Case Law Details
ITO Vs. M/s Nupur Carpets Pvt. Ltd. (ITAT Kolkata)
We note that the AO treated net ‘surplus’ as business income instead of capital gains on the ground that the assessee carried out business of share trading as evident from large volume of transactions and systematic, organized, repeated and regular activity in shares with a clear intention to earn huge profits. But the facts suggests that the assessee- company was holding shares as investment all along and that the initial intention was evident by way the entries made in books and valuation of shares at ‘cost’ and that the volume of transactions was low and that substantial dividend income earned reflecting the intention. Thus, according to assessee the net surplus was not a business income but on account of capital gain. To decide whether a transaction is in the nature of ‘investment’ or ‘trading’ the crucial test that laid down by various courts is that the ‘intention’ of the assessee at the time of purchase of shares. The AO on the other hand, was on the conduct of the business of the assessee which according to him carried out in a systematic and organized manner involving large volumes of transactions in shares. As seen from the principles laid down by various courts, the main test prescribed is the ‘initial intention’ of the assessee to decide whether an activity amounts to ‘trading activity’ or ‘investment activity’. As seen from the above facts, the assessee is justified in its argument that its original initial intention is to hold the shares as ‘investments’ and not as ‘stock-in-trade’. The intention of the assessee as is evident from the circumstances at the time of purchase of shares/units, is a relevant factor and often a conclusive factor in determining whether a transaction is in the nature of trade or in the nature of investment. The assessee had been keeping its holdings in certain companies from a few months to a few years, which clearly indicates that the motive and intention of the assessee is to earn returns in the form of capital gain apart from dividend income. We note that the sources for acquisition of shares are from share capital, reserves and surplus funds. The assessee has been an investor and not a trader as seen from the intention of the assessee. The treatment given in the books under the head ‘investment’ clearly shows that the assessee’s intention to deal in shares as investment. The conversion of investment into stock-in-trade and continuing the trading under that head and again converting the closing stock under that head into ‘investment’, under consideration amounts to a clear change of intention depending on the circumstances. The assessee maintained separate ledger accounts in respect of conversion of stock-in-trade into investment. By converting the stock-in-trade into investment, it does not alter the character, nature and intention of that particular transaction especially in the context of capital gain versus business income. Subsequent conversion and treatment given in the books of accounts do not alter the character of commercial transaction. Accordingly, the profit that has been attributable to this trading activity corresponding to conversion of stock-in-trade into investment is to be treated as ‘business income’ and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as ‘capital gains’ and conversion of stock-in-trade to investment is to be taken as ‘trading income’, which is based on facts of the case and need no disturbance. In addition to this, the assessee`s case under consideration is fully covered by the Jurisdictional ITAT Kolkata, in ITA No. 783/Kol/2009, A.Y 2005-06 (supra). Thus, respectfully following the decision of the Coordinate Bench in assessee`s own case, vide ITA No.783/Kol/2009, A.Y 2005-06 (supra),in the assessment year 2005-06, whereby the issues were decided in favor of the assessee company, as set out above, therefore we confirm the findings of CIT(A).
Please become a Premium member. If you are already a Premium member, login here to access the full content.
To share MORE :
Apprehensions as shared over a decade ago, soon after the CBDT came out with a set of instructions, followed up by fresh instructions, for guidance of and AO to follow seem to have proved not without substance, but turned out to be exactly true.
See Posted earlier comment; and the cited published Article – (2006)153 TAXMAN 126.
In that Article, it has been pinpointed to the effect, that, – according to the view consistently /uniformly taken/followed by courts is that for deciding the subject point of dispute- it is the intention of the assessee at the time of making the purchase and/or sale of the capital asset / stock-in-trade that should be taken as the essential criterion. For that matter, that it could not but be conceivably otherwise finds ample support in the very enactments for taxation of ‘capital gains’, specially dealing with instances /tax treatment of ‘conversion’ of a capital asst into stock-in-trade, or vice versa.
The view the ITAT has taken in the instant case is no different but is the same; hence unimpeachable, leaving no scope whatsoever for any further agitation and procrastination of the dispute by the Revenue.
KEY Note: In the cited Article, may be found covered, in a tone of appreciation, also the simplification of the law then made by the legislature to tax ‘capital gains’ on transfer of ‘equities’ at a preferential rate of 10%. For a discussion of the recent (2018) amendments of the governing scheme of provisions, of contextual relevance, see the ongoing debates in legal circles. As rightly canvassed for, and in one’s firm conviction, the referred development, dubiously regarded / claimed as a measure to ‘reform’, is tantamount to an unwarranted ‘DE-simplification’, frightfully done in haste; only lending unintended scope for a fresh spate of controversies and possible litigation, with no sane / laudable purpose to be eventually served .
INSTANT
The stance taken by the ao, and obstinately persisted in and pursued, by him, to say the least, appears to fly in the teeth of the detailed instructions, and supplementary ones, issued by the CBDT for proper guidance. For a related discussion, attempting to briefly explain the significance of, not just a few, but fifteen criteria, in all, requiring ao to go into and determine ‘the nature of activity’ of taxpayer, anyone may care to and go through the article published over a decade ago- (2006) 153 TAXMAN 126 !