The Commissioner Of Income Tax ??? ... vs Moderate Leasing & Capital ...
2011 Latest Caselaw 5539 Del

                              Reportable

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

+                        ITA No.137 of 2010

                                     Reserved on: 11th August, 2011
%                               Pronounced on: 18th November, 2011


THE COMMISSIONER OF INCOME TAX - II
NEW DELHI                         . . . APPELLANT

                               Through:     Mr. Sanjeev Sabharwal, Sr.
                                            Standing Counsel.

                         VERSUS

MODERATE LEASING & CAPITAL
SERVICES LTD.                                  . . .RESPONDENT

                               Through:     Mr. Salil Kapoor, Advocate
                                            with   Mr.   Ankit  Gupta,
                                            Advocate.

      CORAM :-
      HON'BLE MR. JUSTICE A.K. SIKRI
      HON'BLE MR. JUSTICE M.L. MEHTA

      1.     Whether Reporters of Local newspapers may be allowed
             to see the Judgment?
      2.     To be referred to the Reporter or not?
      3.     Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J.

1. This appeal was admitted on the following substantial

question of law:

"Whether the findings of ITAT are perverse in holding that the loss on sale of shares holding as investment in the books of accounts was revenue loss and not capital loss?"

2. The respondent-assessee is a limited company and engaged

in the business of leasing, investment in shares and to act as

Managers to issue and offers, to give financial assistance in order

and abroad, to act administrator or manager of an investment,

trust, of fund, to give guarantee or other financial assistance for

development of new enterprise, etc. The assessee filed its return

of income for the Assessment Year in question, i.e., 2004-05 and

the same was assessed under the provisions of Section 143(3) of

the Income Tax Act (hereinafter referred to as „the Act‟).

3. During the assessment proceedings, the Assessing Officer

(AO) noted from the Profit & Loss Account of the assessee that the

assessee had debited loss on sale of shares amounting to

`1,34,06,274/- as business loss. The assessee was asked vide

order sheet entry dated 14.9.2005 to give the details of this loss

and to explain why it should not be treated as capital loss in view

of the fact these shares have been shown as investment in the

balance sheet by the assessee company for a number of years.

4. The assessee responded by submitting that it was an

investment company and had been investing in shares of other

companies, which was explained as its main business. Any profit

and loss on sale of business loss had been accounted for business

loss and having claimed in Profit & Loss account and in support

thereof relied upon some judgments. The AO, however, was not

convinced with this explanation. He was of the view that even an

investment company could hold shares either as stock-in-trade or

as an investment. In which particular segment, the assessee was

holding particular shares would depend upon the initial purchase,

as that would reflect the intention of such a company. If it is a

case of stock-in-trade, the Profit & Loss arising from its transfer is

stated as business income or business loss and in case the shares

are held as investment, then the sale thereof may result in a

short-term or a long-term capital gains with indexation benefits.

Applying this principle, the assessee‟s contention was

considered and rejected on the following grounds:-

(i) There is no bar in law for an investment company to have shares as either stock-in-trade or as an investment. At the time of initial purchase the character of expenditure is determined by the intention of the assessee. The assessee may choose at its option to treat to purchase as investment or as stock in trade. The legal consequences of these alternatives are different. In the case it is stock in trade, the profit or loss arising from its transfer is treated as a business income or a business profit or loss arising there from has to be treated as a short term or a long term capital gains with indexation benefits. In short, if the contention of the assessee is accepted, the there cannot be any income on account of capital gains in the case of investment companies who purchase shares as investment.

(ii) In the present case, the intention of the assessee is manifest and apparent from the treatment given to these purchases right from F.Y. 1996-97. The assessee has been consistently showing these shares as investments in the balance sheets filed alongwith the returns of income. The assessee cannot be allowed to change its stance after 8 years for the purpose of setting off of this loss against business income. In fact and in law, this is precisely what is prohibited in the provisions relating to set off of losses.

Apart from the reasons given above, the assessing officer

pointed out many circumstantial evidences which according to him

went against the assessee‟s contention, and enumerated these

circumstances as under:-

(i) In the balance sheet of the assessee, the assessee has shown this 505900 equity shares of ` 10/- each fully paid to M/s SBEC Sugar Ltd. as investments and not as stock in trade n the current assets.

(ii) These shares were purchased on 27.01.1997 and are only being sold for the first time in F.Y. 2003-04. n the interregnum period from 1997 to 2004, there was no transaction of sale of these shares.

(iii) The assessee company M/s Moderate Leasing and capital Services Ltd. is a group company of Modi Group. It is a known business practice of the promoters to make investments in public limited companies through group investment companies. M/s SBEC Sugar Ltd. whose shares have been sold is also one of the group companies of Modi Group of Companies.

(iv) The memorandum and articles of association of the

company shows investment in shares as the main

objects.

5. The assessee preferred the appeal against the aforesaid

assessment order passed by the Assessing Officer but was

unsuccessful in the said appeal as the CIT (A) affirmed the order

of the Assessing Officer and dismissed the appeal. However, on

further appeal by the assessee to the ITAT,

the assessee has succeeded and the ITAT while allowing the

appeal has treated the gain from the sale of shares as income as

business income.

6. The reading of the impugned order of the Tribunal would

reflect that the Tribunal first discussed the legal position as stated

by the Supreme Court in the case of Janki Ram Bahadur Ram

Vs. Commissioner of Income Tax (1965) 57 ITR 21 and culled

out the legal principle therefrom by pointing out that such a

question is a mixed question of fact and law. If a transaction is

related to the business, which is normally carried on by the

assessee, though not directly part of it, an intention to launch

upon an adventure in the nature of trade may readily be inferred.

A similar inference would arise where a commodity is purchased

and sub-dividend and sold. Such an intention may also be

inferred in the case of a commercial commodity. But a transaction

of purchase of land, without anything more, may not lead to the

inference of embarking upon the adventure in the nature of trade.

Therefore, what has to be looked into is the intention at the time

of purchases, the manner n which the shares have been dealt with

and how they were treated in past and future. The Tribunal

thereafter discussed the ratio of the Supreme Court judgment in

the case of Patiala Biscuits Manufacturers Pvt. Ltd. Vs. CIT

(1971) 82 ITR 812 and CIT Vs. Dalmia Jain & Company Ltd.

(1972) 83 ITR 438. In the former case, the transaction was held

on the capital account whereas in the later case, the loss on the

sale of shares was treated as trading loss meaning thereby

transaction was held as business transaction. After discussing

these two cases, the Tribunal concluded that the instant case was

more proximate with the decision of the Supreme Court in Dalmia

Jain (supra) and the case of Patiala Biscuits (supra) were

distinguishable. The conclusive part of discussion runs as

follows:-

"having considered the facts of the case and rival decided cases submitted by the both parties, we are of the view that the classification of the shares in the books of the assessee may be one of the factors but not the conclusive factor as the question has to be considered in totality of the circumstances, as held in the case of Janki Ram Bahadur Ram (supra). The decision of the case of Patiala Biscuits Manufacturers Pvt. Ltd., was in respect of preference shares, where there could not have been any possibility of increase or decrease in value because of fixed rate of dividend. However, the assessee held equity shares and incurred considerable loss in this year as well as in the

immediately preceding year. Thus, it bore the risk of loss also, which makes the transaction to be in the nature of a trading transaction, especially in view of its main object of dealing in shares. All through, the losses were shown as business losses and this stand was accepted by the revenue in assessment year 2003-04. Therefore, the facts come to close the facts I the case of Dalmia Jain & Company Ltd. (supra), in which the transaction was held to be a trading transaction. Insofar as the remarks made by the auditors are concerned, the case of the learned counsel was that they were only in respect of unsold shares. However, to our mind, such remarks are also not of essence when deciding the issue. If any case, the remarks do not represent true state of affairs as in the assessment year 2008-09, surplus on the sale of these shares has been credited in the books of revenue surplus. Thus, the real question is to find out the true nature of the transaction, which is clearly discernible from the treatment given by the assessee to the sale transaction in the profit and loss accounts of three years. The revenue has already accepted this position in assessment year 2003-04 and no reason is shown to digress from the position."

7. To put in nutshell, as per the ITAT the classification of

shares as investment in the profit and loss account is not the

conclusive factor though it may be one of the relevant factors.

Likewise, the Tribunal has not given much credence to the

remarks by the auditors in the profit and loss account on the

premise that these remarks do not represent true state of affairs.

The two factors which had weighed with the ITAT in favour of the

assessee are:-

(i) The sale of shares in earlier assessment year had been credited in the Revenue account by the assessee.

(ii) The revenue had accepted this position in the assessment year 2003-04 and no reason was shown to digress from the position.

8. We are of the view that the ITAT has taken a very myopic

view of the entire matter. Only because some income from the

shares sold in the assessment year 2003-04 were treated as

business income is taken to be the conclusive factor ignoring and

side tracking all other important factors which would outweigh

the aforesaid reason give by the Tribunal.

9. In the first instance, it may be noted that as per the

memorandum/articles of association, investment in shares is one

of the main objectives of the company. Then the shares in

question held by the assessee were always shown as investment

only. Even if the Assessing Officer has wrongly stated the period

of 8 years for holding these shares before their sale, the fact

remains that these shares remained with the company for

substantial period. From the inception, the shares were treated as

investment in every year till their sale in the balance sheet. While

showing it in the profit and loss account, the remarks of the

auditors become relevant and could not be brushed aside so

conveniently as has been done by the Tribunal. Very important

fact which is glossed over by the Tribunal is that the

respondent/assessee is maintaining two separate portfolios. One

portfolio is investment portfolio where shares purchased are

shown as investment. Other is business portfolio where share

purchased are shown as stock-in-trade. Since the assessee is

dealing in the business of sale and purchase of shares as well, in

such a scenario when two portfolios are maintained and shares in

question are shown in investment portfolio, that would be a very

dominant factor disclosing the intention of the assessee as far as

shares in question are concerned. When these factors are kept in

mind, merely because in the previous year the sale transaction

was reflected in the profit and loss account and that was not

deducted by the Assessing Officer, would not be a ground to

upset the findings of the Assessing Officer and the CIT (A) based

on over all appreciation of facts of the case in this year which is a

separate and distinct assessment year.

10. The facts of this case resemble more with the facts of the

case in Patiala Biscuits (supra). In that case the assessee was

carrying in the business of manufacturing biscuits. It purchased

preference shares of another company at the time of the

expansion of that company. Both the companies belonged to one

group, namely, the Dalmia Group. The assessee sold the shares

leading to a loss of ` 4,80,985/- This was the only transaction fo

the assessee in dealing in shares. The Tribunal came to the

conclusion that the shares were preference shares carrying a fixed

rate of dividend, which could not be appreciate in value. The

purchase was not made in the open market. The two companies

were inter-linked with each other. And finally, this was a solitary

transaction of dealing in shares by the assessee company.

Therefore, it was held that the transaction was on the capital

account. The Court held that the aforesaid finding of the Tribunal

was not vitiated in any manner. The AO had also relied on the

decision of Supreme Court in the cast of CIT Vs. Dalmia Jain

(supra). The facts of that case were that the assessee incurred a

loss on sale of shares. It was established that the assessee was

dealing in shares. In past, such losses were deducted while

computing the total income. On these facts, the Tribunal as well

as the High Court came to the conclusion that it was a trading

loss. The Supreme Court pointed out that the question is

primarily a question of fact. It was not the case of the department

that in arriving at its decision, the Tribunal had taken into

consideration any irrelevant consideration or failed to take into

account any relevant consideration. Thus, it was held that there

was no room for any interference by the Court.

11. Since the Tribunal ignored the very material and relevant

aspects resulting into perversity of its findings, we accordingly

answer the question in the affirmative i.e. in favour of the

Revenue and against the assessee holding that the shares in

question were held as investments and loss on the sale thereof

was capital loss and not Revenue loss. The impugned order of

the Tribunal is set aside. This appeal is allowed.

12. No order as to costs.

(A.K. SIKRI) JUDGE

(M.L. MEHTA) JUDGE NOVEMBER 18, 2011 Pmc/skb