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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI ASHWANI TANEJA
आदेश ORDER �ी अिमत शु�ला, �या स: PER AMIT SHUKLA, JM: The aforesaid appeals have been filed against separate impugned orders dated 29.02.2012, for the quantum of assessment passed under section 143(3) r.w.s. 153A for the assessment years 2006-07, 2007-08, 2008-09 and order dated 28.09.2012 for the assessment year 2009-10, for the
As admitted by both the parties, issues involved in all the appeals as well as the facts are identical in all the years, therefore, as a matter of convenience all the appeals were heard together and are being disposed off by way of this consolidated order. The common issue involved in all the appeals are: - Firstly, disallowance under section 14A; Secondly, whether the bonus shares held by the assessee are on capital account, that is, to be treated as investment or to be treated as stock-in-trade under trading account; and Lastly, the cost of shares held and sold on trading account (on which bonus shares were allotted), whether original cost should be taken or average cost. To understand the facts and issues involved we are discussing the appeal for the assessment year 2006-07 and wherever required, the facts of other years shall also be discussed for the sake of brevity and understanding. The grounds of appeal in (which is common for all the assessment years impugned before us), are reproduced hereunder:-
Ground No.1: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the contention of the Ld. A.O. of disallowing a sum of Rs.16,76,417/- u/s 14A out of expenses claimed in the Profit & Loss A/c considering them as expenses incurred for earning exempt income. The appellant prays that the addition may kindly be treated as bad in law and ordered to be deleted. Ground No. 2: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the disallowance of 3 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. loss of Rs. 66,68,788 on the shares of Praj Industries Limited as claimed by the appellant, and further ascertaining a gain of Rs.15,14,212 on the said shares. The appellant prays that the loss on account of share trading be considered at Rs 66,68,788 as claimed by the appellant. The appellant prays that the said action may please be held as bad- in-law and ordered to be deleted.
Ground No. 3: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the Ld. A.O. of considering the 1,06,000 bonus shares of Praj Industries as Trading stock. The appellant prays that the said action of the learned AO may please be held as bad-in- law and ordered to be deleted. Ground No. 4: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in upholding the decision of Ld. A.O. of not allowing the loss of Rs.2,01,32,141 on the shares of Astramicro Limited as claimed by the appellant, and calculating the eligible loss at Rs.26,74,225. The appellant prays that the loss on account of share trading be considered at Rs2,01,32,141 as claimed by the appellant. The appellant prays that the aforesaid action of the learned AO may please be held as bad-in-law and ordered to be deleted. Ground No. 5: On the facts and in the circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the decision of the Ld. A.O. of considering the 71,480 bonus shares of Astramicro Limited as Trading stock. The appellant prays that the said action of the learned AO may please be held as bad-in-law and ordered to be deleted. The Appellant craves leave to add, alter, amend or withdraw any of the Grounds of Appeal herein above and to submit such further arguments, statements, documents and papers as may be considered necessary either at or before the hearing of the appeal.
Brief facts qua the issue of disallowance under section 14A are that, assessee had shown dividend income for the 4 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. various years in the following manner, which were claimed as exempt under section 10(34):- AY 2006-07 - Rs. 27,15,652 AY 2007-08 - Rs. 25,27,125 AY 2008-09 - Rs. 85,49,397 AY 2009-10 - Rs.1,34,88,392 So far as AY 2006-07 is concerned, the AO has made the disallowance of Rs.16,76,417/- under section 14A, which is on account of disallowance of interest expenditure. The AO in his order observed that, the assessee has increased its investment in shares by amount of Rs.6,72,74,450/- which was the difference between the investment standing as on 31st March, 2005 and 31st March, 2006 and further noted that interest debited to the profit and loss account amounted to Rs.33,52,834/-. In response to the show cause notice as to why the provisions of 14A should not be invoked so as to disallow interest expenditure, the assessee submitted that, the entire increased in investment are out of internal accruals which is apparent from the increase in reserves and surplus of the assessee company. No new funds have been borrowed for investments made during the year. The Ld. AO, disallowed 50% of the interest expenditure claim which worked out to Rs.16,76,417/-.
Before the Ld. CIT(A), the assessee on its facts strongly placed reliance in the case of CIT vs. Reliance Utility and Power Ltd, reported in 313 ITR 340 and submitted that its surplus and interest free funds exceeded the investment made in shares. However, the Ld. CIT(A) disagreed with the 5 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. contention of the assessee on the ground that assessee has to demonstrate that the investment has been made out of the surplus funds available and for disposal of the assessee. The assessee is not maintaining separate bank account for the purpose of investment and inflow and outflow of the sources thereof from the bank account cannot be worked out to determine the disallowance, if any. The assessee has also borrowed certain interest bearing funds and, therefore, it cannot be held that the entire borrowings were for the business and nothing has been used for the investment. Further, overall positions of the Balance sheet cannot explain the interest costs that are incurred with several other business activities when there is common bank account. The assessee also has not provided one to one nexus of surplus/interest free funds with the investments made from time to time, that is, sources from which the investment have been made so as to arrive at the availability or otherwise of the interest-free funds at the point of time of making the investment, the income from which has been claimed as exempt. The grouping in the Balance-sheet takes in to account all the accrued profits and gains from the business activities but does not take into account the actual cash flow. Thus, on these reasoning, he confirmed the disallowance made by the AO.
Similarly, the AO has made addition of Rs.1,97,57,641/- on the interest expenditure in the AY 2007-08 on same footing. For the AYs 2008-09 and 2009-10 the AO after applying Rule 8D has made disallowance under section 14A, the break-up of which are given hereunder:
6 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. AY 2008-09 Addition/disallowance of Rs.5,53,66,132/-, the break- up of which is as under:- - Amount of expenditure directly related:-Rs.77,433/- (being demat charges) - Interest allocated - Rs.5,40,30,553/- (Out of total interest expenditure of Rs.10,33,38,955) - Administrative expenditure allocated: Rs.12,58,146/ (which is the sum total of all the expenditure claimed being less than 0.5% of average investments) - AY 2009-10 - Addition/disallowance of Rs.3,23,97,720/-, the break- up of which is as under:- - Interest allocated - Rs.3,13,60,908/- (Out of total interest expenditure of Rs.3,68,83,344/-) - Administrative expenditure allocated:-Rs.10,36,812/ (which is the sum total of all the expenditure claimed being less than 0.5% of average investments)
The Ld. CIT (A), on similar reasons has confirmed the disallowance and further held that from AY 2008-09; Rule 8D is applicable which is mandatory and accordingly administrative expenses were also confirmed.
Before us the Ld. Counsel, Shri Vijay Mehta submitted that, assessee had huge funds available with it which is evident from the reserve surplus and interest free unsecured
7 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. loans from the directors and group companies and other interest free funds as evident from the balance sheets. If the overall availability of interest free funds are taken into consideration vis-a-vis. the investment made right from AY 2006-07 to AY 2009-10, then it can be seen that the assessee had surplus/interest free funds which will take care of the investments made. He submitted that the proposition that, if the assessee has both interest free funds and interest bearing, then presumption is in the favour of the assessee that investments were made from the coffers of interest free funds only, is squarely covered by the decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd (supra) which also reiterated in the case of CIT v HDFC Bank Ltd, 366 ITR 505. However, he submitted that it was only in 2007-08, there would be deficiency, because investment have exceeded the interest free funds and, therefore, any interest if at all should be disallowed then the same should be on account of the excess investment made over and above the interest free funds. He further pointed out that, in any case, if at all any disallowance is called for, then same should not be more than the exempt income, which in AY 2007-08 was only Rs.25,23,123/- therefore, the disallowance for AY 2007-08 should be restricted to Rs.25,27,123/-.
To understand the facts and position of surplus/interest free funds vis-à-vis investments made as contended by ld. Counsel before us, the chart for various assessment years which are subject matter of appeal before us are as under:-
8 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Chart showing position of funds Particulars AYs 2006-07 2007-08 2008-09 2009-10 Share capital 11,12,200 11,12,200 11,12,200 11,651,800 Reserve and Surplus 20,14,96,599 20,13,46,531 2,11,19,16,309 2,37,23,75,327 Interest Free Unsecured Loan from directors and Group companies - 2,38,15,59,243 1,50,49,08,038 1,35,10,62,089 Interest Free ICD 2,74,00,000 10,67,79,500 92,75,000 92,75,000 Security Deposit and advance Received for premises 1,75,09,300 1,75,09,300 29,83,50,900 - Total (A) 24,75,18,099 2,70,83,06,774 3,92,55,62,447 3,73,38,74,216
Chart Showing Investment Particulars AYs 2006-07 2007-08 2008-09 2009-10 Total Investment 231118150 2853800187 3744088130 3660760374 Less: Share Application Money, Advance for Flat and Investment in Venture Capital Fund 9316975 28705185 75825786 66522090 Total Exempt Income Bearing Investment(B) 221801175 2825095002 3668262344 3594238284 Excess/(deficiency) of Own Fund (A-B) 2,57,16,924 (11,67,88,228) 25,73,00,103 13,96,35,932 As regards, the disallowance of indirect expenditure for the assessment years 2008-09 and 2009-10, which has been worked out in accordance with the Rule 8D(2)(iii), i.e. 0.5% of the average value of investment, Mr. Mehta submitted that, same is not being pressed and therefore, disallowance made under rule 8D(2)(iii) can be confirmed.
On the other hand, Ld. DR strongly relied upon the order of the CIT(A).
We have heard the rival submissions, perused the relevant findings given in the impugned orders. So far as the disallowance of interest in all the assessment years, we find that as far as assessment years 2006-07, 2008-09 and 2009- 10 are concerned, there are surplus/ interest free funds
9 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. available with the assessee which was more than the investments made during the year, which is quite apparent from the chart reproduced herein above. Once the surplus / interest free funds are excess of investment made, then in view of the ratio and principle laid down by the Hon’ble Bombay High Court in above two cases (Reliance Utilities and HDFC Bank) as relied upon by the ld. counsel, no disallowance under section 14A on account of interest expenditure should be made. Their Lordships have clearly opined that, once in the Balance sheet the assessee has reflected surplus/ own funds and also interest bearing funds, then presumption is that, investments must have been made out of interest free funds only and once that is so, then no disallowance of interest should be made. As can be seen from the chart incorporated above, for the AYs 2006-07, 2008-09 and 2009-10, there are excess of interest free/ surplus funds over the investments, therefore, no interest disallowance should be made under section 14A for the assessment years 2006-07, 2008-09 and 2009-10 should be made. We order accordingly.
So far as disallowance of interest under section 14A for the assessment year 2007-08 is concerned, we find that amount of Rs.11,67,88,228/- is excess of investment over interest free funds, that is interest bearing funds are more than the investments, therefore, on same logic and reasoning the disallowance of interest should be made after taking figure of Rs.11,67,88,228/-. However, if such a disallowance exceeds the exempt income of Rs.25,27,123/-, then same should be restricted to the exempt income only, in view of 10 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Delhi High Court judgment in Cheminvest Ltd. vs. CIT, reported in [2015] 378 ITR 33. Thus, with this direction the impugned issue of disallowance of interest under section 14A in AY 2007-08 is treated as partly allowed.
As regards the disallowance of indirect expenditure under section 8D(2)(iii), for the assessment years 2008-09 and 2009-10 are concerned, the same has not been pressed by the Ld. Counsel, therefore, the disallowance made by the AO and as confirmed by the CIT(A) under Rule 8D(2)(iii) will stand. Thus, disallowance on account of indirect expenditure is confirmed.
Now we come to the other issues, which has been raised vide grounds No. 2 to 5, with regard to treatment of sale of shares. The facts in brief qua these issues for all the assessment years are discuss hereunder as similar facts are permeating through in all the years and are also inter linked:-
Treatment of sale of shares of Praj Industries:- During the AY 2006-07, the assessee company had acquired 21,200 shares of Praj Industries ('Praj') which were treated as "trading stock". On 12.08.2006 there was a stock split in the ratio 5:1 for the said shares as a result of which the company has held 1,06,000 shares of Praj. The stock split was followed by a bonus issue in the ratio if 1:1. After giving the effect to the same, the number of share available with the company became 2,12,000. The assessee converted such bonus shares from trading portfolio to investment portfolio as on the 11 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. same date on which the bonus shares were allotted to it. Further the company had also purchased 10,000 shares of the Praj. During the same assessment year the assessee had sold 1,16,000 share of Praj from share trading portfolio. The assessee claimed entire cost of Rs.1,71,37,979/- in respect of said sale and accordingly, calculated the business loss of Rs.66,68,788. In AY 2008-09, the assessee sold bonus shares of Praj from investment portfolio in the AY 2008-09 and claimed exempt LTCG of Rs.4,98,57,944/- under section 10(38) of the Act. The assessee had acquired 14,296 shares of Astramicro Limited ('Astramicro') during the AY 2006-07. There was a split in the ratio of 5:1 in the same AY after which the company has held 71,480 shares of Astramicro. The stock split was followed by a bonus issue in the ratio of 1:1 on 15.10.2005. After giving effect to the bonus issue the number of shares with the company became 1,42,960. The assessee company then converted its bonus shares from the trading portfolio to investment portfolio as on same date on which it was received. During the same AY the company sold 71,480 shares of Astramicro from share trading portfolio and claimed entire cost of Rs.3,49,15,835/- in respect of said sale and accordingly calculated the business loss of Rs.2,01,32,141. Subsequently, the assessee company sold Astramicro shares from investment portfolio in AY 2007-08 and 12 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. claimed exempt LTCG of Rs. 1,14,00,115/- u/s 10(38) of the Act. The assessee-company in the AY 2007-08 had acquired 1,12,400 shares of India bulls Co. in AY 2007-08 which were held as "trading shares" and sold 1,12,400 in the same year. The assessee claimed the entire cost of Rs.4,59,76,487/- in respect of said sale and accordingly calculated the business income of Rs.1,42,75,415/-. During the year there was a scheme of demerger in the said scrip. Under the said scheme, due to the company's holding of 46,000 shares of India bulls the company was awarded with 46,000 shares of the resulting company i.e. India bulls Real Estate Limited ('IBREL'). The assessee company accounted the receipts of 46,000 shares of resulting company - IBREL as investment portfolio; and Subsequently, the assessee sold shares of IBRE from investment portfolio in the AY 2008-09 and claimed LTCG of Rs.2,89,48,329/- which was exempt under section 10(38) of the Act.
The AO in the impugned order has noted these facts in the following manner:- “12.1 During the AY 2008-09, the assessee company has claimed LTCG (Long Term Capital Gain) STT paid, as Exempt Income to the extent of Rs.17,59,60,948/-. Out of the said Exempt income, the LTCG on the two scrips under consideration is as under:-
13 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Sr.No. Particulars Qty. Cost Sales Rs. LTCG Rs. Rs. 1 Praj Industries 1,06,000 NIL 4.98,57,944 4.98,57,944 2 India Bulls Real Estate 46,000 NIL 2,89,48,329 2,89,48,329
1.2 The AR was required to explain as to why the cost of acquisition was taken at NIL? The AR explained that these shares of the two scrips were the BONUS SHARES received by the company and therefore as per the provisions under section 55(2)(aa)(iiia), the cost of acquisition is taken at NIL.
1.3 The ORIGINAL HOLDING in respect of these shares was traced to the AY 2006-07 and 2007-08. It was observed that in the AY 2006-07 and 2007-08, the shares were actually part of TRADING stock. The status of the two Scrips in the AY 2007-08 is as under: Sr. AY Particulars Qty. Cost Sales Trading No. Rs. Rs. Loss Rs. 1 2006-07 Praj Industries 1,16,000 1,71,37,979 1,04,69,192 66,68,788 2 2007-08 India Bulls Real Estate 1,12,400 4,59,76,487 3,17,01,073 1,42,75,415
In response to the show cause notice by the AO in this regard, assessee had made detailed submissions as to how the law permeates conversion of stock-in-trade into capital asset and vis-à-vis. The relevant submissions of the assessee for the sake of ready reference are reproduced hereunder:- It is pertinent to note herein that whereas conversion of capital assets into stock-in-trade and taxability of resultant profit or loss is specifically dealt under Section 45(2) of the Income Tax Act, there is no specific provision to deal with reverse situation involving conversion of stock-in-trade into capital asset or investment. Thus, to determine the tax effects of the said
14 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. transaction, one has to rely squarely on the legal precedents available on the subject. It is well settled legal position that stock in trade can be converted into capital assets. However, two moot issues in respect of taxation aspect which arises are as under - 1) Value to be recorded in the books of the business and for purpose of computing cost in case of future sale or transfer 2) The point of time from which indexation should be applied, whether on the date of conversion or the date of purchase as stock in trade. Both the above issues have been deliberated by various courts over the years. The guiding principle has been laid out by the cases of Sir Kikabhai Premchand v. CIT (24 ITR 256) (SC) & CIT v. Dhanuka & Sons (124 ITR 24) (Cal), where it has been stated that even if the stock in trade to be valued at cost at for the purpose of calculation of cost of acquisition of capital asset. Relying on the Another leading case on the point is Keshavaji Karsondas Vs. CIT (207 ITR 737) where it was categorically held that what is relevant is the "cost of acquisition" and not the date on which the asset became a capital asset of the purpose of levy of capital gains tax. The property which was transferred could become the property of the assessee only at one point of time. It would not become the property of the assessee as a non- capital asset at one point of time and as a capital asset at another point of time. Hence for the purpose of determining "capital gains, the "cost of acquisition of the capital asset belonging to the assessee has to be taken as on date it becomes the capital asset of the assessee. Relying on the methodology adopted by the above case, the assessee valued its investment at Rs. Nil which was the cost of its bonus shares. The methodology adopted by the 15 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. assessee has also been recently validated by Bombay High Court in the case of CIT vs. Jannhavi Investments (P) Ltd where in the facts of the case were completely similar to the facts of the assessee's case. Herein the assessee had been allotted bonus shares on the shares originally held as stock in trade. The Hon'ble court had stated that the assessee was entitled to value the said bonus shares at cost which is applicable on the date of conversion into capital asset. Applying the ratio of the above decision, it is submitted that the methodology adopted by the assessee is completely in sync with the applicable law. Further, during the course of assessment proceedings, your goodself had asked to explain why the sale of bonus shares shouldn't be treated as income from business and profession. In reply to the same it is once again stated various judicial; precedents have held the conversion of stock in trade into capital asset as valid and as per law. Applying the analogy of the said above cited decisions; the assessee submits that in the particular year, it was intention of that assessee to transfer its stock in trade to 'investment' and accordingly the same were accounted under the head "investments". The only motive and intention of the assessee behind making such a switch was to reap the benefits of appreciation in price of shares in the long run, which every investor in shares always does. The same were also accounted at cost applying the conservative approach of accounting. Further, it is pertinent to note that assessee-company has limited its investment into few scripts with the intention of long term growth. After a long holding period of more than a year, the assessee sold the scrips out of the investment portfolio and earned long term capital gain arising out of steady market appreciation. There was no panic selling or frequent transactions of sale involved. The shares in the investment portfolio were sold only after the 16 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. due considerations that the same were fully priced in and the share price has reached their logical full valuation. This clearly signifies that the assessee had been a pure investor and not involved into any trading activities for its investment portfolio. It is pertinent to note that the holding period for the shares sold during the year is more than 12 months which is a considerable period of time in case of volatile asset like shares. Further to negate the contention of your goodself that an assessee cannot treat a single scrip as stock in trade in one year and investment in another, we draw your goodself's attention to the above cited case of Jaanhavi Investments. As stated in the above paras, the facts of the above case were similar to the assessee's case wherein a single scrip was treated as stock in trade in one year and as investment in another. However, no adverse inference on the same was drawn by the court on this and the capital gain as calculated by the assessee was accepted”.
However, the AO rejected the assessee’s contentions, which are summarized as under:- i) The assessee had received the bonus shares during the period it held the original shares. The original shares were the trading stock. Therefore, the bonus shares are necessarily the trading stock and not investment stock due to the basic origin of the shares being trading stock. When the bonus shares are sold, the character of the same remains the same i.e. trading stock. ii) The assessee has converted the bonus shares into capital asset before the original shares were sold. The treatment of bonus shares as capital asset before the sale of original shares is apparent from the fact that the cost of bonus shares is taken at NIL. The cost of bonus shares can be taken at NIL
17 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. only when it is investment stock. The cost of purchase of trading stock for the bonus shares is to be taken as the original cost as apportioned on the bonus shares and original shares. During the assessment year of purchases of shares, the cost should have been apportioned on the shares equally by the assessee and should have worked out the trading profit or loss. The assessee, instead, worked out the trading loss in the year of purchases, taking the total cost into consideration. The plea of the assessee that the cost of acquisition of bonus shares is NIL is applicable only for the investment stock and not for the trading stock.
Accordingly, the trading and profit and loss account of these shares were worked out by the AO in the following manner:- For AY 2006-07 and AY 2007-08 Sr. AY Particulars Original Bonus Cost Rate Qty. Sold N Qty. Issued Rs. Per Share 1 2 3 4 5 6 7 8 1 2006 Praj -07 Industries 116,000 106,000 17,137,979 77.20 116,000 2 2007 India Bulls -08 Real Estate 112,400 46,00 45,976,487 290.26 112,400
Cost Rs. Sales Rs. Trading Profit/ Loss Rs. 9 10 11 8,954,980 10,469,192 1,514,212 32,624,729 31,701,073 (923,656)
For AY 2008-09 Sr. Particulars Bonus Rate per Cost of Qty Sale conside- Trading No. Issued share shares Sold ration for Profit or Balance Loss Shares during AY 2008-09 1 Praj Industries 106,000 77.20 8,183,200 106,000 49,857,944 41,674,744 2 India Bulls Real Estate 46,000 290.26 13,351,960 46,000 28,948,329 15,596,369 TOTAL 57,271,113
18 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. Thus, in view of the aforesaid working, the adjustments done by the AO in the respective assessment years were as under: A.Y. Head of Income Particulars Amount Rs. 2006-07 Business Income Add: Disallowance of Loss 66,68,788 Add: Income 15,14,212 2007-08 Business Income Add: Disallowance of Loss 1,42,75,415 Less: Loss Incurred 9,23,656 2008-09 Business Income Add: Income 5,72,71,113 LTCG (Exempt) Less: LTCG treated Trading 7,88,06,273
In the first appeal, the Ld. CIT(A) upheld the action of the AO by observing that, principle of averaging the price of the equity shares would be applicable irrespective of the nature of holding of the shares (investment or stock-in-trade). For coming to this conclusion, he strongly referred and relied upon the decision of Hon’ble Supreme Court in the case of Escorts Farms (Ramgarh) vs CIT, reported in [1996] 222 ITR 509. He further held that the original intention of the company was to treat all the shares as stock-in-trade and later on, the shares were converted into investments merely to avail exemption of Long-term-capital-gain under section 10(38). Thus, he held that AO was right in treating the shares as stock-in-trade in the impugned assessment years and income from sale thereof has rightly been held as business income. Similarly, with regard to another shares also he has discussed in detail. The relevant observation and finding of the ld. CIT(A) are given in paras 10 to 13 of his order.
19 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd.
Before us, Mr. Mehta submitted that the assessee company follows a consistent practice of trading in securities as stock throughout the year and converting the balance securities, if any left in the year end into investments. The same he pointed out, is substantiated from the financial statements for all the years wherein there is no trading stock at the year end. Ld. Counsel submitted that, there is no bar under the Income Tax Act, 1961 to maintain two portfolios, i.e., ‘trading’ as well as ‘investment’ for the same stock. Even CBDT Circular no. 4 of 2007 dated 15th June 2007 duly recognizes holding shares on account of these two portfolios. He further submitted that the said consistent practice had regularly been accepted by the department in the earlier years, wherein orders were passed under scrutiny assessments under section 143(3) and also under section 153A r.w.s 143(3) as the case may be. In relation to the conversion of trading portfolio to investment portfolio, he argued that, the bonus shares were automatically acquired on capital account. In support, he pointed out that the assessee had not held bonus shares as stock in trade and same is evident from the balance sheets for the various years, as submitted in the paper book. He pointed out that at page no. 14 of the assessment order for the AY 2006-07, the Ld. AO himself has stated that there is no bar for conversion of one scrip from trading account to investment portfolio and therefore, principally the department is also under the same view that conversion can be done. In support, of his contention that bonus shares are held on capital account/investments, he strongly relied upon the following judgment:-
20 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. 1. Atlas Corporation v. ITO –Mumbai ITAT (57 ITD 139); 2. CIT v. Madan Gopal Radheyal –Supreme Court (73 ITR 652)
Mr. Mehta further pointed out that, the department has also accepted identical treatment of shares which are under consideration, i.e. conversion of bonus stock into investment in the case of shares of Sesa Goa, wherein the income from different portfolios was offered to tax under the head 'Income from business or profession' and 'Capital gains' in AY 2005- 06 and 2006-07 for which orders u/s 143(3) and 153A r.w.s 143(3) respectively have been passed. He, further relied upon the judgment of Delhi High Court in the case of CIT vs. Express Securities Pvt. Ltd. (364 ITR 488) wherein it was concluded that once the shares are held as investment by the assessee, then resultant gain / loss should be assessed as capital gain although the scrip has been held as stock in trade prior to such conversion. He also relied upon the decision of Hon’ble Bombay High Court in the case of CIT vs. Yatish Trading Co. Pvt. Ltd, reported in [2013] 359 ITR 320. Thus he submitted that the provisions of capital gain would be applicable once the share was converted into investment. Lastly, in support of the consistent practice followed by the assessee and accepted by the department, he filed the details of certain shares which were held as stock-in-trade and the bonus shares were treated as investment and also filed a separate sheet with regard to various shares when purchased were taken into trading account and later on converted into investments at the yearend.
21 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd.
In relation to the valuation of bonus shares and the proportionate cost of acquisition taken by the AO for the shares purchased on trading account and allocation of such proportionate cost to bonus shares, Mr. Mehta argued that, now in wake of Section 55(2)(aa)(iiia) of the Income Tax Act, 1961, which is applicable in such type of cases, the cost of bonus share is to be taken at nil as assessee has not made any payment for acquiring the bonus shares nor incurred any costs. The relevant clause provides that "in addition to the financial assets allotted to the assessee without any payment and on the basis of holding any other financial assets, shall be taken to be NIL in case of such assessee"; and accordingly, he submitted that, the cost of bonus shares under consideration should be taken “Nil”. As regard to the judgment of Hon'ble Supreme Court in the case of Escort Farms (Ramgarh) Ltd. vs. CIT (222 ITR 509) which was relied upon by the CIT(A) in his appellate order, he submitted that the said judgment was related to AY 1967-68 and 1968-69 and 1968-69 and was hence prior to the insertion of Section 55(2)(aa)(iiia) of the Income Tax Act, 1961 which is effective from 1st April, 1996 and accordingly, the said judgment of Hon’ble Apex Court will not be relevant for the present appeal under consideration.
Ld. CIT DR strongly relying upon the decision of ld. CIT(A) submitted that, there cannot be two limbs from the same set of shares specifically when at the time of purchase the assessee has clearly intended to buy the shares and stock-in-trade. The allocation of cost for the bonus shares, has to be taken with reference to purchase value of the shares and the acquisition cannot be taken at ‘Nil’ cost. The original
22 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. cost has to be allocated to the bonus shares also for determination of business profit / loss.
We have heard the rival submissions and also perused the relevant finding given in the impugned orders. The first controversy is, whether the bonus shares held on capital account can be treated on the trading account. From the perusal of the records, as pointed out by the Ld. Counsel, it is seen that the assessee company right from the earlier assessment years has been treating the purchase of shares, both into trading account and also under the investment portfolio. The bonus shares as a matter of ‘consistency policy’ has always been held as ‘investment’ in the Balance-sheet. The revenue’s case is that, once these shares have been purchased/acquired as stock-in-trade, then as a natural corollary, the bonus shares on such scrips has to be treated as part of stock-in-trade only. This precise issue had come up for consideration before the Hon’ble Supreme Court in the case of CIT vs Madan Gopal Radhelal (supra). In that case also the assessee dealt with the shares and securities and held the shares as part of stock-in-trade. In certain shares held by the assessee, the companies at different times issued bonus shares proportionate to the equity share-holding. Thus, from time to time, the assessee was having bonus shares received by it on the shares held by it as stock-in- trade. The issue which had come before the Hon’ble High Court was that, whether the sale proceeds of the bonus shares which had been issued in respect of shares forming part of the assessee’s stock-in-trade of the shares dealing business are liable to inclusion in the assessee’s total income
23 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. for the respective years as profits of these shares dealing in business? The Hon’ble High Court by majority answered this question in favour of the assessee. Before the Hon’ble Supreme Court various decisions were relied upon by the revenue including that of the Hon’ble Bombay High Court in the case of CIT vs Maniklal Chunnilal and Sons Ltd. (ITR 16 of 1948), however, the Hon’ble apex court decided the issue after observing and holding as under:- “We are unable to agree with the judgment of the Bombay High Court (to which reference was made by the Tribunal) in Commissioner of Income-tax V. Maniklal Chunnilal and Sons Ltd. (I.T. Reference No. 16 of 1948) that bonus shares received by a shareholder who carries on business in shares and securities "ipso facto become accretion to his stock-in-trade." Bonus shares would normally be deemed to be distributed by the company as capital and the shareholder receives the shares as capital. The bonus shares are accretions to the shares in respect of which they are issued, but on that account those shares do not become stock-in-trade of the business of the shareholder. A trader may acquire a commodity in which he is dealing for his own purposes, and hold it apart from the stock-in-trade of his business. There is no presumption that every acquisition by a dealer in particular commodity is acquisition the purpose of his business in each case the question is one of intention to be gathered from the evidence of conduct and dealings by the acquirer with the commodity.
Bonus shares having been received by the assessees in respect of their stock-in-trade did not, therefore, become part of their stock-in-trade, merely because they were accretions to the stock-in-trade. The bonus shares were received as capital; they could be converted by the assessee, in to their stock-in- trade or retained as their capital asset”.
Thus, the Hon’ble Supreme Court clearly opined that, the bonus shares having received by the assessee in respect of stock-in-trade will not become the part of stock-in-trade automatically; they can be converted by the assessee either into stock-in-trade or can be retained as capital asset, that is,
24 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. as investment. This decision of the Hon’ble apex court clearly clinches the issue in favour of the assessee and there is no support for the proposition canvassed by the Department that the bonus shares issued on the shares held as stock-in-trade has to be reckoned as stock-in-trade only and cannot be treated as part of capital asset. At least, no judicial authority has been brought to our notice by the Department. The ITAT Mumbai Bench in the case of Atlas Corporation v ITO (supra) on the issue of bonus shares has also observed and held as under:- “As far as the bonus shares were concerned, acquisition of bonus shares is always on capital account, irrespective of the nature of holding of shares on the basis of which the bonus shares were issued. Even if shares are held by an assessee as stock-in-trade and bonus shares are to be treated on capital account and, therefore, profit on sale of such shares acquired on the basis such holding, the bonus shares are to be treated on capital account and, therefore, profit on sale of such shares is to be assessed as capital gain and not as business income, unless it is shown that the assessee has converted them into stock-in-trade. In the instant case, there was no material to hold the assessee ever converted any of such shares into stock-in-trade. Therefore, the income arising in respect of the bonus shares would not be assessed as business income but has to be assessed as capital gains”.
Thus, we hold that the bonus shares held by the assessee are to be treated as ‘capital asset’ that is, investment.
Not only that, from the past records, it is seen that, the assessee company has been following consistent practice of trading and security as stock throughout year and converting the balance securities levied at the yearend as investment and this practice has been accepted by the Department under scrutiny proceedings under section 143(3) in respect of various shares as per the chart submitted before us. Further,
25 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. once the assessee is maintaining two portfolios; one for ‘stock-in-trade’ and one in respect of ‘investment’ and has been as a matter of practice converting the shares held as stock-in-trade to capital account and transferring the shares in investment portfolio, the then same has to be accepted here in these years also. Once the shares held as ‘investment’ in the books are sold, that is, out of investment portfolio, then same is assessable under the head Long-term-capital-gain. This precise issue had come up for consideration before the Hon’ble Delhi High Court in the case of CIT v. M/s Express Securities Pvt Ltd, reported in [2014] 364 ITR 488, wherein the Hon’ble High Court held that, such a conversion of stock- in-trade into investment/capital account is permissible in law and the fact that the long-term-capital-gain on sale of shares held as investments have been treated as exempt under section 10(38) brought under statute from 1st April, 2005, that does not mean that conversion was colourable or illegal. Their Lordships thus rejected the contention of the revenue in this regard that such a conversion was only to avail the benefit of exemption on sale. In view of the decision of the Hon’ble Delhi High Court, the observation of the Ld. CIT(A) that the shares have been converted to capital asset only to fetch exemption under section 10(38) cannot be accepted. We find that in the case of CIT vs, Yatish Trading Co (supra), the Hon’ble Bombay High Court held that, the assessee’s trading in shares would not estop the assessee from dealing in shares as investments and gain offered on sale of such shares has to be taxed under the head “capital gains”. Thus, it is open to for a trader to hold the shares as stock-in-trade as well as investments and can be converted in either way. Once the 26 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. shares sold were held by the assessee as investments, then the gains arising out of sale of investments has to be assessed under the head “capital gains” and not under the head ‘business profits’. From the above proposition of law, as culled out from the various binding precedence of judicial authorities of Hon’ble apex court and Hon’ble jurisdictional High courts, we hold that, the assessee is entitled to hold shares both as stock-in-trade as well as under the investment portfolio even on those shares which were though purchased for the purposes of trading but have been converted into capital asset or investment at the yearend and have to be treated as ‘capital asset’ only and any gain arising there from in the subsequent years has to be treated as income assessable under the head “capital gain”.
Now, we come to the second issue, as to whether the cost of shares sold under the head “business income” should be taken as original cost or average cost and in case of bonus shares, whether the cost should be taken at “Nil” or proportionate cost of purchase value of original share has to be allocated. As culled out in the earlier part of the order, the bonus shares issued to the assessee has always been treated as capital asset in the Balance-sheet. The cost of bonus shares have been taken at “Nil”, because at the time of purchasing the shares the assessee has incurred the cost and the bonus shares was received without incurring any cost. The assessee, while selling the shares on trading account has taken the cost of purchase for determination of its business income. This has been correctly done, because in a trading account all the direct cost including purchases has to be 27 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. taken into consideration for determining the profit. However, for the bonus shares, the assessee has taken the cost at “Nil” because, admittedly, no actual cost has been incurred by the assesee for acquiring the bonus shares. Any allocation of notional cost is not required because now the statute itself provides that, if the financial asset allotted to the assessee is without any payment, then it should be taken at “Nil”. In other words, if the assessee has not incurred any cost for the bonus shares then no value should be assigned for the acquisition. The provision under section 55(2)(aa)(iiia) reads as under: 55(1) xxx
(2) For the purposes of sections 48 and 49, “cost of acquisition” (a) xxx (aa) In case where, by virtue of holding a capital asset, being a share or any other security, within the meaning of clause (h) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) (hereafter in this clause referred to as the financial asset), the assessee – (A) becomes entitled to subscribe to any additional financial asset; or (B) is allotted any additional financial asset without any payment, then subject to the provisions of sub-clause (i) and (ii) of clause (b) (i) xxx (ii) xxx (iii) xxx
28 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. (iiia) in relation to the financial asset allotted to the assessee without any payment and on the basis of holding of any other financial asset, shall be taken to be nil in the case of such assessee”.
From the above provisions which has been brought in to the statute w.e.f. 01.04.1996, it is clear that, once the assessee had not incurred any cost at the time of acquisition of bonus shares then it has to be taken as “Nil” and no cost should be assigned. This deeming provision will apply in the present case also with regard to bonus shares. As submitted by the Ld. Counsel, the decisions of the Hon’ble Supreme Court in the case of Escorts Farms (Ramgarh) (supra) will not apply in wake of this newly amended section brought by the Finance Act, 1995 w.e.f. 01.04.1996. Thus, we hold that, firstly, the cost of shares sold on trading account has to be taken at original cost and average cost, that is, the cost incurred for purchase of shares and not the proportionate allocated cost to bonus shares and secondly, the cost of bonus shares has to be taken at “Nil”. The AO is directed to give effect to our aforesaid finding while dealing with the determination of business income as well as capital gain in respect of the shares for all the assessment years impugned before us.
In the result, grounds No.2 to 5 raised by the assessee are treated as allowed.
There is one additional ground in the appeal for AY 2009-10, that is, with regard to availability of MAT credit of 29 ITA No.: 3561/Mum/2012 ITA No.:3562/Mum/2012 ITA No.:3563/Mum/2012 ITA No.:7303/Mum/2012 M/s Ashok Apparels P Ltd. AY 2008-09 in AY 2009-10. Since it is purely a legal ground, the same is admitted for adjudication.
24.. The AO is directed to verify the contention of the assessee and if the MAT credit of AY 2008-09 is available then benefit should be given in AY 2009-10 if found permissible in law and on facts. Thus, the additional ground is treated as allowed for statistical purposes.
As we have taken into account the facts and issues for all the years, therefore, no separate adjudication is required for all the appeals and our finding given above will apply mutatis- muntadis to the remaining impugned appeals for AYs that is, 2007-08, 2008-09 and 2009-10. Accordingly, the grounds raised by the assessee in all the appeals are treated as partly allowed.
In the result, all appeals of the assessee are partly allowed.
Order pronounced in the open court on 29th July, 2016.
Sd/- Sd/- (अशवनी तनेजा) (अिमत शु�ला) लेखा सद�य �याईक सद�य (ASHWANI TANEJA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 29th July, 2016 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT –38, Mumbai. 4) The CIT -4, Mumbai 5) िवभागीय �ितिनिध “ए”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “A” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /