Case Law Details
CIT Vs. Moderate Leasing & Capital Services Ltd. (Delhi High Court)– The Court, on the facts of the case held that where two portfolios are maintained by the assessee, i.e., investment portfolio and stock in trade, then, if the shares sold during the particular year pertains to investment portfolio and there happens to be loss, then such loss would be capital loss; and not the revenue loss.
Re-portable
IN THE HIGH COURT OF DELHI AT NEW DELHI
ITA No. 137 of 2010
Pronounced on: 18th November, 2011
THE COMMISSIONER OF INCOME TAX– II, NEW DELHI
VERSUS
MODERATE LEASING & CAPITAL SERVICES LTD.
ORDER
A.K. SIKRI, J.
1. This appeal was admitted on the following substantial question of law:
“Whether the findings of ITAT are perverse in holding that the loss on sale of shares holding as investment in the books of accounts was revenue loss and not capital loss?”
Applying this principle, the assessee‟s contention was considered and rejected on the following grounds:-
(i) There is no bar in law for an investment company to have shares as either stock-in-trade or as an investment. At the time of initial purchase the character of expenditure is determined by the intention of the assessee. The assessee may choose at its option to treat to purchase as investment or as stock in trade. The legal consequences of these alternatives are different. In the case it is stock in trade, the profit or loss arising from its transfer is treated as a business income or a business profit or loss arising there from has to be treated as a short term or a long term capital gains with indexation benefits. In short, if the contention of the assessee is accepted, the there cannot be any income on account of capital gains in the case of investment companies who purchase shares as investment.
(i) In the balance sheet of the assessee, the assessee has shown this 505900 equity shares of Rs. 10/- each fully paid to M/s SBEC Sugar Ltd. as investments and not as stock in trade n the current assets.
(ii) These shares were purchased on 27.01.1997 and are only being sold for the first time in F.Y. 2003-04. n the interregnum period from 1997 to 2004, there was no transaction of sale of these shares.
(iii) The assessee company M/s Moderate Leasing and capital Services Ltd. is a group company of Modi Group. It is a known business practice of the promoters to make investments in public limited companies through group investment companies. M/s SBEC Sugar Ltd. whose shares have been sold is also one of the group companies of Modi Group of Companies.
(iv) The memorandum and articles of association of the company shows investment in shares as the main objects.
5. The assessee preferred the appeal against the aforesaid assessment order passed by the Assessing Officer but was unsuccessful in the said appeal as the CIT (A) affirmed the order of the Assessing Officer and dismissed the appeal. However, on further appeal by the assessee to the ITAT, the assessee has succeeded and the ITAT while allowing the appeal has treated the gain from the sale of shares as income as business income.
“having considered the facts of the case and rival decided cases submitted by the both parties, we are of the view that the classification of the shares in the books of the assessee may be one of the factors but not the conclusive factor as the question has to be considered in totality of the circumstances, as held in the case of Janki Ram Bahadur Ram (supra). The decision of the case of Patiala Biscuits Manufacturers Pvt. Ltd., was in respect of preference shares, where there could not have been any possibility of increase or decrease in value because of fixed rate of dividend. However, the assessee held equity shares and incurred considerable loss in this year as well as in the immediately preceding year. Thus, it bore the risk of loss also, which makes the transaction to be in the nature of a trading transaction, especially in view of its main object of dealing in shares. All through, the losses were shown as business losses and this stand was accepted by the revenue in assessment year 2003-04. Therefore, the facts come to close the facts I the case of Dalmia Jain & Company Ltd. (supra), in which the transaction was held to be a trading transaction. Insofar as the remarks made by the auditors are concerned, the case of the learned counsel was that they were only in respect of unsold shares. However, to our mind, such remarks are also not of essence when deciding the issue. If any case, the remarks do not represent true state of affairs as in the assessment year 2008- 09, surplus on the sale of these shares has been credited in the books of revenue surplus. Thus, the real question is to find out the true nature of the transaction, which is clearly discernible from the treatment given by the assessee to the sale transaction in the profit and loss accounts of three years. The revenue has already accepted this position in assessment year 2003- 04 and no reason is shown to digress from the position.”
7. To put in nutshell, as per the ITAT the classification of shares as investment in the profit and loss account is not the conclusive factor though it may be one of the relevant factors. Likewise, the Tribunal has not given much credence to the remarks by the auditors in the profit and loss account on the premise that these remarks do not represent true state of affairs. The two factors which had weighed with the ITAT in favour of the assessee are:-
(i) The sale of shares in earlier assessment year had been credited in the Revenue account by the assessee.
(ii) The revenue had accepted this position in the assessment year 2003-04 and no reason was shown to digress from the position.
10. The facts of this case resemble more with the facts of the case in Patiala Biscuits (supra). In that case the assessee was carrying in the business of manufacturing biscuits. It purchased preference shares of another company at the time of the expansion of that company. Both the companies belonged to one group, namely, the Dalmia Group. The assessee sold the shares leading to a loss of Rs. 4,80,985/- This was the only transaction for the assessee in dealing in shares. The Tribunal came to the conclusion that the shares were preference shares carrying a fixed rate of dividend, which could not be appreciate in value. The purchase was not made in the open market. The two companies were inter-linked with each other. And finally, this was a solitary transaction of dealing in shares by the assessee company. Therefore, it was held that the transaction was on the capital account. The Court held that the aforesaid finding of the Tribunal was not vitiated in any manner. The AO had also relied on the decision of Supreme Court in the cast of CIT Vs. Dalmia Jain (supra). The facts of that case were that the assessee incurred a loss on sale of shares. It was established that the assessee was dealing in shares. In past, such losses were deducted while computing the total income. On these facts, the Tribunal as well as the High Court came to the conclusion that it was a trading loss. The Supreme Court pointed out that the question is primarily a question of fact. It was not the case of the department that in arriving at its decision, the Tribunal had taken into consideration any irrelevant consideration or failed to take into account any relevant consideration. Thus, it was held that there was no room for any interference by the Court.
NOVEMBER 18, 2011
Whta will happen if it is a case of individual where there is no balance sheet is prepared and all.
Individual is just doing sale and purchase of shares and having income from other sources.