In determining head for profit/loss on sale of shares intention of Assessee also need to be look into
SUMMARY OF CASE LAW
Where the intention of the assessee-company was to purchase and hold the shares of group companies as investment, the loss arising from transactions in the said shares was assessable under the head “income from other sources”
CASE LAW DETAILS
Decided by: ITAT, DELHI BENCH `G’ NEW DELHI, In The case of: Goswami Credits & Investment Ltd. v. JCIT , Appeal No.:, ITA No. 1720 to 1722/D/2003, Decided on: July 25, 2008
9. We have considered the rival submissions and also perused the relevant material on record. The main issue involved in these appeals is whether the loss shown by the assessee is assessable under the head “income from business “as claimed by the assessee company or under the head “income from other sources” as held by the authorities below. In order to decide this issue,’ it has to be ascertained as to whether the relevant shares were purchased and held by the assessee company as its investment or as stock in trade. In this regard, the Id. Counsel for the assessee has laid great emphasis on the nature of the assessee company being an investment company. In our opinion, this fact alone is not sufficient to establish that the relevant shares were purchased and held by it as stock in trade. What is relevant in this context is the intention of the assessee company to hold the said shares and such intention, as rightly contended by the Id. DR before us, is to be gathered from the conduct of the assessee as well as the treatment given by it in the books of accounts. In this regard, it is observed that the said shares were treated as investment by the assessee company in its books of accounts as investment at least in the previous year relevant to AY 1996-97. No doubt, the said treatment was sought to be changed by the assessee company by showing that the said shares have been converted from investment to stock in trade in the previous year relevant to AY 1997-98. However, the said change in the treatment to the relevant shares given by the assessee company again, in our opinion, was not sufficient to support its case keeping in view all the facts of the case including especially the conduct of the assessee. First of all, it is noted that in the previous year relevant to AY 1996-97, the assessee company had sold some of the said shares and the profit arising from such sale was declared by ii as short term capital gain which clearly shows its intention to hold the said shares as investment and not stock in trade. Secondly, even if the shares were claimed to be converted from investment to stock in trade in the pervious year relevant to AY 1997-98 as per the treatment given in its books of accounts and such treatment continued to remain the same in AY 1998-99. the same – were valued at cost which as commented by the auditors in their report was not in accordance with accounting standard issued by the Institute of Chartered Accountants of India. Even in the notes to accounts for that year (copy placed at page no. 21 of the assessee’s paper book), a following note was given as note no. 4:-
“the company has during the year classified its investments to stock in trade at cost. Such reclassification at cost is not in consonance with the accounting standard on accounting for investment issued by the Institute of Chartered Accountants of India consequent to which loss for the year has been understated by Rs. 1014 lakhs”.
10. As is clearly evident from the aforesaid note given in the notes to accounts of the assessee company, the conversion of shares from investment into stock in trade was claimed to be made without complying with the mandatory accounting standard inasmuch as the valuation thereof was not done as per the said standard. This vital aspect of the matter clearly supports the case of the Revenue that the change in the accounting treatment given by the assessee company by converting the shares into stock in trade was only for the purpose of claiming the loss as business loss and the same therefore cannot be relied upon to say that the real intention of the assessee was to hold the said shares as stock in trade in a real sense. Moreover, as pointed out by the Id. DR on the basis of the pattern of sale and purchase of the said shares by the assessee company during the years under consideration, the investment in the shares of other group companies was static and even the few transactions of sale of the said shares were made to the other group companies. As observed by the Id. CIT(A) in his impugned order, there was a failure on the part of the assessee company to establish that the said shares were held by it in order to acquire a controlling interest in the other group companies and the Id. Counsel for the assessee has not been able to make out such a case even before us. Keeping in view all these facts of the case, we find it difficult to accept the stand of the assessee company that the relevant shares were held by it as stock in trade during the ordinary course of its business and the transactions in those shares constituted its business. On the other hand, the intention of the assessee company as is evident from its conduct as well as the accounting treatment given, in our opinion, was to acquire and hold the said shares as investment and the loss arising therefrom thus was rightly held as chargeable to tax under the head “income from other sources”.
11. In the case of Dr. P. Vadamalayan v/s. CIT (supra) cited by the Id. Counsel for the assessee, it was no doubt held by the Hon’ble Madras High Court that the term “business” as used in the fiscal statute cannot ordinarily be understood in its etymological sense and the definition of “business” being an inclusive definition it is indicative of extension and expansion and not restriction. However, as further clarified by their Lordships, an activity can be termed as “business” giving such a wide connotation only when it is really a commercial activity. In this context, a reference can usefully be made to the another judgement of Hon’ble Madras High Court in the case of Janab Abubucker Sait v/s. CIT (Supra) cited by the Id. Counsel for the assessee wherein it was held that one of the essential elements in an adventure in the nature of trade is the intention to trade and such intention must be present at the time of purchase. It was also held that if however the subject of transaction is normally used for investment such as land, houses, shares etc., an admitted intention to sell such subject matter on the arrival of suitable reselected time does not always warrant a definite conclusion that the transaction is in the nature of trade. As already observed by us, the intention of the assessee company in the present case, having regard to all the facts and circumstances including the conduct of the assessee, was to purchase and hold the shares of group companies as investment and going by the static manner in which the said shares were held, it cannot be said that the transactions in the said shares constituted the business activity of the assessee company.
13. Keeping in view the reasons given above, we are of the view that the shares of other group companies were held by the assessee as investment and the loss arising from the transactions in the said shares was assessable under the head “income from other sources” as rightly held by the authorities below. In that view of the matter, we uphold the impugned order of the Id. CIT (A) confirming the action of AO in disallowing the claim of the assessee for carry forward of the said loss as a business loss.