COMMISSIONER OF INCOME TAX-II LUDHIANA vs. M/S PUJA INVESTMENT P. LTD. LUDHIANA

Facts

The assessee, M/s Pooja Investment Pvt. Ltd., Ludhiana, filed its return for assessment year 2006-07 declaring an income of Rs.1,27,80,378/-. The Assessing Officer (AO) initiated scrutiny. The assessee normally earned income from dividends and interest. During the year, the assessee invested Rs.3 crores in Tata Service Industries Fund (Dividend Plan) on 5.4.2005, which was redeemed prematurely on 21.12.2005 for Rs.4,24,70,700/-, booking a profit of Rs.1,24,70,700/- as short-term capital gain. The AO treated this profit as business income, considering the investment as stock-in-trade. The Commissioner of Income Tax (Appeal) deleted the addition, treating it as short-term capital gain. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s order.

Held

The High Court held that the CIT(A) and ITAT were wrong in adjudicating the income on sale of Tata Mutual Funds (Dividend Plan) as income from 'short term capital gains' merely on the ground that the units of mutual funds were not freely tradable. The Court found that the assessee is engaged in the trade of sale and purchase of equity shares, securities, and debentures, and the impugned transaction was no different from others entered into in the regular course of its business. The Court observed that the assessee consistently used a strategy of investing in tenurial plans and redeeming them before maturity, often within the same year, to reduce tax liability, which was manipulation rather than tax planning. The Court concluded that the investment was rightly treated as stock-in-trade and the revenue generated was business income. The appeals filed by the revenue were allowed.

Key Issues

1. Whether on the facts and in law, the Hon'ble ITAT was legally justified in upholding the decision of CIT(A)-II, Ludhiana and in holding that the income on sale of Tata Mutual Funds (dividend plan) are assessable as income from Short Term Capital Gain, inter alia, on the ground that the units of mutual funds are not tradable and that therefore the assessee had made investment in non-tradable commodity? Assessee's contention: The assessee argued that merely because the securities were redeemed earlier than the stipulated period, the profits were on premature redemption of an investment, not from the business of sale and transfer of shares and securities. Revenue's contention: The revenue contended that the transaction was conducted in the usual course of the assessee's business of trading in shares and securities, and the assessee was indulging in sale and purchase of securities as a routine, not for static investments.