TMI Blog2019 (11) TMI 87X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Tribunal that such shares were held as stock-in-trade, therefore, we are of the considered opinion that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal. We find the CBDT, vide Circular No.6/2016 dated 29th February, 2016 had categorically held that where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. In our opinion, the above Circular being clarificatory in nature is retrospective and cannot be held as prospective as argued by the ld. DR. We further find the coordinate Bench of the Tribunal in the case of Cosmos Industries Ltd. [ 2019 (1) TMI 268 - ITAT DELHI] while deciding somewhat identical issue has held that the loss incurred on sale of shares of a subsidiary company is a business loss. - Decided in favour of assessee. - ITA No.6396/Del/2015 - - - Dated:- 30-10-2019 - Shri R.K. Panda, Accountant Member And Ms Suchitra Kamble, Judicial Member For the Assessee : Shri Kapil Goel, Advocate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon'ble Supreme Court in the case of Vania Silk Mills Pvt. Ltd. vs. CIT, 98 CTR 153. 4. The assessee preferred an appeal, but, without any success. Subsequently, the Tribunal, vide ITA No.3836/Del/2011, order dated 13th February, 2012 , restored the issue to the file of the Assessing Officer for fresh adjudication of the issue by observing as under:- 5. We have heard rival contentions and gone through the entire material available on record. As the facts emerge, the lower authorities have not adverted to the crucial facts i.e. assessee's investment in Surya Roshni Ltd., a group company, by way of subscription to convertible debentures being held as stock in trade not only in this year but earlier year also. These facts have a material bearing on taking a proper decision as to whether assessee's investment was a business asset. Besides, the AO has heavily relied on the issue of lock in period as a determinate factor to hold the impugned investment as accrual of a right while denying the assessee's claim. In our considered view the contentions raised by the assessee have not been duly considered by AO. The observations abou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oo, but, has to be treated as a capital loss. He accordingly rejected the claim of the assessee of the said loss of ₹ 41,60,000/- on account of forfeiture of convertible debentures as business loss. 6. Before the CIT(A), the assessee submitted that it was consistently engaged in the business of dealing in shares and securities under stock-in-trade portfolio. The Assessing Officer failed to distinguish the facts in assessee s case vis-a- vis the facts in the case of Tainwala Trading Investment Company Ltd. It was argued that the Assessing Officer travelled beyond the scope of the directions issued by the Tribunal by going into the concept of commercial expediency under the misconceived notion that the assessee could have at best incurred a loss of ₹ 5 lakhs if it had exercised the option of acquiring the shares. Relying on various decisions, it was submitted that the action of the Assessing Officer was illegal and not in accordance with law and, therefore, the disallowance made by the Assessing Officer should be deleted. 7. However, the ld. CIT(A) was not satisfied with the arguments advanced by the assessee. Relying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om forfeiture of advance paid on convertible warrants (business or capital field) 1. That on the facts and in the circumstances of the case and in law, learned CIT-A erred in affirming the order of Assessing Officer (AO) treating the subject loss amounting to ₹ 41,60,000 as capital loss in nature. 2. That on the facts and in the circumstancesof the case and in law, learned CIT-A erred in affirming the order of Assessing Officer (AO) treating the subject loss amounting to ₹ 41,60,000 as capital loss in nature in gross non appreciation of: a. AS-13 of ICAI do not apply to stock in trade as clarified in our detailed reply available on records; b. Misinterpreted the facts about fluctuation in price of shares of Surya Roshni Ltd/SRL leading to perverse findings; c. Price of shares of SRL on cut off date was lower than original subscription price justifying appellant s prudent action for bearing of subject loss; d. Loss claimed was as per SEBI guidelines (point no. 12.1.2.3(c)) pointed in our reply available on records (letter dt. 16/7/2007); e. Assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plication money. If the assessee has subscribed to the preferential warrants as an investor, then the share application money assumes the character of capital expenditure and the loss incurred by the assessee on forfeiture of the initial payment already made by the assessee is capital in nature. But if the assessee is trading in shares and in the course of such business, if it has incurred loss, it would be revenue expenditure. The assessee has filed the copies of the balance sheets along with the relevant schedules to prove that the assessee has been trading in shares and has been treating the shares as current assets all along. Even before the AO, the assessee had stated to be a trader in shares and therefore, the treatment of the loss on forfeiture of shares is correctly accepted by the AO as revenue loss. Thus, the AO has accepted one of the possible views and there is no erroneous application of law, making the assessment order erroneous and prejudicial to the interest of revenue. We find that the CIT has not considered this issue. We accordingly set aside the order of CIT u/s 263 and restore the order of the AO dated 30.03.2015. 10. Referring to the decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Company Ltd. (supra). So far as the CBDT Circular No.6/2016 relied on by the ld. counsel for the assessee, she submitted that the said Circular is prospective. She accordingly submitted that since the ld.CIT(A) has passed a very speaking order on this issue, therefore, the same should be upheld and the grounds raised by the assessee should be dismissed. 15. The ld. counsel for the assessee, in his rejoinder, submitted that the said Circular being clarificatory in nature is retrospective and cannot be said to be prospective. 16. We have considered the rival arguments advanced by both the sides, perused the orders of the authorities below and the paper book filed on behalf of the assessee. We have also gone through the various decisions cited before us. The only dispute in the instant appeal is regarding the treatment of the loss on account of forfeiture of share application money amounting to ₹ 41,61,000/- as business loss or capital loss. While the loss is not in dispute, according to the assessee it is a business loss whereas according to the Revenue it is a capital loss. Thus, the genuineness of the said loss is not doubted and the only q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the lower authorities in the set aside proceedings have not followed the direction of the Tribunal. 17. We find the CBDT, vide Circular No.6/2016 dated 29th February, 2016 had categorically held that where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income. For the sake of ready reference, we reproduce the CBDT Circular No.6/2016 dated 29th February, 2016 below:- Sub: Issue of taxability of surplus on sale of shares and securities - Capital Gains or Business Income - Instructions in order to reduce litigation - reg.- Sub-section (14) of Section 2 of the Income-tax Act, 1961 ('Act') defines the term capital asset to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ trading assets or both. De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t years; c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT. 4. It is, however, clarified that the above shall not apply in respect of such tran sactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain / Short Term Capital Loss or any other sham transactions. 5. It is reiterated that the above principles have been formulated with t he sale objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities. 18. In our opinion, the above Circular being clarificatory in nature is retrospective and cannot be held as prospective as argued by the ld. DR. We further find the coordinate Bench of the Tribunal in the case of Cosmos Industries Ltd. (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t necessity for without it the subsidiary would have suffered grave financial prejudice. 15. The Tribunal, therefore, erred in coming to the conclusion that the CIT (Appeals) had not considered the judgment of the Supreme Court in the correct perspective. With respect, we find that the Tribunal has not even analyzed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). 16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of ₹ 10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. 17. The Assessing Officer's view that the advance was not for business purposes as the appellant had no business dealings with the si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of loan itself is justified on the ground of commercial expediency, it is only corollary thereto that even write off of such a loan is incidental to business. It is, therefore, not really correct to say that write off of the loans granted by the assessee to Camelot would have been an inadmissible business deduction and the entire transaction was devised to avoid legitimate tax liability. We see substance in the plea of the company that anyone buying a company would like to buy a company with minimum liabilities, it was considered appropriate to first pay off the dues by the company, even by raising the funds through fresh issue, and then sell the company. This explanation is in consonance with the ground business realities and we find no infirmity in the same. The advances given by the assessee were finally converted into equity, as the assessee company subscribed to the Camelot shares to enable Camelot to pay off its dues to the assessee company. On these facts, in our humble understanding, the assessee had invested in the Camelot, and extended financial help to Camelot, purely for commercial expediency. The head under which investments in subsidiaries is shown is governed by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt is justified on the grounds of commercial expediency, the loss on sale of such investment is to be considered a business loss. The nature of business expediency could vary from case to case but what is important is that there must be an underlying motive to serve business interests of the assessee in making such investment. Let us now turn to the facts of the case before us. The company in which shares are subscribed is engaged only in the business of manufacturing the toothbrushes for the assessee company. Any investment in such a company is justified for pure commercial considerations, and, therefore, loss on sale of such shares is admissible as business losses. In the case of DCIT Vs Gujarat Small Industries Corporation (84 TTJ 22), a coordinate bench of this Tribunal was dealing with a situation in which from the facts on record, it is obvious that the Girnar Scooter Ltd. was floated for the same purpose as a subsidiary and later on sold off when the loss started mounting and on these facts the coordinate bench held that loss on sale of shares in subsidiary was business loss in nature. We are in considered agreement with the line of reasoning thus adopted by the coordinat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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