proceedings u/s 271(1)(c) are initiated separately."

The assessee appealed unsuccessfully to the Commissioner of Income Tax (Appeals). However, its further appeal to the ITAT was accepted. The ITAT took note of the judgment of this Court in CIT (Central) v. M/s. Express Securities Pvt. Ltd. dated 22.10.2013. The Court had held that conversion of stock in trade under the head of investment by itself was inconclusive as to whether the transaction in question was done by way of investment or business. The ITAT reasoned as follows:-

"5. At the time of hearing before us, it is stated by the learned counsel that originally the assessee company was incorporated to do the finance business and after restrictions imposed by Reserve Bank of India, the company stopped its main business and started dealing in shares. However, during the accounting year relevant to assessment year 2005-06, i.e., on 30th September, 2004, the assessee company turned into investor of shares and securities by converting the closing stock of the immediately previous year into investment and paid short term capital gains thereon. That the conversion of stock-in-trade into investment in the preceding year, i.e., AY 2005-06 was not disputed by the Revenue. That during the year under consideration. the assessee realized the investment and offered capital gains tax thereon. The assessee showed long term capital gain where the holding of the shares was more than 12 months and short term capital gain where the holding was less than 12 months. That the Assessing Officer accepted the long term capital gain but with regard to short term capital gain, he observed that in the immediately preceding year, the conversion of closing stock of the shares'' into investment was to take the advantage of differential rate of tax on short term capital gain and business income. It is submitted by the learned counsel that first of all, if the Department had any objection to the conversion of stock-in-trade to the capital gain, it should have been taken in assessment year 2005-06 in which the conversion took place and not in the year under consideration. He further submitted that even on merits, the issue is settled in favour of the assessee by the decision of Hon''ble Jurisdictional High Court in the case of M/s. Express Securities Pvt. Ltd. Vide order dated 22nd October, 2013 in Income Tax Appeal No. 406/2013''. In the said case, under identical facts, the Conversion of stock-in-trade to the head ''investment'' was upheld by the ITAT and Hon''ble Jurisdictional High Court dismissed the revenue''s appeal. He further pointed out that the Assessing Officer wrongly held that the intention of the assessee was to act as a trader as in the past. He submitted that after the conversion of stock-in-trade as investment, the intention of the assessee is to hold the investment and realize the investment. He also stated that the volumes of purchase and sale transactions are not high and the same are only in a few scripts. Learned counsel relied upon the decision of Hon''ble Bombay High Court in the case of Gopal Purohit wherein the Revenue''s SLP was'' rejected by Hon''ble Apex Court. He also referred to the decision of Hon''ble Jurisdictional High Court in the case of Rohit Anand vide ITA No. 1135/2010 and Commissioner of Income Tax-VII Vs. Avinash Jain, (2013) 1 AD 785 : (2013) 199 DLT 51 : (2013) 3 ILR Delhi 2092 : (2014) 362 ITR 441 : (2013) 214 TAXMAN 260 ."

We are of the opinion that in the given facts of the case, the mere circumstance that for the previous year, a part of the stock in trade was converted into investments would not have been conclusive as to whether the realisation out of purchase and sale of shares was by way of income from business. The AO had accepted the assessee''s claim for long term capital gains and completed the assessment. Having done so, he could not have fallen back upon the facts of the previous years when the conversion took place. Furthermore, we are of the opinion that the ITAT duly considered the applicable law in deciding that the income was not business income but in fact short term capital gain. The question of law urged, therefore, does not arise.

So far as the other question with respect to disallowance under Section 14A is concerned, we noticed that the order of the ITAT merely remands the matter for re-adjudication afresh in the light of the directions in Maxopp Investment Ltd. Vs. Commissioner of Income Tax, New Delhi, (2012) 247 CTR 162 : (2012) 347 ITR 272 : (2011) 203 TAXMAN 364 ; no interference is, therefore, called for.

The appeal is consequently dismissed.