STOREWELL CRDITS & CAPITAL P.LTD,MUMBAI vs. ADDL CI T RG 5(3), MUMBAI

The facts relating to the case are stated in brief. The assessee company was formed in the year 1994 with the objective of making investment in shares and also do financing activities. It effectively commenced operations in the year relevant to the AY 2004-05. Its gross income for the year relevant to AY 2004-05 and 2005-06 consisted of following items of receipts:- Particulars of receipts AY 2005-06 2004-05 Profit on sale of shares 3,70,58,123 5,17,13,449 Interest income 11,81,549 4,44,026 Dividend income 30,17,098 32,46,765 It is also pertinent to note that the assessee suffered on sale of shares to the tune of Rs.2,00,94,768/- and Rs.97,23,342/- during the years relevant to the AY 2005-06 and 2004-05 respectively. The assessee declared profit/loss arising on sale of shares under the head Income from Capital gains. However, the AO assessed the same as “Business income” of the assessee. The Ld CIT(A) also confirmed the action of the AO.

In the alternative, the assessee claimed for deduction of expenses, if the profit is assessed as business income. The Ld CIT(A) gave directions to the AO to consider the alternative claim of the assessee. However, according to the assessee, the said direction did not cover expenses

It may be noticed here that the appeals filed by the assessee before the Tribunal were originally disposed of by restoring the matter to the file of Ld CIT(A) with the direction to pass a reasoned order. In the set aside the proceedings, the Ld CIT(A) confirmed the order of the assessing officer.

The Ld Counsel appearing for the assessee submitted that the assessee had held the shares for sufficiently long period and further the own funds available with the assessee were sufficient enough to make the investments. He further submitted that the assessee has shown the purchase of shares as “Investment” in its books of account and also earned sufficient amount of dividend income. Accordingly he submitted that the tax authorities are not justified in assesing the profit arising on sale of shares as business income of the assessee. He further submitted that the Tribunal has considered an identical issue in AY 2006-07 and has held that the profit arising on sale of shares is assessable as Capital gain only.

The Ld D.R, on the contrary, submitted that the assessee has borrowed funds for purchasing shares. Further the volume of purchase and sales are very high which would vindicate the stand of the AO that the assessee has acted as trader in shares. He further submitted that the 4 and 5396/Mum/2011 assessee has not held all the scrips for longer period, i.e., only few scrips were held for three months to nine months. In this regard, the Ld D.R invited our attention to paragraph 7 (page 10) of the assessment order relating to AY 2004-05. He further submitted that assessee did not receive dividend income from all the shares, which show that the intention of the assessee was not to earn dividend income by making investments, but it was to earn profit by trading in shares.

We heard the parties and perused the record. We notice that the assessee company was formed with the main objective of carrying on financing activities. Though the assessee company was formed in the year 1994, it effectively commenced its operations only in the year relevant to the assessment year 2004-05. A perusal of the components of gross receipts extracted above would show that the assessee has earned major chunk of its income through the profit arising on sale of shares.

The contention of the assessee is that it has held the shares as its “Investments” and hence the profit arising on sale of shares should be assessed under the head “Capital gains”. We have noticed that the assessee has earned major portion of its income through share trading activity and further it has also incurred losses in that activity in both the years. The Assessing officer has noticed that the volume of purchase and sale of shares was very high in both the years. For example, in the year relevant to AY 2004-05, the assessee has purchased shares worth 43.69 crores and sold shares worth Rs.39.82 crores, both aggregating to about Rs.83 crores. The high volume of turnover, in our view also, shows that the assessee was continuously carrying on the activity of purchase and sale of shares.

We have earlier noticed that there is merit in the observation of the tax authorities that the assessee has carried out the share trading activity in a continuous manner, in view of the huge volume of purchases and sales. The very fact that the assessee has incurred losses also in the share trading activity further fortifies the same, since the sale of share at losses would be normally undertaken to reduce further loss, which would be possible only if one continuously monitors the movements of the share

Further, a perusal of the Computation of total income filed by the assessee for both the years under consideration would show that the assessee has declared huge amount of “Short term Capital gains” only (Rs.412.07 lakhs in AY 2004-05 and Rs.165.12 lakhs in AY 2005-06) in both the years, except a nominal amount of Rs.6047/- as Long term capital gain in AY 2005-06. Absence of Long term capital gains belies the contention of the assessee that its intention at the time of purchase of shares was to hold them as investments. Hence, we find merit in the observations of the tax authorities that the assessee did not intend to hold the shares for a longer term, which is one of the main features of a trader.

The assessing officer has also pointed out that the Object clause of the assessee permits dealing in shares and hence the assessee was dealing in shares as a trader only. The assessing officer has further pointed out that the dividend has been earned only from part of the shares, which shows that the intention of the assessee was not always to earn dividend income by holding the shares as its investment. The 7 and 5396/Mum/2011 assessing officer has also pointed out that the entries made in the books of account are not always determinative factor to decide about the intention of the assessee. We also agree with the said observations of the tax authorities.

In view of the foregoing discussions, we are of the view that it cannot be said that the assessee’s intention at the time of purchase of shares was to hold them as investments. In our view, the assessee’s conduct and surrounding circumstances discussed above would show that the assessee has actually intended to deal in shares as a trader only. Hence, in our view, the Ld CIT(A) was justified in confirming the assessment of profit arising on sale of shares as business income of the assessee.

Before us, the assessee placed reliance on the order passed by the co-ordinate bench in AY 2006-07, wherein the Tribunal has reversed the findings of the assessing officer, i.e., this issue was decided in favour of the assessee. We further notice that the order passed by the Tribunal for AY 2006-07 was subsequently followed by the Tribunal in AY 2007-08 and 2008-09. Admittedly all the above said orders pertain to succeeding years, where as we have considered the facts available on record for the years under consideration and confirmed the order of the Ld CIT(A). The assessee has also placed reliance on the decision rendered by the Hon’ble Bombay High Court in the case of CIT Vs. Gopal Purohit (ITA No.1121 of 2009 dated January 6, 2010). We are unable to understand as to how the assessee could place reliance on the above said decision to support its case. In fact, the assessing officer has consistently assessed the profits arising on sale of shares as Business income only in AY 2004-05 to 2008- 09. Hence, there is no inconsistency in the stand of the assessing officer

In view of the foregoing discussions, we uphold his order on this issue.

The alternative contention of the assessee is that the assessing officer should be directed to allow the interest expenses and other expenses, if the profit arising on sale of shares is assessed as business income. We notice that the Ld CIT(A) has already given similar directions to the assessing officer. Accordingly, we modify the order of Ld CIT(A) on this issue and direct the AO to consider all the expenses that may be claimed by the assessee.

The next issue contested by the assessee relates to the valuation of the closing stock of shares. Though the assessee valued the shares “At cost” in the books, it claimed before the assessing officer that the valuation should be done at lower of cost or market value of shares. The said claim was rejected by both the tax authorities. We notice that the assessing officer has observed that the assessee has chosen to value its closing stock of shares at cost in its books of account and further the “Profits and gains from business” has to be arrived at in accordance with the method regularly followed by the assessee. The AO has further pointed out that the closing stock of the first year becomes opening stock of the succeding year and hence the ultimate tax effect would be nil. In our view, there is merit in the stand taken by the assessing officer. As 9 and 5396/Mum/2011 observed by him the Profits and gains of business has to be arrived at the method of accounting regularly followed by the assessee. Since the assessee has chosen to value its closing stock of shares at Cost price, we are of the view that the tax authorities are justified in rejecting the claim of the assessee to value the shares at lower of cost or market value.