INDBANK MERCHANT BANKING SERVICES LIMITED,CHENNAI vs. ACIT CORPORATE CIRCLE 2(2), CHENNAI

आदेश / O R D E R

PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER

‘’1.The order of the Commissioner of Income Tax (Appeals) is against law and facts and circumstances of the case. 2.The Commissioner of Income Tax (Appeals) ought to have noted that the capital gains on sale of investments is eligible for exemption under Section 10(38) as the investments have all along been held to be investments and not stock-in-trade by the Assessing Authority in earlier assessments 3.The Commissioner of Income Tax (Appeals) ought to have appreciated that up to the earlier assessment year, the Department has not allowed the decline in value of investments as business expenditure and hence, for the current year, the correct amount of decline in value that ought to have been allowed should have been computed on the basis of actual allowance made in the earlier years and not merely the provision made for the current year. 4.The Commissioner of Income Tax (Appeals) ought to have appreciated that the Assessing Authority is switching the stand vis-a-vis the capital gain by treating the gains as business income but not allowing the decline in value of investments as business expenditure’’.

Submission of the ld. Authorised Representative was that the Tribunal, should give necessary directions to the ld. Assessing Officer to value the investments, which were considered as stock in trade, at cost or at net realizable value whichever was lower.

Per contra, ld. Departmental Representative submitted that 3.

no such issue was raised by the assessee before the ld. Commissioner of Income Tax (Appeals). According to him, even in the grounds before the Tribunal, question regarding method of valuation of closing stock was not brought out by the assessee.

We have considered the rival contentions and perused the 4. orders of the authorities below. On the question as to treatment of surplus arising to the assessee on sale of investments, whether to be treated as capital gains or business profits, what was held by this Tribunal in its order dated 17.04.2012 in & 73/Mds/2012, for assessment years 2007-08 and 2008-09 is reproduced hereunder:-

‘’11.We considered the matter in detail. We also considered the decision relied on by the counsel appearing for the assessee in the case of ACIT v. Stargate Investments (P) Ltd. (10 ITR (Trib) 211) (Chennai). The Commissioner of Income-tax(Appeals) in his order has given a direction to the Assessing Officer to examine whether the shares sold by the assessee were subject matter of revaluation on account of depletion in the value of those shares and to decide the exact nature of shares held by the assessee, to find out whether the shares were held as investments or stock-in-trade. Among other things, it is necessary for the Assessing Officer to look into the length of period the assessee has held the shares, the frequency of transactions in shares carried out by the assessee, the nature of funds utilized by theassessee to acquire the shares, whether the fund is own funds or interest bearing borrowed funds, the market tendency of the shares held by the assessee, etc. Therefore, it is not fair to suggest that the nature of the shares held by the assessee company should be decided on a singular test.

of computing its income and thereby for the purpose of taxation as well. It is, therefore, to be seen that what is long term investment and what is short term investment, what is stock-in-trade in the handsof the assessee are all matters of its own business prudence. The assessee might classify the shares as long term investments on the basis of length of period for which those shares were held by the assessee. But that is not the matter to be considered for computing the income for income-tax purpose. For income-tax purpose, the question is whether surplus is capital gains or business income. The surplus can be treated as capital gains only if the assessee has not valued the shares year after year to account for the depletion in the value of those shares. Wherever the assessee provides for such depletion in the value of shares in the assessment after assessment, those shares have to be treated as stock-in-trade for the purpose of income-tax. There is nothing on record to show that the shares of Punj Lloyd Ltd. and Numeric Power Systems Ltd. was different from the above stated position. Therefore, in the facts and circumstances of the case, we find that the Assessing Officer has rightly treated the surplus as business income. The orders of the Commissioner of Income-tax(Appeals) on this issue are set aside’’.

What we can understand from the above order of the Tribunal is that even the long term capital investments held were valued by the assessee at the end of every previous year, after providing for the deplenishment in value thereof, vis-à-vis its market value. It is also observed that shares held by the assessee, though characterized as long term investments, its annual valuation was done by treating it as stock in trade for the purpose of computing income. Once the assessee had valued the investments after providing for diminution of its value, when compared to the market value of such investments effectively the stock in trade stood valued at net realizable value. This being the case, we are of the opinion that submissions made by the ld. Authorised Representative for valuing the closing stock of shares, at cost or at net realizable value is ill conceived. We thus do not find any reason to interfere with the order of the ld. CIT(A).

In the result, the appeal of the assessee stands dismissed. 5.

Order pronounced on Thursday, the 5th day of April, 2018, at Chennai.