2024 (7) TMI 1278 - AT - Income Tax

Correct head of income - treating short term capital gain as business income - HELD THAT - In the case of the present assessee it is second year of the business and half way through the financial year the trading was initiated in shares. Thus by merely mentioning the shares to be the investments benefit of Circular No.4 of 2007 dated 15.06.2007 cannot be granted. Then in the judgement in the case of Indi Stock (P) Ltd. 2022 (10) TMI 130 - CALCUTTA HIGH COURT again the assessee was found to be maintaining separate account for trading in shares and stock-in-trade and the assessee was found to have purchased shares by way of investments only and debited cost to the investment account. Then in the order in ACIT vs. Jignesh Madhukant Mehta 2017 (5) TMI 1644 - ITAT MUMBAI it was found that the assessee had undertaken delivery based transactions. In the order in the case of Second Leasing (P) Ltd. 2018 (6) TMI 405 - ITAT DELHI again in the preceding years income arising on sale of investments was accepted by the AO as capital gains and all the transactions was delivery based. Therefore we are of the considered view that the claim of assessee was investing its own funds which were lying idle is not in itself sufficient to establish that the trading in shares was done as investments to earn capital gain Exemption u/s 80IC for business income - differences in balances of tax audit does not entail a disallowance of claim of Sec 80IC if all the conditions are fulfilled - as pointed out that Section 80IC claims were accepted in subsequent years - HELD THAT - CIT(A) has not disputed the fact that the assessee company was located in a geographical area which was covered by the CBDT Notification for the purpose of benefit u/s 80IC of the Act. Before us the ld. AR has demonstrated on the basis of copies of Notification available with special reference that areas of Salempur Mehdood and Rawli Mehdood fall in the notified industrial areas. As we go through the assessment order for AY 2012-13 copy of which is available it appears that the manufacturing activity and income of the assessee from the business of manufacture of milk and milk based products is not disputed at all and during AY 2012-13 on the basis of particulars of sales and net profit of the assessee company for AY 2010-11 and 2009-10 the AO had re-determined the NP ratio to make an addition. Thus there is no justification in findings of CIT(A) that the manufacturing activity of the assessee itself is doubtful. Disallowing @ 20% out of the total purchases of milk - HELD THAT - Tax authorities have fallen in error in making ad hoc disallowance without pointing out any error in the books of account of the assessee. As we go through the books of account of the assessee in the form of tax audit report available and audit report in Form 10CCB available and audited financial statements available we find that the assessee has maintained a composite trading and profit loss account for the year ending 31st March 2010 and all expenses of the nature like advertisement expenses director s remuneration interest expenses machine running maintenance salary staff welfare expenses vehicle running and maintenance expenses have been debited and which have not been doubted. We are of the considered view that the nature of business of the assessee primarily requires electricity consumption and fuel expenses which along with substantial purchases stands allowed. Thus there is no justification to doubt the purchases by accepting the sales and the income. As we have observed on the basis of assessment order for AY 2012-13 the assessee s net profit ratio for AY 2010-11 have been considered for making an assessment of the net profit for AY 2012-13. Thus there is no justification to discredit the purchases on ad hoc basis. Accordingly we allow this ground.

Summary

Issues Involved:

1. Opportunity to explain facts and circumstances.
2. Treatment of Short Term Capital Gain as business income.
3. Denial of deduction under Section 80IC of the Income Tax Act, 1961.
4. Disallowance of 20% of total purchases of milk.

Issue-wise Detailed Analysis:

1. Opportunity to Explain Facts and Circumstances:

The first ground raised by the assessee was that the authorities below did not provide a proper opportunity to explain the facts and circumstances of the case. However, this ground was not specifically argued and was considered general in nature. Therefore, it was covered under other grounds on merits.

2. Treatment of Short Term Capital Gain as Business Income:

The assessee company declared a Short Term Capital Gain (STCG) of Rs. 15,669,577, which the Assessing Officer (AO) treated as business income. The AO observed that the assessee's transactions in shares were frequent and voluminous, indicating a business activity rather than an investment. The magnitude of transactions, frequency, and the ratio of sales to purchases suggested that the assessee was engaged in trading shares to earn quick profits rather than holding them for investment purposes. The CIT(A) upheld the AO's decision, citing the CBDT's Circular No. 4/2007 and various judicial precedents, including the Supreme Court's decision in CIT v. H Holck Larsen, which emphasized the cumulative factors affecting transactions to determine their nature. The Tribunal also noted that the assessee's Memorandum of Association included dealing in shares as one of its objects, further supporting the AO's conclusion. The Tribunal found no merit in the assessee's arguments and upheld the treatment of STCG as business income.

3. Denial of Deduction under Section 80IC:

The AO denied the deduction under Section 80IC, citing that the assessee's unit was not located in a notified area and that the conversion from a partnership firm to a private limited company constituted a reconstruction of an existing business. The CIT(A) sustained the AO's decision, highlighting discrepancies in the tax audit report and statutory audit report, and noting that no manufacturing activity was carried out. The Tribunal, however, found that the CIT(A) did not dispute the geographical location of the unit being in a notified area. The Tribunal also observed that the conversion from a partnership firm to a private limited company did not amount to a reconstruction of business, as the deduction is available to the undertaking, not the individual assessee. The Tribunal allowed this ground in favor of the assessee, concluding that the change in status did not disqualify the assessee from claiming the deduction under Section 80IC.

4. Disallowance of 20% of Total Purchases of Milk:

The AO disallowed 20% of the total purchases of milk, amounting to Rs. 60,84,325, due to the inability to verify the genuineness of the transactions with the milk vendors. The assessee failed to produce the vendors for verification, and the letters sent to the addresses provided were returned unserved. The CIT(A) upheld the disallowance, reasoning that it was beyond comprehension how petty milk vendors could afford to supply milk on credit without receiving payments throughout the year. The Tribunal, however, found that the tax authorities erred in making an ad hoc disallowance without pointing out any error in the books of account. The Tribunal noted that the assessee maintained proper books of account, and the nature of the business required substantial purchases, which were not doubted. The Tribunal allowed this ground, concluding that there was no justification for the ad hoc disallowance.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal upheld the treatment of STCG as business income but allowed the deduction under Section 80IC and the disallowance of 20% of total purchases of milk. The order was pronounced in the open court on 23.07.2024.