COMMISSIONER OF INCOME TAX (C(I)) vs. M/S CHATURANAN INDUSTRIES LTD

:« • > $~ * IN THE HIGH COURT OF DELHI AT NEW DELHI 2. ITA 196/2015 COMMISSIONER OF INCOME TAX (C)-I Appellant Through: Mr N.P. Sahni, Senior Standing Counsel with Mr Nitin Gulati, Junior Standing Counsel and Ms Sri Tanujan, Advocate. versus M/S CHATURANAN INDUSTRIES LTD Respondent Through: Mr Ajay Vohra, Senior Advocate with Ms Kavita Jha & Ms Roopali Gupta, Advocates. AND 3. + ITA 197/2015 COMMISSIONER OF INCOMETAX (C)-I Appellant Through: Mr N.P. Sahni, Senior Standing Counsel with Mr Nitin Gulati, Junior Standing Counsel and Ms Sri Tanujan, Advocate. versus M/S CHATURANAN INDUSTRIES LTD Respondent Through: Mr Ajay Vohra, Senior Advocate with Ms Kavita Jha & Ms Roopali Gupta, Advocates. CORAM: JUSTICE S. MURALIDHAR JUSTICE VIBHU BAKHRU ORDER % 15.12.2015 1. The Revenue has filed these appeals impugning a common order dated 25^*^ February, 2014 passed by the Income Tax Appellate Tribunal ('ITAT') in ITA Nos.4793/Del/2010 and 5521/Del/2010 for the Assessment Years ('AYs') 2006-07 and 2007-08 respectively. Whilst ITA ITA 196&197of2015 Page 1of8 Digitally Signed By:AMULYA Signature Not Verified

^0 •th No.4793/Del/2010 was preferred by the Assessee againstan order dated25 February, 2010 passed by the Commissioner of Income Tax (Appeals) [CIT(A)], ITA No.5521/Del/2010 was filed by the Revenue impugning an order dated 16^*^ September, 2010 passed by the CIT(A). 2. Insofar asthe AY 2006-07 is concerned, the Assessing Officer ('AO') framed an assessment order dated 28^^ November, 2008 whereby itsought to tax Rs.69,54,609/- as income from business as against the Assessee's claim of long term capital gains of Rs.55,68,488- not chargeable to tax. The aforesaid amount, Rs.69,54,609/-, is the aggregate sale proceeds of 200,000 shares ofOswal Chemicals and Fertilizers Ltd. and 26,400 shares ofJaypee Hotels Ltd., which were sold by the Assessee during the Financial Year ('FY') 2005-06. Prior to 1®^ April, 2004, the said shares were held as stock- in-trade by companies that stood merged with the Assessee from l" April 2004. The Assessee had, inter-alia, converted the aforesaid shares from stock-in-trade to investments in its books. The Assessee declared that the sale of aforesaid shares had resulted in a business loss of Rs.6,06,000/- and long term capital gains ofRs.55,94,809/-. 3. Briefly stated, the relevant facts giving rise to the aforesaid controversy are that pursuant to an order passed by this Court on 27^^ September, 2004, several companies stood merged with the Assessee company w.e.f T' April, 2004. It is asserted that on 17"" April, 2004, the Board of Directors of the Assessee Company resolved to convert all shares held by the amalgamating companies as stock-in-trade, as investments. Accordingly, shares of various companies which were reflected as stock-in- ITA 196 &197 of2015 Page 2of8

trade by the amalgamating companies were now reflected as investments in the balance sheet of the Assessee Company drawn as on 31®^ March 2005. The accounts of the Assessee were audited and the final accounts including the balance sheet as on 31^^ March, 2005 were also approved by the Board of Directors of the Assessee on 30''" June, 2005. The said balance sheet was also approved at the General Body Meeting of the Assessee held on 12^^ September, 2005. Thereafter, the Assessee filed its return of income for the AY 2005-06 relevant to the FY 2004-05. The return was picked up for scrutiny and the Assessing Officer treated the conversion of shares from stock-in-trade to investment as a deemed sale at the market value as on 1'^ April, 2004. Accordingly, the AO assessed a sum of Rs.27,07,60,721/- as business income of the Assessee being the difference between the purchase value of the shares in question and the market value of the said shares as on 1''April, 2004. 4. Aggrieved by the same, the Assessee filed an appeal before the CIT(A). By an order dated 20* March, 2008, the CIT(A) held that while the difference between the purchase price of shares and its market value as on 1®^ April, 2004 would be treated as business income, the same would be assessed and brought to tax only in the year in which the said shares were sold. This decision was accepted by the Revenue as well as the Assessee and neither the Assessee nor the Revenue preferred an appeal against the said order. 5. The Assessee declared that during the FY 2005-06 it had sold shares of Oswal Chemicals and Fertilizers Ltd. and Jaypee Hotels Ltd. which were ITA 196 &197 of2015 Page 3of8

V, ; part of the stock-in-trade of the erstwhile amalgamating companies and held as investments by the Assessee with effect from 1®^ April, 2004. The AO sought to tax the proceeds as business income. 6. Aggrieved by the decision of the AO to tax the sale proceeds of the aforesaid scriptsas business income, the Assessee preferredan appeal before the CIT(A) which was rejected. The CIT(A) concurred with the AO that the shares were converted for the purposes of evading taxes by reflecting the profits from its sale as capital gains. However, the CIT(A) rectified the assessment order to assess the profits realised from the sale of the shares in question instead of the entire sale proceeds. Thus, the additionmade by AO was reduced from Rs.69,54,609/- to Rs.49,88,809/-. 7. The ITAT, following the decision of this Court in CIT v. Express Securities (P.) Ltd.'. [2014] 364 ITR 488 (Delhi) held that it was open for an Assessee to convert its holding from stock-in-trade to investment and such conversion could not be rejected only on the ground that long term capital gains from sale of investments were not taxable by virtue of Section 10(38) of the Act. The ITAT further observed that it would be open to reject the conversion for other reasons such as, if the AO found that it was not the real intention of the Assessee to treat its stock-in-trade as investments. However, the ITAT proceeded to observe that there was hardly any discussion by the AO with regard to the intention of the Assessee and, therefore, decided the issue in favour ofthe Assessee. 8. We find no infirmity with the ITAT's view as aforesaid. In our view, it would also not be open for the AO to now reject the conversion of shares ITA 196&197of2015 Page4 of8

I i 1:3 from stock-in-trade to investment as the same was accepted by the AO in the relevant year, i.e., FY 2004-05. Concededly, in AY 2005-06, the AO had accepted that the Assessee had converted its stock-in-trade of the erstwhile amalgamating companies and held the same as investments w.e.f. 1®^ April, 2004. The AO had further proceeded to assess the notional income arising from such conversion. In appeal, the CIT(A) held that the business income assessed by the AO would be brought to tax in the year in which the investments were sold. This decision had become final as none ofthe parties had appealed against the same. Thus, it would not be open for the AO to now take a contrary view. In our view, no substantial question of law arises in respect ofthe decision ofthe ITAT on the above aspect. 9. The next issue, which is common to AYs 2006-07 and 2007-08, relates to the question whether the income from sale of shares shown as investments by the Assessee was liable to be assessed as business income. It is seen that for AY 2006-07, the Assessee had declared short term capital gains of Rs.2,66,21,066/- out of which Rs.1,26,16,000/- were gains on redemption of mutual funds and the balance gains were in respect of listed shares which were held as investment. 10. Similarly, for AY 2007-08, the Assessee had declared short term capital gains of Rs.1,48,56,548/-. The Assessee had also pointed out that it had ignored a capital loss of Rs.1,10,09,650/- as per the provisions of Section 94(7) ofthe Act. The ITAT quoted from a decision ofthe Lucknow Bench of the ITAT in Saarnath Infrastructure (P) Ltd. v. ACIT: (2008) 16 DTR (Luck) 1997 and held that the question whether shares are held for ITA 196& 197 of2015 Page 5 of8

h investment purposes or as trading assets are dependent on the following factors: "(1) What is the intention of the assessee at the time of purchase ofthe shares (or any other item). This can befound outfrom the treatment itgives tosuch purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset. (2) Whether assessee has borrowed money to purchase and paid interest thereon? Normally, money is borrowed to purchasegoodsfor the purposes oftradeand notfor investing in an assetfor retaining. (3) What is the frequency ofsuchpurchases and disposal in that particular item? Ifpurchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment). (4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares. A commercial motive is an essential ingredient oftrade. (5) How the value ofthe items has been taken in the balance' sheet? If the items in question are valued at cost, it would indicate that they are investments or where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as ITA 196 &197 of2015 Page 6of8

lb stock-in-trade. (6) How the company (assessee) is authorized in memorandum ofassociation/article ofassociating? Whetherfor trade orfor investment? If authorized only for trade, then whether there are separate resolutions ofthe hoard ofdirectors to carry out investments in that commodity? And vice versa. (7) It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. Ifthe assessee is able to discharge theprimary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to revenue to prove that apparent is not real. (8) The merefact ofcredit ofsale proceeds ofshares (orfor that matter any other item in question) in a particular account or not so muchfrequency ofsale andpurchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question)for investment. (9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, ifit is claimed that it is dealing as a trader in that item? Whether it had such an intention (to carry on illegal business in that item) since beginning or whenpurchases were made? (10) It ispermissible as per CBDT's Circular No. 4 of2007 of 15'^ June, 2007 that an assessee can have both portfolios, one for trading and otherfor investmentprovided it is maintaining separate accountfor each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios. (11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect ofseveralfactors has to be seen. " ITA 196&197 of2015 Page7of8

IC 11. The ITAT also took note of CBDT Circular No. 4/2007 dated 15^*^ June, 2007 which also laid down various tests for asserting whether shares were held as trading assets or as investments. Applying the aforesaid principles, the ITAT held that the frequency of transactions alone would not be sufficient to conclude that the Assessee was engaged in trading of the shares which were reflected as investments. The ITAT also took note of the fact that the Assessee was maintaining an investment portfolio and keeping in view the totality of facts, the ITAT held that it could not be concluded that the Assessee was engaged in trading of the shares which was reflected in its investment portfolio. We concur with the aforesaid view of the ITAT. In addition, we have also examined the frequency of transactions entered into by the Assessee which had resulted in the short term capital gain declared by the Assessee and find that the number of transactions is not much and relates only to 24 share scrips. Further, there is no repetitive sale and purchase of the same scrips which could possibly lead to an inference that the Assessee's intention was to trade in those share scrips. 12. In the circumstances, we are not persuaded to interfere with the order of the ITAT and no substantial question of law arises for our consideration. The appeals are, accordingly, dismissed. DECEMBER 15, 2015/MK S.MURALIDHAR, J VIBHU BAKHRU, J ITA 196 & 197 of2015 Page 8 of8