ASST CIT 16(2), MUMBAI vs. MAHENDRA POPATLAL SHAH, MUMBAI

आदेश / O R D E R Sandeep Gosain, Judicial Member: The present Appeal filed by the revenue is against the order of Ld. CIT (Appeal) – 28, Mumbai dated 13.11.13 for AY 2009-10 on the grounds mentioned herein below:-

2. "Whether on the facts and circumstances and in law, the Ld. CIT(A) was justified in holding that conversion of Investment to Stock in Trade was right and as per law even though there was no change in holding pattern of shares, no share business was reported till A.Y.2009-10, there is no concrete justification or sound reasoning to support the claim of business loss through business activity in share transactions?"

The Appellant prays that the order of the CIT (A) on the above grounds be set aside and that of the Assessing Officer be restored.

Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and Ld. CIT(A) after considering the case of both the parties, partly allowed the appeal of the assessee.

Now before us, the revenue has preferred the present appeal by raising the above grounds.

Ground No. 1 to 4 3. These ground raised by the revenue are inter connected and inter related and relates to challenging the order of Ld. CIT(A) in holding that conversion of ‘Investment’ to Stock-in- trade was right and thus deleted the additions, therefore we thought it fit to dispose of these grounds by present common order.

4. Ld. DR appearing on behalf of the department submitted that Ld. CIT(A) was not justified in holding that conversion of Investment to Stock in Trade was right and as per law even though there was no change in holding pattern of shares, no share business was reported till A.Y.2009-10, there is no concrete justification or sound reasoning to support the claim of business loss through business activity in share transactions It was further submitted that the assessee had share transactions of Rs.6,97 crores which clearly shows that the assessee was seriously pursuing the share trading business and the real motive of the assessee was to off-set the profit from other proprietary firms which were carrying business centre income. Lastly, Ld. DR submitted that Ld. CIT(Appeal) grossly erred on facts in confirming loss of Rs. 1,53,89,529/- on account of share transaction business claimed in earlier years as Short Term Capital Gain.

5. On the other hand, Ld. AR relied upon the order passed by Ld. CIT(A) and reiterated the same arguments as were raised by him before Ld. CIT(A), which are contained in para no. 3.2 of the order of Ld. CIT(A).

Before we decide the merits of the case, it is necessary to evaluate the orders passed by Ld. CIT(A). The Ld. CIT(A) has dealt with the above grounds raised by the revenue in para no. 3 of its order. The operative portion of the order of Ld. CIT(A) is contained in para no. 3(3.3) of its order and the same is reproduced below:-

Reg.;- GROUND OF APPEAL

NO.

2. It is seen that the assessee has been dealing in shares in a big way since many years and has been claiming them as investment and the profits arising on sale of shares have been shown consistently as Short Term/ Long Term Capital Gain. From the details of transactions and holding pattern of shares, the following characteristics are noticed:-

1) Frequency of buying and selling of shares is high, transactions have been earned for almost 229 days during the previous year. The number of scrips purchased is 293 and a number of scrips sold during the year is 292. The total value of scrips purchased is Rs.3.24 crores and the value of scrips sold is Rs.3.37 crores.

2) The period of holding of shares was low, within average holding period of 7-16 days.

3) The dividend earned by the assessee on the shares was only Rs. 1.861akhs, which was about 1% of the average investment.

4) The assessee has carried out transactions in Future and Option also, although their quantum was not very high.

5) The shares dealt in by the assessee are not 'A group' or 'B group' shares but mostly 'C group shares' with low market price.

Although, most of these characteristics of share transactions and holding of shares are there in earlier years as well, but these characteristics indicate that the transactions in shares are under taken with the intention of earning profits rather than holding them as investment and earning dividend.

The assessee has converted all his shares (which were till last year shown as investments), into stock-in-trade and has offered the result of trading therein under the head 'income from business & profession1. The assessee has continued to show the holding of shares as stock-in-trade in the subsequent years and profits earned therefrom have been shown as income from business in all the subsequent years. Although there seems to be no marked change in trading and holding pattern of shares in the current year compared to the earlier years to justify the change in treatment of shares from investment to stock-in-trade, but there is no prohibition under law to prevent the assessee from converting investment into stock-in-trade. The only condition stipulated in this regard is that on conversion, the shares would be held as 'transfer' and the market value on the date of conversion would be treated as full value of consideration of such transfer and the resultant profits would be chargeable to tax under the head capital gain, i the shares are ultimately sold. The assessee has complied with this conditions and has offered the sum of Rs. 20,00,0007- as Short term capital gain in the return of income filed. However, it is climed that there is error in the computation thereof, which needs to be verified and necessary action taken. Since the assessee has converted the entire portfolio of shares held as investment into stock-in-trade and not selected scrips, the bonafides of such a conversion cannot be doubted. Although, it is a fact that by such a conversion the assessee has stood to gain in terms of tax liability for the year, as the entire profits from Steelite Business Centre has got setoff against losses fromsale of shares but that alone cannot be a ground for not accepting the conversion, which is otherwise permitted under law.

Even for the sake of argument if it is considered that the sole motive of the conversion done by the assessee was to avail the set off of profit and do tax planning and save taxes, it cannot be considered as non genuine and disallowed unless the conversion is established as sham. No such finding is given by the AO in the assessment order. It has been held by a number of decisions of ITAT/ High Court and Supreme Court that tax planning within the four corners of law is permissible and cannot be found fault with and disallowed. The following recent judgement support this proposition:-

BHORUKA ENGINEERING INDS. LTD. V. DY.CIT (2013) 36 taxmann.com 82 (Karnataka)

Where arrangement of assessee to avoid payment of tax did not contravene any statutory provision and was achieved within four corners of law, it couldn't be found fault with Every taxpayer is entitled to arrange his affairs so that his taxes would be as low as possible and that he is not bound to choose that pattern which will replenish the treasury. If the taxpayer is in a position to carry through a transaction in two alternative ways, one of which will result in liability to tax and the other will not, he would at liberty to choose the latter one and would do so effectively in the absence of any specific tax avoidance provision; In Re AVM Capital Services Private Limited (Bombay High Court) July 19th 2012 Tax planning is legitimate if it is within the framework of the law A scheme of arrangement u/s 391 to 394of the Companies Act was entered into which provided that five private limited companies would be merged with Unichem Laboratories. Pursuant to the Scheme, (a) the entire undertaking of the transferor companies would stand vested with the transferee, (b) The shares held by the transferor companies in the transferee company would be cancelled & (c) shares of the transferee company would be issued to the shareholders of the transferor companies. The scheme was challenged by a shareholder on the ground that it was propounded to avoid capital gains tax that would have arisen if the transferor companies would have directly transferred their shares to the promoters and that it was a "colourable device to evade tax". Reliance was placed onMcDowell 154 ITR 148 (SC),Wood Polymer 47 CC 597 (Guj) &Groupe Industrial Marcel Dassault (AAR). HELD by the High Court rejecting the objection:

InAzadi Bachao Andolan263 ITR 706 (SC), it was held that McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavor. A citizen is free to act in a manner according to his requirements, his wishes hi the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable devicewhich may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. This was considered again in Vodafone International 341 ITR 1 (SC) and it was held that there is no conflict between McDowell and Azadi Bachao Andolan and reiterated that tax plannit may be legitimate provided it is within the framework of law. On facts, the object of the scheme is to enable the Promoter to hold shares directly in the transferee company rather than indirectly and not to There is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection that the scheme is a tax avoidance device stands rejected.

Killick Nixon Ltd vs. DCIT (Bombay High Court)

March 13th, 2012 Transaction within four corners of law can be treated as' "colourable device" by looking at "human probabilities"

In AY 2000-01 the assessee borrowed Rs. 48 crores from the G. K. Rathi group and used that to buy shares in three 100% subsidiary companies. Though the fair value of the shares was Rs. 24, the assessee paid Rs. 150 for each share. The amount received by the said subsidiary companies was transferred back to another company of the G.K. Rathi group. In AY 2001-02, the said shares were sold for Rs. 5 each and a short-term capital loss was claimed and this was set-off against other long-term capital gains. The AO, CIT (A) & Tribunal (order attached) rejected the transaction of investment into, and sale of, shares as a sham. On appeal by the assessee, HELD dismissing the appeal:

Whenever there are reasons to believe that the apparent is not real; then the taxing authorities are entitled to look into surrounding circumstances to find out the reality and apply the test of human probabilities. The judgement of the Supreme Court in Vodafone International vs. UOI makes it clear that a colourable device cannot be a part of tax planning. Where a transaction is sham and not genuine, it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. It was clarified that there is no conflict between McDowell 154 ITR 148 (SC), Azadi Bachao Andolan 263 ITR 706 (SC) &Mathuram Agarwal. On facts, as the purchase and sale of shares was found to be a sham, the loss cannot be allowed (Sumati DayaI214 ITR 801 (SC) followed)

Nothing has been brought out hi the assessment order to establish that the conversion of investment into stock-in-trade was sham. The Assessing Officer has basically held that there has been no change in the nature of share transactions or shareholding from proceeding years and hence there was no justification for such a sudden change in the accounting of shares. While this may be correct but nothing prevents the assesee from converting the shares held as investment into stock-in-trade, especially when he continues to show them as stock- in-trade consistently in the future and offers the resultant profits to tax as business income. In the assessee's case, it is seen that he has offered a sum of Rs. 69.78 lakhs as business income on purchase and sale of shares in A.Y. 2010-11 and Rs. 6.31 lakhs in A.Y. 2011-12. Generally, the assessees try to convert shares held as stock-in-trade into investment to gain tax advantage of lower rate of tax of Short term capital gain/ Long term capital gain, which is looked down upon by the Revenue, but this is a reverse case in which the assessee has converted his investment into stock-in-trade and has entered into the area where profit on sale of shares are subjected to tax at higher rates. The tax advantage gained in this year will get offset in the subsequent years when the profits on sale of shares would be subjected to tax at higher rates and the actual conduct of the assessee in A.Y. 2010-11 & 2011-12 also supports this.

Considering all the above, it is held that in the absence of establishing that the /conversion of shares was a sham or subterfuge, the disallowance of such a conversion is not justified and not as per law. The Action of the Assessing Officer in disallowance the loss of Rs. 1,53,89,529/- under the head business income, being the set off of loss earned on trading in shares against income of other businesses is not justified and is directed to be deleted.

Reg-GROUND OF APPEAL

NO.

3. The appellant has claimed that the Short Term Capital Gains of Rs. 20,00,000/-on conversion of shares held as 'investment' in share into 'stock-in-trade', which was offered to tax in the return filed as per section 45(2) of the I.T. Act, be deleted. Vide letter dated 24.10.2013, it was also claimed that the working of Rs. 20,00,000/- is erroneious and it was requested that the AO to be directed to verify and allow capital gain /loss as the case may be. In view of the decision given against ground no. 2 that the the conversion of shares held as investment into stock-in-trade being allowable in the case of the assessee, the capital gains arising on the date of conversion be brought to tax as per provision of section 45(2). The Assessing Officer is directed to verify the computation of capital gain/ loss arising on such conversion and to bring to tax the same in the year of sale of such shares, as per provision of section 45(2), after due verification. This ground of appeal is partly allowed for statistical purposes.

After having gone through the facts of the present case and hearing the parties at length, we find from the records that the assessee was carrying on the investment activities till the previous year. However, as per assessee, with the increase in activity, the assessee decided to start share trading business and accordingly, converted his entire investment portfolio into stock- in-trade and introduce the same in his share trading business. It was also specifically pleaded that the assessee had maintained separate books of accounts for share trading activities and had obtained audit report under the I.T. Act. It was also submitted that full disclosure in the relevant clauses of the tax audit report have been made regarding conversion of investment into stock- in-trade and commencement of share trading business during the year. Upon conversion of share investment to stock-in-trade, the resultant gain of about Rs. 20,00,000/- being the difference between the cost of acquisition of the share and the market value as of 1.04.08 was offered as short term capital gain. The same has been accepted by the AO and added to the total income of the assessee for the year under consideration and in this way, according to the assessee, the entire share trading activities carried on during the year under consideration was treated as business activity and the gain /loss made during the year from such activity was offered to tax under the head ‘Profit and gains of business or profession’. It was also submitted that converting the entire share portfolio into stock-in-trade is a clear indication of the intention and motives of the assessee of trading in shares. Even otherwise, it is a settled law that ‘Tax Planning is legitimate if it is within the frame work of law’ as has been held in the case of AVM capital services Pvt. Ltd. (Bom HC). Even in the case of Azadi Bachao Andolan263 ITR 706 (SC), it was held that McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reducing the tax burden of the assessee, must be looked upon with disfavor. A citizen is free to act in a manner according to his requirements, his wishes hi the manner of doing any trade, activity or planning his affairs with circumspection, within the framework of law, unless the same fall in the category of colourable devicewhich may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. This was considered again in Vodafone International 341 ITR 1 (SC) and it was held that there is no conflict between McDowell and Azadi Bachao Andolan and reiterated that tax plannit may be legitimate provided it is within the framework of law. On facts, the object of the scheme is to enable the Promoter to hold shares directly in the transferee company rather than indirectly and not to There is nothing illegal or unlawful or dubious or colourful in the Scheme and the same is a perfectly legitimate scheme and permissible by law. Therefore, the objection that the scheme is a tax avoidance device stands rejected. However, there is no prohibition under law to prevent change in accounting of shares, more particularly, converting the shares as ‘investment’ into ‘stock-in-trade’. Even otherwise nothing has been brought out in the assessment order to establish that the conversion of investment into stock-in-trade was sham.

The only ground, AO had taken that there has been no change in the nature of share transactions or shareholding from proceeding years and hence According to AO, there was no justification for such a sudden change in the accounting of shares. However, we are of the view that nothing prevents the assesee from converting the shares held as ‘investment’ into ‘stock-in-trade’, especially when he continues to show them as stock- in-trade consistently in the future and offers the resultant profits to tax as business income. In assessee's own case, it was noticed that he had offered a sum of Rs. 69.78 lakhs as business income on purchase and sale of shares in A.Y. 2010-11 and Rs. 6.31 lakhs in A.Y. 2011- 12. Ld. CIT(A) had rightly pointed out that generally, the assessees try to convert shares held as stock-in-trade into investment to gain tax advantage of lower rate of tax of Short term capital gain/ Long term capital gain, which is looked down upon by the Revenue, but this is a reverse case in which the assessee has converted his investment into stock-in-trade and has entered into the area where profit on sale of shares are subjected to tax at higher rates. The tax advantage gained in this year will get offset in the subsequent years when the profits on sale of shares would be subjected to tax at higher rates and the actual conduct of the assessee in A.Y. 2010-11 & 2011-12 also supports this. Thus, considering the entire circumstances, it was rightly held that in the absence of establishing that the conversion of shares was a sham or subterfuge, the disallowance of such a conversion was not justified and was not as per law.

Moreover, no new facts or contrary judgments have been brought on record before us in order to controvert or rebut the findings so recorded by Ld. CIT(A). Therefore, there are no reasons for us to interfere into or deviate from the findings recorded by the Ld.CIT(A). Hence, we are of the considered view that the findings so recorded by the Ld. CIT (A) are judicious and are well reasoned. Resultantly, these grounds raised by the revenue stands dismissed.

Ground No. 5 7. This ground raised by the revenue are general in nature, thus requires no specific adjudication.