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TMI Blog2012 (8) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... income of Rs. 1,34,74,170/- under normal provisions of the Act and at a book profit Rs. 1,46,11,735/- u/s 115JB of the Income Tax Act, 1961 (the Act) vide order dated 31.10.2005 passed under section 143(3) of the Act. On appeal, the ld. CIT(A) vide his common order dated 18.8.2006 partly allowed the appeals for the A.Ys. 2003-04 and 2004-05. 3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us. 4. Grounds of appeal No. I taken by the assessee reads as under : "I. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Additional Commissioner of Income Tax erred in taxing income from sale of units other than units under section 54EA under the head "Business income" instead of the head "capital gains" even though the units were held by the appellant as investments and not as stock-in-trade". 5. The brief facts of the above issue are that during the course of assessment proceedings, the AO noted that the assessee has shown long term capital gains and short term capital gains from numerous sale and purchase transactions of units of mutual funds. The AO therefore, asked the assessee to explain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of mutual funds. Assessee did not make investment in open market and preferred mutual funds route for safety of capital. It was further submitted that sale of units of mutual funds, which are not freely tradable as sale of stock-in-trade chargeable as business income. Assessee placed reliance on the Hon'ble Supreme Court decision in the case of Ramnarian Sons (P.) Ltd. v. CIT [1961] 41 ITR 534 (SC). However, the AO did not accept the assessee's explanation. While rejecting the assessee's explanation the AO has referred to the assessment order for AY 2001-02 wherein it was concluded that the assessee was engaged in the business of trading in units of mutual funds and hence all profits and losses arising out of the purchase and sale transactions were assessed under the head "profits and gains of business or profession and accordingly, the AO treated the profit on sale on investment Rs. 1,08,83,868/- as income under the profits and gains of business or profession. 6. On appeal, the ld. CIT(A) while relying on the decision of the Tribunal in the assessee's own case for the assessment year 2001-02 directed the AO to treat the profit on sale of 48,94,046 units of Birla Sun Life Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DFC liquid fund 44,30,071 Switching of Units from one Scheme to another Scheme of same Fund 15 Prudential ICICI Liquid Fund 35,84,820 Switching of Units from one Scheme to another Scheme of same Fund 16 3 Alliance Income Fund 26,39,951 For Buy Back of Shares 178 4 Alliance Cash Manager Growth 35,944 Switching of Units from one Scheme to another Scheme of same Fund 19 5 Prudential ICICI Income Fund 30,78,962 For Buy Back of Shares 182 6 Prudential ICICI Income Fund 20,30,948 These units were withdrawn along with other units to invest in Rural Electrification Corporation Bonds 320 Prudential ICICI Income Fund 5,35,540 329 Prudential ICICI Income Fund 6,95,088 265 Prudential ICICI Income Fund 6,94,444 233 HDFC Income Fund 39,44,384 These units were withdrawn along with 698 7 IL & FS Bonds Fund 1,28,722 Switching to HDFC Short Term Plan 62 8 GSSIF Investments Plan 47,00,128 Payment to Legrand for Past tax liability shown as loans and advances 279 9 Chola Mutual Fund Triple Ace 2,95,379 Switching to HDFC Short Term Plan 89 10 GSSIF Investments Plan 7,43,494 These units were withdrawn along ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iance was also placed in (a) DSP Merril Lynch Ltd. [IT Appeal No. 2735/Mum/1999 (AY-1995-96) dated 11.2.2009], (b) Management Structure & Systems (P.) Ltd. [IT Appeal No.6966/Mum/2007 (AY-2004-05) dated 30.4.2010], (c ) Vinod M. Shah v. Addl. CIT [2010] 38 SOT 503 (Mum), (d) Hitesh Satishchandra Doshi v. Jt. CIT [2011] 46 SOT 336/12 taxmann.com 79 (Mum.), (e ) S.K. Finance [IT Appeal No. 6190 (Mum.) of 2008, Dated 4-2-2010] (f) DCIT v. Ravindrakumar Aggarwal in [IT Appeal No.2063/Mum/2009 (AY-2005-06) dated 30.4.2010 and (g) Ramesh Babu Rao v. DCIT and vice-versa in ITA No.3719/Mum/2009 (A.Y. 2005-06) and ITA Nos.4084, 5318 & 5319/Mum/2009 (AY-2005-06, 2007-08 and 2006-07) order dated 13.4.2011. 8. On the other hand, the ld. DR while relying on the order of the AO and ld. CIT(A) further submits that since the Tribunal in the assessee's own case has held that the income from sale of shares/units has correctly treated as income from business, therefore, following the same view the ld. CIT(A) was fully justified in treating the income from purchase and sale of shares/units as income from business. He further submits that in all the decisions relied on by the ld. Counsel for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee shall be the aggregate of the amount of income-tax calculated on such short-term capital gains at the rate of fifteen per cent. If the shares purchased by the appellants are held to be capital assets, sale of such shares could fall within the ambit of section 111A of the Act and such capital gains would be subject to tax at a lower rate. If the shares are held by the appellants as stock-in-trade, profit on the sale of such shares would constitute business income and be subject to tax at a higher rate. As noted hereinabove, section 2(14)(i) of the Act defines a capital asset as not including stock-in-trade. If the appellants had held the shares as stock in trade, and not as investment then such shares would stand excluded from the definition of short-term capital asset, and the profit earned on the sale of such shares would not be exigible to tax as short-term capital gain but as profits and gains from business. 10. We find that as per memorandum of association main object of the company is as under : "(A) The main objects to be pursued by the company on its incorporation are: 1. To carry on the business of investments and to buy, invest in acquire, subsc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immediately after the holding period of three years, as stipulated in Section 54EA, was over. (iv) The assessee had engaged in numerous transactions of purchasing and selling of large quantities of units in a systematic and organized manner in association with its sister concerns, not only in the relevant financial year but also in the earlier years. (v) The assessee has made investment since 1984-85 from borrowed funds and interest is paid on these borrowings and debited to the profit and loss account." 12. We further find that the ld. CIT(A) while holding that the transaction of purchases and sales of shares/units of mutual fund except the sale of units of Birla Sun Life Plus, is income from business or profession has observed as under (para 16): "In the light of above discussions, it has to be seen as to what exactly is the nature of various transaction of purchase and sales of shares and units made by the appellant Admittedly, as also discussed in detail in the assessment order and submissions of the AR reproduced above, it is seen that appellant has in the past and, is in the present heavily engaged in the purchase and sale of shares/units. AR's contention tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ground No.1 and 2 of the appeal are partly allowed." 14. From the combined reading of the objects of the company, findings of the AO and ld. CIT(A) and the order of the Tribunal in assessee's own case for the A.Y.2001-02 (supra) we observe that the main objects of the assessee's business are to deal in Shares/Units and Mutual Funds of the Companies and others, and the assessee has placed no material on record to show that the main object of the assessee's business is to invest in Shares/Units and Mutual Funds. Merely because the purpose of redemption, according to the ld. Counsel for the assessee, is different i.e. other than business and the average period of holding is 413 days do not mean that the assessee is not carrying on business in Shares/Units and Mutual Funds of the Companies and others. 15. In all the decisions relied on by the ld. Counsel for the assessee (cited supra), the assessee was engaged in business other than income arisen out of short term and long term capital gain and there is no material on records to show that in all those cases the only business of the assessee was income from purchase and sales of mutual funds/shares/units, therefore, we are of the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and keeping in view of our findings recorded in Ground No.1, we are of the view that in the interests of justice the matter should go back to the file of the AO and accordingly, we restore the matter to the file of the AO to decide the same afresh and in accordance with law after providing reasonable opportunity of being heard to the assessee. The grounds taken by the assessee are, therefore partly allowed for statistical purposes. 23. Ground Nos. IV and V taken by the assessee read as under: "IV. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the appellant will not be entitled to deduction in respect of expenses to the extent of profit which has been treated as capital gains. V. On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that the appellant will not be entitled to deduction in respect of depreciation to the extent of profit which has been treated as capital gains." 24. At the time of hearing the ld. Counsel for the assessee submits that the assessee may be allowed to claim expenses to the extent of profit which has been treated as capital gains and depreciation. 25. On the other ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome Tax (Appeals) further erred in rejecting the contention of the appellant that if the profit on sale of units is to be taxed under the head "business income" then the said units ought to have been considered as stock-in-trade right from the year of purchase and that once having accepted them as investments in the past assessment, they could not be treated as stock-in-trade in the year of sale. III. In case Ground Nos. I and II are decided in favour of the appellant, the appellant submits that the Dy. CIT be directed to allow deduction in respect of expenses amounting to Rs.12,91,627/- (Rs.16,45,075 - Rs.3,53,448)." 29. At the time of hearing, both the parties have agreed that the facts of the above grounds are similar to the facts of the case for the assessment year 2003-04, therefore, plea taken by them in the said appeal may be considered while deciding the above grounds taken by the assessee. 30. After hearing the rival parties and perusing the material available on record and keeping in view that there is no dispute that the facts of the above issues are similar to the grounds taken in the assessment year 2003-04, we direct the AO to follow our findings recorded in Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e held by the appellant as investments and not as stock-in-trade." "II. Without prejudice to Ground No. I above and in the alternative, the Commissioner of Income Tax (Appeals) further erred in rejecting the contention of the appellant that if the profit on redemption of units is to be taxed under the head "Business Income", then the said units ought to have been considered as stock-in-trade right from the year of purchase and that once having accepted them as investments in the past assessment, they could not be treated as stock-in-trade in the year of sale." 35. At the time of hearing, both the parties have agreed that the facts of the above grounds are similar to the facts of the case for the assessment year 2003-04, therefore, plea taken by them in the said appeal may be considered while deciding the above grounds taken by the assessee. 36. After hearing the rival parties and perusing the material available on record and keeping in view that there is no dispute that the facts of the above issues are similar to the grounds taken in the assessment year 2003-04, we direct the AO to follow our findings recorded in Ground Nos. I and II of the appeal for the assessment year 2003-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case and in law, the CIT(A) erred in upholding the action of the Assistant Commissioner of Income Tax in adding an amount of Rs. 9,77,517/- in respect of accounting mistake of assessment year 2001-02" 41. The brief facts of the above issue and findings recorded by the AO and the ld. CIT(A) are as under (page 3 of the order of CIT(A): "Ground of appeal No. 4: is against addition in respect of accounting loss of AY 2001-02 of Rs. 9,77,517/-. Assessee/appellant submitted before the AO that above loss represented an accounting entry in respect of units of Alliance Mutual Fund, which were redeemed in AY 2000-01 but was wrongly passed in books of accounts. It was submitted that the said loss was not claimed in AY 2000-01 also. AO, however, was not satisfied with the aforesaid submission of the assessee. AO observed that loss of Rs. 9,77,517/- pertains to AY 2000-01 and should have been claimed in that year. It cannot be claimed in a subsequent year. AO therefore disallowed the assessee's claim and made addition of Rs. 9,77,517/-. Objecting to the above, AR has not made any written submission against aforesaid addition in his case. I have considered the facts of the case as discu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal that the assessee is actually in the business of purchase and sale of units. He further submits that since the assessee has disclosed all the material facts, the proceedings initiated u/s 148 amounts to change of opinion and for this proposition the reliance was also placed in the case of Prashant S. Joshi v. ITO [2010] 324 ITR 154/189 Taxman 1 (Bom). He, therefore, submits that order passed by the AO and confirmed by the ld. CIT(A) be quashed. 50. On the other hand, the ld. DR at the outset submits that in this case, the return was processed u/s 143(1) on 28.2.2003 and the AO after recording valid reasons within four years from the end of the relevant assessment year has reopened the assessment u/s 148 in view of the findings recorded by the Tribunal in the assessee's own case for the assessment year 2001-02 wherein it has been held that the assessee is actually in the business of purchase and sale of shares/units liable to assess under the head income from business and not under the head capital gains. He, therefore, submits that the assessment order passed u/s 148 is valid in law and the same be upheld. The reliance was also placed on the decision in Asstt. CIT v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed could not be supplemented by affidavits. In any case ex facie section 28(iv) does not apply to the benefits which are paid in cash or money. A payment made to a partner in realisation of his share in the net value of the assets upon his retirement from a firm, does not fall under clause (v) of section 28. There was absolutely no basis for the Assessing Officer to form a belief that any income chargeable to tax had escaped assessment within the meaning of the substantive provisions of section 147. The notices were not valid and were liable to be quashed." 54. Whereas in the case before us it is not the case of the assessee that no such reasons were recorded by the AO u/s 148 of the Act or the same have been supplemented by the affidavits. In the absence thereof and keeping in view of the law laid down by the Hon'ble Supreme Court in Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) and the decision of the Hon'ble Bombay High Court in Multiscreen Media (P) Ltd. v. Union of India [2010] 324 ITR 54/7 taxmann.com 38 (Bom.) wherein it has been held that reassessment on the basis of additional material discovered in assessment proceedings of a subsequent year was justified, the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X
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