The Commissioner Of Income Tax-Ii, Ludhiana v. M/S Pooja Investment Pvt. Ltd., Ludhiana.woe Respoondent

LTA. No.39 of2012 -/- IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH (1) LTA. No.39 of 2012.Decided on:-April 11, 2014. The Commissioner of Income Tax-II, Ludhiana. ....... Appellant, Versus M/s Pooja Investment Pvt. Ltd., Ludhiana.woe RESpOondent, (2)LTA. No 226 of 2012) The Commissioner of Income Tax-II, Ludhiana........ Appellant, Versus M/s Hero Investments Pvt. Ltd., Ludhiana.woe RESpOondent, (3) LTA. No 227 of 2012) The Commissioner of Income Tax-II, Ludhiana. ....... Appellant, Versus M/s Bahadur Chand Investment Pvt. Ltd., Ludhiana. woe RESpOondent, LTA. No.39 of2012 -)- CORAM: Hon'ble Mr. Justice Rajive BhallaHon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. 11111 Argued by:- Ms. Savita Saxena, Advocate for the appellant. Mr. Akshay Bhan, Advocate for the respondent, Dr. Bharat Bhushan Parsoon, J. By way of this order, we shall dispose of ITA Nos.39, 226 and227 of 2012 as common questions of fact and law are involved in theseappeals. For convenience and clarity, facts have been taken from ITA No.39ot 2012. ?DThe assessee dealing in shares and securities filed its return forthe assessment year 2006-07 declaring an income of Rs.1,27,80,378/-. Afterprocessing the return, the case was selected for scrutiny. Notices undersections 143(2) as also 142(1) of the Income Tax Act, 1961 (for short, theAct) were issued. From information supplied by the assessee, it was foundthat the assessee was normally deriving its income from the following!SOUTCES: (1)Dividends received from mutual funds and equity shares;and, (11)Interest from investment of capital in partnership firm. 3During regular course of its business, the assessee made aninvestment of Rs.3 crores during the year in Tata Service Industries Fund(Dividend Plan) on 5.4.2005 for the purpose of earning dividend but thisinvestment was prematurely redeemed on 21.12.2005 for Rs.4,24,70,700/-.The assessee had booked this profit as a short-term capital gain. TheAssessing Officer (hereinafter mentioned as the AQ), from the record, hadfound that the assessee had shown no intention of holding this investment LTA. No.39 of2012 for the full term and rather not even for a year and that the assesseeredeemed the investment with a purpose to earn more profits. The AO cameto the conclusion that the assessee had made profits from its investmentwithout waiting long enough for the investment to yield benefits in the formof dividends. Consequently, the AO treated the investment shown by theassessee as its stock-in-trade and the revenue generated i.e. Rs.1,24,70,700/-was taken as business income of the assessee vide an order dated30.12.2008. 4The Commissioner of Income Tax (Appeal), Ludhianal[hereinafter mentioned as the CIT(A)]| disagreeing with the AO took thpurchase of shares as an investment. Addition made in the income, taking itto be income from business, was deleted. In the appeal against this order ofCIT(A) preferred by the revenue before the Income Tax Appellate Tribunal(hereinafter mentioned as the ITAT), the revenue had taken the followingground; “That the learned CIT(A)-II has erred in law and onfactsin directing the Assessing Officer to consider the income ofRs.1,24,70,700/- as short term capital gain instead of businessincome assessed by the Assessing Officera 5 |The revenue had sought restoration of the order of the AO onreversal of the order of the CIT(A), 6_The ITAT disagreeing with the AO, refused to set aside theorder of the CIT(A) and held that units of Tata Mutual Funds (DividendPlan) are assessable in the hands of the assessee as income from short termcapital gains, and not as business income, vaIn appeal before this Court, following question of law has beenposed for adjudication: AWhether on the facts and in law, the Hon'ble ITAT was -4- “That the learned CIT(A)-II has erred in law and onfactsin directing the Assessing Officer to consider the income ofRs.1,24,70,700/- as short term capital gain instead of businessincome assessed by the Assessing Officera 5 |The revenue had sought restoration of the order of the AO onreversal of the order of the CIT(A), 6_The ITAT disagreeing with the AO, refused to set aside theorder of the CIT(A) and held that units of Tata Mutual Funds (DividendPlan) are assessable in the hands of the assessee as income from short termcapital gains, and not as business income, vaIn appeal before this Court, following question of law has beenposed for adjudication: AWhether on the facts and in law, the Hon'ble ITAT was -4- legally justified in upholding the decision of CIT(A)-II,Ludhiana and in holding that the income on sale of Tata MutualFunds (dividend plan) are assessable as income from ShortTerm Capital Gain interealia on the ground that the units ofmutual funds are not tradable and that therefore the assesseehad made investment in non-tradable commodityB@ S|Plea of the revenue is that the impugned transaction entered intoby the assessee was conducted by it in the usual course of its business oftrading in shares and securities. It is contended that the assessee wasindulging in sale and purchase of securities as a routine and not for makingStatic investments. Claims of the assessee, on the other hand, is that merelybecause the securities were not kept for their full term and were redeemedearlier than the stipulated period, profits on premature redemption were notearned in the conduct of business of sale as also transfer of shares andsecurities, but the same was on premature redemption of an investment. Q |Hearing has been provided to the learned counsel for the partieswhile perusing the paper book.| 10.Before rival claims of the parties are adjudicated in the contextof factual matrix and attending circumstances, it would be appropriate toanalyse the backdrop in which concurrent findings by the CIT(A) and theITAT were returned against the assessment framed by the AO. The matterswhich weighed with both the appellate authorities in returning finding infavour of the assessee, are as below: (1) Intention of the assessee at the time of making depositwas to make capital investment. Sequelly, the impugned|deposit was shown under the head “investment” and notunder the head “stock in trade” in the balance sheet —ending 31.3.2006;was to make capital investment. Sequelly, the impugned|deposit was shown under the head “investment” and notunder the head “stock in trade” in the balance sheet —ending 31.3.2006; (ii) Even in assessment-year 2005-06, such deposit made bythe assessee had been shown under the head “investment’and not under the head “stock in trade” in the balance the assessee had been shown under the head “investment’and not under the head “stock in trade” in the balance LTA. No.39 of2012 Sheet for the year ending 31.3.2005, assessment for whichwas made in the assessment year 2005-06 and this standtaken by the assessee was not interfered with. Principle ofconsistency was in favour of the assessee. (411) Deposit from which the taxable income was generatedcannot be termed as tradeable item in the sense of sharesetc. Units of the mutual funds are allotted as well as.redeemed by the managers of the mutual funds itself at the prescribed rates. Such units have no secondary marketfor buying and selling as is the case with other shares andsecurities. In short, such units are not transferable in thesame manner as other shares and securities are transferred;cannot be termed as tradeable item in the sense of sharesetc. Units of the mutual funds are allotted as well as.redeemed by the managers of the mutual funds itself at the prescribed rates. Such units have no secondary marketfor buying and selling as is the case with other shares andsecurities. In short, such units are not transferable in thesame manner as other shares and securities are transferred; (iv)There is no bar in redemption of an investment after a Short period and there cannot be any change of nature of|investment merely because it was not held by the assesseefor the complete term; and,Short period and there cannot be any change of nature of|investment merely because it was not held by the assesseefor the complete term; and, (v) No borrowed funds were used by the assessee for theimpugned deposit but it was surplus out of the earnedincome of the assessee, which was used for such deposit.impugned deposit but it was surplus out of the earnedincome of the assessee, which was used for such deposit. ll.Notwithstanding such strong observations of the CIT(A) as alsoof the ITAT in their respective orders in favour of the assessee, there arecertain important aspects which either got ignored or had not engaged thequantum of attention, these deserved by these appellate authorities. Thoseaspects are being considered herebelow. 12)The assessee is not a business entity in the nature of amanutacturing unit or marketing concern which, making departure from itsnormal business or marketing activities, had acquired a ‘capital asset’ asdistinguished from ‘business asset’. In case of such an assessee, as ismentioned earlier, making investment to raise a ‘capital asset’ woulddefinitely be not in the nature of stock-in-trade and such transaction would also not be a venture in the nature of trade. Thus,CIT Versus PrincipalOfficer, Laxmi Surgical (P) Ltd [1993] 202 ITR 601 (Bombay)where theasset had been acquired by the assessee as a capital asset with an intention ofearning profits because the company had suffered losses in the past inconduct of its normal business activities, was not taken in the nature ofnormal business activity. Similarly, in yet another case as |Janak S.Rangwalla Versus Assistant Commissioner ofIncome Tax [2007] 11 SOT627 (Mumbai)investment made in purchase of shares had been held to beincome from capital gains as the assessee was not treated as a trader inShares and deposits. These authorities do not help the present assessee as it isdealer in stocks, shares and deposits etc. and conduct this trade ofinvestments as its normal business activity, 13.Unlike circumstances ofCIT Versus Kethan Kumar A. Shah[2000] 242 ITR 83 (Kerala)>JI.M. Share & Stock Brokers Ltd. Versus JtCIT, Special Range-22 (Mumbai)and |CIT Versus Girish MohanGanertwala 260 ITR 417 (P&H)cited by the assessee, deposit had not beenmade by the assessee departing from its normal business activity. Rather, inthe case in hand, the assessee used to earn its bread and butter only fromdividends etc. earned from its investments made in the nature of equityShares, securities, debentures etc. It also had its earnings from interestaccruing on its investments made in the partnership firm which again isengaged in earning income from investments etc. In short, the assessee isfully engaged in whole time business and trading activity of dealing ininvestments in shares, debentures, mutual funds etc. These are its stock-in-trade as is raw material for a manutacturing concern. To demonstrate, astime is stock-in-trade for a chartered accountant or for a lawyer or for apractising engineer or for a professional alike similarly money and cash putin investments, deposits or even capital for earning profits as a regularcourse turns out to be stock-in-trade for an investment company, as is the LTA. No.39 of2012 -/- asseSsSsee 14.The assessee in that sense trades in money; it is its stock-in-trade and thus, it earns its income by profits in sale and purchase of shares,securities and other investments as also by earning out of dividends andinterest on money invested as capital which, in fact, all through forms itsstock-in-trade only. LTA. No.39 of2012 -/- asseSsSsee 14.The assessee in that sense trades in money; it is its stock-in-trade and thus, it earns its income by profits in sale and purchase of shares,securities and other investments as also by earning out of dividends andinterest on money invested as capital which, in fact, all through forms itsstock-in-trade only. 15.Thus, deposit of Rs.3 crores in Tata Service Industries Fund inthe nature of units of a mutual fund was not in the nature of building up ofcapital but was in the nature of normal business activity of makinginvestments to earn profits in the regular course of such business. Contentionof the assessee that such deposit was merely to earn dividend and thus,wasin the nature of capital investment different from the normal businessactivity of dealing in shares and debentures, is an argument, devoid of anymerit. 16.Assessee, a company earning its income from sale and purchaseof shares, securities as also from dividends and interest from its investments,as all other such investment companies do, acted intelligently in managingits portfolio. When sale and purchase of shares, debentures and othersecurities are subjected to vagaries of market forces which considerablyaffect quantum of profits and at times even results in losses, investmentsenuring for fixed returns are safe and are sometimes used by investmentcompanies to offset their possible losses in trading of other scrips,Consequently, impugned deposit was not at all an activity made in departurefrom the normal business activity of the assessee. In fact, such depositcannot be taken away from the normal business activity and also from usualcourse of trade of the assessee._ 17.Merely because such deposit was made in a not freely tradeable LTA. No.39 of2012 fund with a tenurial investment plan yielding high income and was shown asan investment in books of accounts of the assessee, are not thecircumstances sufficient to conclude that the deposit was intended to beconverted into long term or short term capital asset. 18.Circumstances sufficiently reveal that deposit in tenurialinvestment plan was merely to obviate possible losses as is the case ofinvestments in equity, shares, securities and other derivatives etc. It cannotbe denied that the assessee intended to increase its profitability by offsettingpossible losses in its other type of investments. By no means can such a stepby the assessee be construed as a bid to increase its capital freezing itsvolatility of liquidity. If the assessee, an investment company, would ventureto enhance its capital by forclosing liquidity, then it will lose dynamics of itsbusiness and would become static earning only from interest or dividendsreceived from its fixed and capitalised investments. Such an investmentcompany then would lose the vibrance of its business. Such deposits areusually made by the investment companies like the assessee, as a Strategyand pursuant to intelligent planning as stock in profitable trade, yieldingfixed income when other derivatives may be in a Situation of great fluxgiving no clear picture of high or low tides. 19.In short, the impugned deposit was clearly made in the usualcourse of its activity of trading in money and in the discharge of its normalbusiness. Even though it was in the nature of tenurial investment,redemption of such investment during the same previous year of investmentspeaks volumes of the intention of the assessee that it had not intended touse such deposit as a capitalised investment. 2().sequelly, booking this profit as a short term capital gain isclearly a strategic move of the assessee to blur vision of the revenue to showthat such deposit was made in departure of its normal business and trading LTA. No.39 of2012 19.In short, the impugned deposit was clearly made in the usualcourse of its activity of trading in money and in the discharge of its normalbusiness. Even though it was in the nature of tenurial investment,redemption of such investment during the same previous year of investmentspeaks volumes of the intention of the assessee that it had not intended touse such deposit as a capitalised investment. 2().sequelly, booking this profit as a short term capital gain isclearly a strategic move of the assessee to blur vision of the revenue to showthat such deposit was made in departure of its normal business and trading LTA. No.39 of2012 activity of sale and purchase of equity shares, scrips etc. Non-holding ofsuch deposit as an investment even for one year is clearly indicative of thenormal business tendency of the assessee, a dealer in shares and scrips, toprofitably liquidate investment for further booking at the _ earliestopportunity. Intention of nature of a transaction is to be gathered not onlyfrom the recording of an entry in the accounts where it even manipulativelymay be shown as tenurial investment but also from the conduct whichprecedes or follows such a transaction. The pattern of investments made,behaviour of the assessee in conducting its business, nature of thetransactions entered into in the usual course of its business, outcome of suchtransactions and of deposits made by the assessee, are important factorswhich were completely ignored by the appellate authorities. Outcome of thisdeposit is that the assessee had made profits from its investment and it wasin the usual course of its business. The assessee had also not to wait for longto earn this income in the nature of dividend. 21.Viewing it from another angle, undoubtedly, the motive inpurchase and sale of share, securities and of such deposits by the assessee isto earn profit. There cannot be intention or object of making such deposits toraise capital. The only purpose was to earn safe profits within a short span oftime, even though by making investment in a tenurial dividend plan. 2).Merely because it is a single transaction of deposit ipso facto isnot a ground to take this as an investment in the nature of raising capital. Toconstitute trade, it is not necessary that there should be a Series oftransactions of purchase and sale. In CIT Nagpur Versus Sutlej CottonMills Supply Agency Limited (100 ITR 276), the Hon'ble Apex Court hadheld that even a single transaction of purchase and sale even outside theassessee's line of business may constitute a venture in the nature of tradewhere neither repetition nor continuity of transactions is necessary. LTA. No.39 of2012 -]0- 23.In the present case, the assessee is engaged in the trade of saleand purchase of equity shares, securities and debentures etc. The transactionin dispute is no different from the others entered into by the assessee in theregular course of its business and in the usual discharge of its functions byits employees. Sequelly, if all the facts and circumstances of the case aretaken into consideration, by no means such impugned deposit can be takento be distinct or different from other transactions carried out by the assesseeduring the year under consideration. This deposit was clearly made by theassessee to earn profits on its deposit and thus, was in the nature of stock-in-trade and the revenue generated to the extent of Rs.1,24,70,700/- is to beassessed as business income. -]0- 23.In the present case, the assessee is engaged in the trade of saleand purchase of equity shares, securities and debentures etc. The transactionin dispute is no different from the others entered into by the assessee in theregular course of its business and in the usual discharge of its functions byits employees. Sequelly, if all the facts and circumstances of the case aretaken into consideration, by no means such impugned deposit can be takento be distinct or different from other transactions carried out by the assesseeduring the year under consideration. This deposit was clearly made by theassessee to earn profits on its deposit and thus, was in the nature of stock-in-trade and the revenue generated to the extent of Rs.1,24,70,700/- is to beassessed as business income. D4.It is important to note that this is not for the first time that suchrevenue income has been earned by short-circuiting the wait of tenurialinvestment but even earlier, the assessee had been undertaking suchventures. In the assessment year in question, the assessee had even sought tomake adjustment for the brought forward unabsorbed short-term capital lossof the two previous years i.e. for a sum of Rs.1,93,776/- tor the assessmentyear 2004-05 and for a sum of Rs.2,49,734/- of the assessment year 2005-06.It is clear that the assessee had been using the methodology of shifting itsnormal trading activity of some transactions into term investments and laterhad been getting the same redeemed before tenure and most of the times inthe year of deposit itself and then had been showing it as short term capitalgain or loss as the case may be without accounting for results of suchtransactions in the trading account as normal business or trading activity. D5.This maneuverability and manipulation used by the assessee asa consistent course, blinding the vision of the revenue is merely a bid toreduce its tax liability. It is neither ‘tax planning’ nor ‘tax organization’ nor‘tax management’ but is clearly a manipulation to thwart the tax effect as alsoto thwart legal provisions for which actually, there is no escape for the LTA. No.39 of2012 -/]- asSseSsee 26.Merely because deposits in mutual funds are not traded in thenature of sale and purchase of equity shares and such transactions aredifferent in effect and consequences is no ground to treat those differently.Frequency of dealings in deposits of mutual funds with the strategy of firstlyinvesting in tenurial plans and then getting redemption within the same yearof deposit and at times resulting in huge profits while at other times in loss,has been usual business activity of the assessee. Such before termredemption, is done in the usual course of business by the assessee clearly toincrease its actual cash inflow to tide over its commitments made in themarket and at times to earn higher interest in other lucrative investmentplans contemporaneously emerging in the market. In this case, in the nameof consistency the assessee had tried to hoodwink the authorities. Ratherprevious conduct of the assessee reveals that the accounts had beenmanipulated by the assessee to treat the investment as a capital asset only asa camouflage and smoke screen. It is a case where intention as also principleof consistency sought to be used by the assessee in its favour rather goesagainst it as year after year the same manipulation strategy andmaneuverability had been adopted to hoodwink the revenue. QT.In view of the discussion made earlier, by now, it is abundantlyclear that the CIT(A) as also the ITAT were wrong in adjudicating theincome on sale of Tata Mutual Funds (Dividend Plan) as income from ‘shortterm capital gains' merely on the ground that the units of mutual funds werenot freely tradable and thus, such investment was in non-tradeablecommodity. In fact, in the present case, it has been amply proved that thebusiness of the assessee is to make profits by virtue of investments in sharesand securities etc. Merely because there is single transaction or that suchinvestment was in not freely tradeable commodity, does not change theprofit intent of the assessee who is in the business of investments only, LTA. No.39 of2012 -/7) Therefore, the investment made by the assessee was rightly treated as stock-in-trade and revenue generated to the tune of Rs.1,24,70,700/- was correctlyassessed as business income by the AO. Rightly, no adjustment for thebalance forward on account of short term capital loss of assessment year2004-05 to the tune of Rs.1,93,776/- and for the assessment year 2005-06 tothe tune of Rs.2,49,934/-, had been allowed by him. D8.So far as ITA Nos.226 and 227 of 2012 are concerned, unlikecase of ITA No.39 of 2012, activities of the assessee in these appeals are sofrequent and regular in their operation and in the usual course of businessactivity of the assessees that no case for treating the impugned income asresulting from transactions labelled as ‘tenurial investments’, is made out. 29.sequelly, the question of law posed in earlier part of this|judgment i.e. para 7 is answered in favour of the revenue and against theasSseSsee, 30.Consequently, all the three appeals filed by the revenue are allowed. (Dr. Bharat Bhushan Parsoon)Judge April 11, 2014 ‘Yag Dutt} (Rajive Bhalla)Judge iWhether Reporters of local papers may be allowed to see the judgment? Yes _2Whether to be referred to the Reporters or not? Yes3Whether the judgment should be reported in the Digest? Yes|2Whether to be referred to the Reporters or not? Yes3Whether the judgment should be reported in the Digest? Yes|