IT : Business of galvanizing MS pipes does not amount to manufacture and thus, is not entitled for benefits of section 80-I
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[2013] 33 taxmann.com 143 (Allahabad)
HIGH COURT OF ALLAHABAD
Commissioner of Income-tax
v.
Aggarwal Tubes (P.) Ltd.*
PRAKASH KRISHNA AND RAM SURAT RAM (MAURYA), JJ.
IT APPEAL NOS. 108 OF 2005 AND 312 & 521 OF 2012†
MARCH 4, 2013
Section 80-I of the Income-tax Act, 1961 - Deductions - Profits and gains from Industrial Undertaking, etc., after certain dates [Manufacture or production] - Assessment years 1991-92, 1992-93 and 1995-96 - Whether business of galvanizing MS pipes does not involve any manufacture or production of any article or thing and such activity is not entitled to benefits under section 80-I - Held, yes [Para 10] [In favour of revenue]
FACTS
| ■ | The assessee was engaged in the business of galvanizing the mild steel pipes. In the return, the assessee claimed deduction under section 80-I. The said claim was rejected by the Assessing Officer. | |
| ■ | On appeal, the Commissioner (Appeals) affirmed the order of Assessing Officer. | |
| ■ | On further appeal, the Tribunal held that the assessee was entitled to the benefits of section 80-I. | |
| ■ | On appeal : |
HELD
| ■ | This Court in CST v. Tata Iron & Steel Co. Ltd. 1975 UPTC 104 and CST v. Om Engineering Works 1986 UPTC 55 and Supreme Court inGujarat Steel Tubes Ltd. v. State of Kerala 1989 UPTC 1072, in relation to the controversy under the Sales Tax Act, held that by galvanization iron and steel are not changed and remained iron and steel. [Para 9] | |
| ■ | Industrial undertaking of the assessee which is engaged in the business of galvanizing MS Pipes, is not involved in manufacture or production of any article or thing and, as such, it is not entitled for the benefits under section 80-I. [Para 10] |
CASES REFERRED TO
CST v. Tata Iron & Steel Co. Ltd. 1975 UPTC 104 (para 6), CST v. Om Engineering Works 1986 UPTC 55 (para 6), Gujarat Steel Tubes Ltd. v.State of Kerala 1989 UPTC 1072 (SC) (para 6), CIT v. Krishna Copper Steel Rolling Mills AIR 1992 SC 422 (para 7), CIT v. Gem India Mfg. Co. [2001] 10 SCC 733 (para 8) and Gujarat Steel Tubes Ltd. v. State of Kerala 1989 UPTC 1072 (para 9).
A.N. Mahajan, Ashok Kumar, Bharatji Agarwal, D. Awasthi, G. Krishna, R.K. Upadhyaya and S. Chopra for the Petitioner. P.K. Jain for the Respondent.
JUDGMENT
Ram Surat Ram (Maurya), J. - The aforementioned appeals have been filed under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as the Act) from the common order of the Income Tax Appellate Tribunal, Delhi Bench 'C', New Delhi (hereinafter referred to as the Tribunal) dated 04.10.2004 passed in ITA No. 2523/D/1999, ITA No. 2524/D/1999 and ITA No. 2409/D/2000. The Revenue has proposed the following Substantial Questions of Law, being involved in all these appeals:-
"(1) Whether on the facts and circumstances of the case, the Tribunal is legally justified in law, in directing the A.O. to allow the relief u/s 80-I of the Act for assessment years 1991-92, 1992-93 and 1995-96 despite the fact that in the assessment year 1990-91, the issue was restored to the file of the A.O. For fresh adjudication of the case and whether this tantamount to review of it's earlier order?
(2) Whether on the facts and circumstances of the case, the Tribunal is justified in treating the assessee as engaged in manufacturing and allowing deduction u/s 80-I in asmuch as the assessee company is engaged in processing of MS Pipe after coating with zinc and not manufacturing?"
2. These appeals relate to the assessment years 1991-92, 1992-93 and 1995-96. M/S Aggarwal Tube (P) Ltd. (the assessee) is engaged in the business of galvanizing the mild steel pipes (MS pipes). For the assessment year 1991-92, the assessee filed it's return, under Section 139(1)(a) of the Act, on 31.10.1991 declaring total loss of Rs. 7,36,241/-. The Assessing Officer issued notice under Section 143(2) of the Act to the assessee. In response to the notice, the assessee appeared and produced his papers. Assessing Officer noticed that the assessee has debited manufacturing expenses to the tune of Rs. 19,66,459, fresh investment allowance of Rs. 5,05,733/- and has claimed deduction under Section 80-I of the Act. The Assessing Officer found that there was some mistake in calculating the manufacturing expenses and after it's correct calculation held total profit of the assessee in the assessment year was Rs. 2,68,882.80 and total business loss and unabsorbed depreciation was Rs. 4,79,391/-. Thus assessed total loss of Rs. 2,10,508/-.
3. Aggrieved from the aforesaid order, the assessee filed an appeal before Commissioner of Income-tax (A), Muzaffar Nagar (CIT(A) and claimed deduction in respect of profits and gains under Section 80-I of the Act. The assessee raised the plea that as the assessee was an industrial undertaking, established within the relevant dates and engaged in the business of galvanizing the iron pipes as such it was entitled for the benefits under Section 80-I of the Act. CIT(A) by the order dated 04.02.1999 held that the work of the assessee is merely coating zinc on the MS pipes for protecting it from the rust as such plant and machinery of the assessee is not involved in manufacture or production of any article or thing and the assessee was not entitled to the benefits under Section 80-I of the Act.
4. The assessee again filed an appeal from the aforesaid order before the Tribunal, who by the impugned order, relying upon the previous order of the Tribunal in the matter of the assessee for the assessment year 1990-91, in which it was held that raw material used by the assessee is MS pipes and product of the assessee is GI pipes as such plant and machinery of the assessee was not involved in manufacture of an article or thing and it was entitled to the benefits under Section 80-I of the Act, provided benefits of Section 80-I to the assessee. Hence this appeal has been filed by the Revenue. Since all the appeals were decided by a common judgment and common questions of law are involved in all these appeals between the same parties as such it were consolidated and are decided by common judgment.
5. We have heard Sri Dhananjay Awasthi, Senior Standing Counsel for the Revenue and Sri P.K. Jain, learned counsel appearing for the respondent -assessee.
6. Sri Awasthi, submitted that earlier the word 'manufacture' was not defined under the Act, as such dictionary meaning is to be taken in to account. For manufacturing a thing or article, it is necessary that the product must be a distinct from material used for producing it. By galvanizing the MS pipes, product remains the same and only zinc was coated on it for protecting it from rust and no new product was manufactured. Section 80-I of the Act provides incentive for establishment of the industrial undertaking to increase manufacture and production. The work of the assessee is merely processing of the product and not manufacture of new product as such the assessee is not entitled to the benefits of Section 80-I of the Act. He placed reliance uponCST v. Tata Iron & Steel Co. Ltd. 1975 UPTC 104 and CST v. Om Engineering Works 1986 UPTC 55 and in Gujarat Steel Tubes Ltd. v. State of Kerala 1989 UPTC 1072 (SC).
7. The issue as to whether processing of mild steel rod, bars and rounds from scrap iron amounts to manufacture within the meaning of Section 80-I of the Act came up for consideration before the Supreme Court in CIT v. Krishna Copper Steel Rolling Mills AIR 1992 SC 422, in which it was held as follows:-
"The Finance Act of 1964 decided to grant a rebate in the corporation tax payable by companies in order to encourage development of certain industries which occupy an important place in our economy, the list of industries named in the Finance Act was similar to and included many of the items, including Items 1 to 3, of the list we are concerned with now. The reliefs were given to strengthen the reserves and augment the capacity of the corporate sector to develop. This process was continued under the Finance Act of 1965 which introduced a higher development rebate for machinery or plant installed for the purposes of construction, manufacture or production of any one or more of the articles or things specified in the list in the Fifth Schedule. The Finance Act of 1966 substituted a new concession to these priority industries basic to the commercial development of the community. This historical background reflects the intention of the legislature to grant progressively certain exemptions, reliefs or concessions for certain types of industries which were considered important for national development. The industry in iron and steel and other metals figures in all these lists. The only relevance of this background to the issue before us is that it gives an indication that the incentive, concession or relief granted under these provisions has to be construed in a broad and comprehensive manner so as to cover all manufacturing activities legitimately pertaining to the specified core industry with no limitation save what may be called for by the wording of a particular entry. So far as Items 1 and 2 are concerned, as earlier pointed out, the wording points to a distinction between the metal which is used as the base and other articles manufactured therefrom. We have earlier pointed out that pig iron and iron scrap are fed into furnaces to produce ingots, billets and blooms. But both are iron and steel in different form, the latter being referred to as "semi-finished steel". Likewise, we think, the bars, rods, rounds, wire rods and the like constitute the second stage in which one gets only "finished" forms of iron and steel. Having regard to the nature and weight of the metal, it has to be "finished" to assume these forms before manufacturers of iron and steel articles can take over and proceed to manufacture articles from them by drawing wires or converting them into rails or shaping them into tees, zees, pipes, tubes and the like or, again, producing articles of iron like ploughs, shovels, pickaxes, lathes, blowers, surface guiders and drills.
9. Whether the article produced is the raw material or an article made of iron and steel has to be decided on the basis of the nature of the article and not the kind of mill which turns it out. It is significant that these items do not draw a distinction between basic steel mills, integrated steel mills and the various other types of mills that are used in the industry which have been referred to earlier. The Board's clarification, referred by Dr Gauri Shankar, that the machinery and plant in "rolling mills" will not be eligible for the higher development rebate would not, therefore, seem to be justified if it intends to draw a distinction between the same machinery and plant when used in rolling mills and when used in other mills in the industry. If machinery and plant installed in steel mills where the process includes not merely the production of ingots, billets and the like but also the production of bars and rods are eligible for the higher development rebate, it is difficult to see why the same plant and machinery, when installed in rolling mills which proceed, from the stage of ingots or billets, to manufacture bars and rods should not be eligible for the higher rate of development rebate. In considering the issue before us, we should not be carried away by classifications of stages of manufacture that may be relevant for other purposes. We would like to emphasise, at the cost of repetition, that what we should examine is not the nature of the mill which yields the article but the nature of the article or thing that is manufactured and ask ourselves the question whether such article or thing can be considered as raw material for manufacture of other articles made of the metal or is it itself an article made of the metal. On this issue our view is, as we have already stated, that the goods in the present case fall in the former category. We think Sri Ramachandran is right in pointing out that the mild steel rods, bars or rounds which are manufactured by the assessees here are only finished forms of the metal and not articles made of iron and steel. They only constitute raw material for putting up articles of iron and steel such as grills or windows by applying to them processes such as cutting or turning. The rod or the wire rods (with which some of the decisions were concerned) are likewise not products of iron and steel but only certain finished or refined forms of the metal itself."
8. Supreme Court again in CIT v. Gem India Mfg. Co. [2001] 10 SCC 733 held that cutting and polishing of diamond does not amount to manufacture and industrial undertaking is not entitled to the benefits of Section 80-I of the Act.
9. This court in Tata Iron & Steel Co. Ltd. (supra) and Om Engineering Works (supra) and Supreme Court in Gujarat Steel Tubes Ltd. v.. State of Kerala 1989 UPTC 1072, in relation to the controversy under the Sales Tax Act held that by galvanization iron and steel are not changed and remained iron and steel.
10. Thus from the aforesaid discussions, it is held that industrial undertaking of the assessee which is engaged in the business of galvanizing MS Pipes, is not involved in manufacture or production of any article or thing, as such, it is not entitled for the benefits under Section 80-I of the Act. The questions of law raised in these are decided in favour of the Revenue. The view taken by the Tribunal is illegal. Accordingly the impugned orders passed by the Income Tax Appellate Tribunal, Delhi Bench 'C', New Delhi are liable to be set aside. The appeals are allowed and orders of the Tribunal dated 04.10.2004 passed in ITA No. 2523/D/1999, ITA No. 2524/D/1999 and ITA No. 2409/D/2000 are set aside.
IT : Where there was no failure on part of assessee to disclose all material facts necessary for assessment, reassessment proceedings could not be initiated after expiry of four years from relevant assessment year merely on ground that in view of retrospective amendment to provisions of section 80-IA, assessee was not entitled to deduction granted under said section earlier
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[2013] 33 taxmann.com 146 (Allahabad)
HIGH COURT OF ALLAHABAD
Avadh Transformers (P.) Ltd.
v.
Union of India*
RAJIV SHARMA AND DEVENDRA KUMAR ARORA, JJ.
WRIT PETITION NO. 2391 (M/B) OF 2013 (TAX)
MARCH 20, 2013
Section 147, read with section 80-IA, of the Income-tax Act, 1961 - Income escaping assessments - Non-disclosure of primary facts [To disallow section 80-IA deduction] - Assessment year 2006-07 - For relevant assessment year, assessment was completed under section 143(3) allowing assessee's claim for deduction under section 80-IA- After expiry of four years from end of relevant assessment year, a notice under section 148 was issued seeking to reopen assessment on ground that as per Explanation given below sub-section (13) of section 80-IA which had been substituted by Finance Act (No. 2) of 2009 with retrospective effect from 1-4-2000, deduction under section 80-IA would not be admissible to assessee - Whether since there was no failure on part of assessee to disclose fully and truly all material facts necessary for its assessment, impugned notice was invalid and, therefore, reassessment proceedings initiated in pursuance of said notice were to be quashed - Held, yes [Para 13] [In favour of assessee]
CASES REFERRED TO
GKN Driveshafts (India) Ltd. v. ITO [2003] 259 ITR 19/[2002] 125 Taxman 963 (SC) (para 3).
Prashant Kumar for the Respondent.
ORDER
1. Heard learned Counsel for the petitioner, Sri Prashant Kumar, learned Counsel for the respondent Nos. 2 and 3.
2. Through the instant writ petition under Article 226 of the Constitution of India, the petitioner, who is engaged in the business of undertaking renovation and modernization of existing network of transmission or distribution lines, challenges the notice dated 13.1.2012 issued under Section 148 of the Income-tax Act, 1961 by the Deputy Commissioner of Income Tax, Circle Sultanpur (respondent No.2) contained in Annexure No.2 to the writ petition, whereby the petitioner was informed that the Deputy Commissioner of Income Tax (respondent No.2) has reasons to believe that certain income of the petitioner for Assessment Year 2006-2007 has escaped assessment.
3. Shorn off unnecessary details the facts of the case are that the petitioner's Company had filed return of income for Assessment Year 2006-2007 in terms of Section 139(1) of the of the Income Tax Act, 1961 (hereinafter referred to as the "Act"). The case of the petitioner was selected for scrutiny assessment and statutory notice was also issued under Section 143(2) of the Act. During the course of assessment proceedings, the claim of deduction under Section 80-IA of the Act was examined by the respondent No.2 and on examination, it was allowed. Consequently, the assessment of Assessment Year 2006-2007 was concluded vide order dated 21.3.2007 under Section 143(3) of the Act.
After completion of the assessment for the Assessment Year 2006-2007, impugned notice dated 13.1.2012 was issued by the respondent No.2 under Section 148 of the Act, to which the petitioner, vide its letter dated 30.1.2012, while complying with the notice dated 13.1.2012, filed the return of income for Assessment Year 2006-2007 and also while placing reliance upon the judgment of the Apex Court in GKN Driveshafts (India) Ltd. v. ITO[2003] 259 ITR 19/[2002] 125 Taxman 963 (SC), requested the respondent No.2 to provide the copy of reasons recorded by him which formed the basis for issuance of notice dated 13.1.2012 under Section 148 of the Act. In response to the letter dated 30.1.2012 of the petitioner, respondent No.2 supplied the copy of reasons recorded by him which formed the basis for issuance of Notice dated 13.1.2012 under Section 148 of the Act on 3.2.2012.
4. According to the petitioner, the only reason stated in the reasons recorded by the respondent No.2 is that an Explanation has been introduced to Section 80-IA of the Act vide Finance (No.2) Act, 2009 with retrospective effect i.e. from April 01, 2000. Thus, it is evident that merely on the basis of the said retrospective amendment, the respondent No.2 issued the notice dated 13.1.2012 i.e. after the expiry of four years from the end of relevant Assessment Year and has further invoked the extended period of limitation contained in First Proviso to Section 147 of the Act.
5. Hence the instant writ petition.
6. Learned Counsel for the petitioner has vehemently assailed the impugned notices on various grounds. However, considering the view that the court is inclined to take in the matter, it is not necessary to refer to all the contentions raised by the learned advocate for the petitioner. In the present petition, the main ground for assailing the impugned notice is that in absence of any allegation that the petitioner has failed to furnish fully and truly all material facts necessary for its assessment for the relevant assessment years, the impugned notice which are issued beyond a period of four years from the end of the relevant assessment years are invalid in the light of the first proviso to section 147 of the Act and as such the very initiation of proceedings under section 147 of the Act is bad.
7. On the other hand, Sri Prashant Kumar, learned Counsel for the respondent Nos. 2 and 3 did not dispute that there was any failure on the part of the petitioner in disclosing fully and truly all material facts relevant for its assessment but he invited our attention to the reasons recorded for reopening the assessments under Section 147 of the Act i.e. in the light of the amendment of section 80-IA vide Finance (No.2) Act, 2009 with retrospective effect from 01.04.2000 and as such, it is deemed that the assessee had not submitted the true facts at the relevant point of time, thus, the provisions of section 147 are clearly attracted.
8. In the facts of the present case, relevant Assessment Years is 2006-2007. The notice under section 148 of the Act relating to Assessment Year 2006-2007 has been issued on 13.1.2012. Computing the period between the end of the relevant Assessment Years and the date of issuance of the notice under section 148, it is evident that notice has been issued beyond a period of four years from the end of the relevant Assessment Year. The first proviso to Section 147 of the Act, lays down that where an assessment under sub-section (3) of section 143 of the said section has been made for the relevant assessment year, no action shall be taken under the section after expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee to make a return under section 139 or in response to notice issued under subsection (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment.
9. Thus, for the purpose of invoking section 147 after the expiry of four years from the end of the relevant assessment year, the income chargeable to tax should have escaped assessment by reason of failure on the part of the assessee either
| (i) | to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148, or; | |
| (ii) | to disclose fully and truly all material facts necessary for his assessment. |
10. In the facts of the present case, it is an undisputed position that there is no failure on the part of the assessee insofar as the first condition is concerned. Insofar as the second condition, viz. failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment is concerned, on a plain reading of the reasons recorded, it is apparent that the same are totally silent as regards any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the relevant assessment years.
11. From the reasons recorded, it is apparent the assessment is sought to be reopened only on the ground that as per the explanation given below sub-section (13) of section 80-IA of the Act, which has been substituted by the Finance Act No.2 of 2009 with retrospective effect from 1.4.2000, deduction under section 80-IA would not be admissible to an assessee who carries on business which is in the nature of works contract and as such, the petitioner/assessee being engaged in the business of works contract is not eligible for deduction under section 80-IA but the same has been claimed by the assessee, hence, there was reason to believe that income chargeable to tax has escaped assessment for the assessment years under consideration. The record of the case does not in any manner indicate that proceedings under section 147 are sought to be reopened by reason of failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for assessment years under consideration.
12. The respondents has not disputed the fact that there is no failure on the part of the petitioner to disclose fully and truly all material facts. Only by way of submission advanced before the Court it is contended that in the light of the amendment of section 80-IB, it is deemed that the petitioner has failed to disclose the correct facts. As to whether or not there is any failure on the part of the assessee in disclosing fully and truly all material facts necessary for his assessment, is a matter of fact and there can be no deemed failure as is sought to be contended on behalf of the respondents.
13. In the circumstances, in absence of any failure on the part of the petitioner to disclose fully and truly all material facts necessary for its assessment for the assessment years under consideration, the notice under section 148 of the Act having been issued after the expiry of a period of four years from the end of the relevant assessment years, the very initiation of proceedings under section 147 of the Act stand vitiated and as such cannot be sustained.
14. In view of the above, the writ petition succeed and is, accordingly, allowed. The impugned notice dated 13.1.2012 issued under section 148 of the Income Tax Act, 1961, is hereby quashed.
IT : Where assessee-company purchased shares of a private limited company from funds received from its holding company and after some time it had sold said shares to its holding company, profit arising from sale of shares had to be taxed under head capital gains
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[2013] 33 taxmann.com 262 (Bombay)
HIGH COURT OF BOMBAY
Commissioner of Income-tax-7
v.
Renato Finance & Investment Ltd.*
J.P. DEVADHAR AND M.S. SANKLECHA, JJ.
IT APPEAL NO.1672 OF 2011
MARCH 4, 2013
Section 45, read with section 28(i) of the Income-tax Act, 1961 - Capital gains - Chargeable as [Business income v. Capital gains] - Assessment year 2005-06 – Assessee-company purchased shares of a private limited company from funds received from its holding company - During previous year, it sold said shares to its holding company and earned profit, which was declared as long term capital gains - Assessing Officer treated said profit as business income - Tribunal held that shares sold by assessee to its holding company were not tradeable in market like any other normal trading asset and, therefore, profit arising from sale of shares had to be taxed under head capital gains - Whether Tribunal was justified in its view - Held, yes [Para 6] [In favour of assessee]
FACTS
| ■ | The assessee-company had purchased shares of a private limited company 'L' from the funds received from its holding company. During the previous year, it had sold the said shares to its holding company. In the process, it earned profit, which was declared as long term capital gains. | |
| ■ | The Assessing Officer held that the profit earned on sale of shares was not taxable under the head 'capital gains' but was taxable under the head 'profits and gains of business and profession.' | |
| ■ | On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | On second appeal, the Tribunal held that the shares of a private limited company, i.e., company 'L' were not tradeable in the market and consequently such shares could not be considered to be stock in trade. The shares of company 'L' were purchased by the assessee from the funds received from its holding company. This borrowing was not in the nature of a commercial borrowing but more in the nature of the capital being infused in the subsidiary company by the holding company. This was for the reason that no lender would lend an amount to an extent where the net worth of the borrower was less than 1 per cent of the amount lent for investment in shares. The same was in the nature of introduction of capital rather than commercial borrowing. In these circumstance, the funds borrowed by the assessee per se would not lead to the conclusion that the investment in shares was for the purposes of trading. Therefore, the profit on sale of shares had correctly been declared by the assessee as being long term capital gains and the same was not taxable as business income. | |
| ■ | On appeal to High Court: |
HELD
| ■ | The Tribunal has considered the cumulative effect of all the facts and arrived at a conclusion that the transaction was not an adventure in the nature of trade, therefore, classifiable as capital gains. [Para 5] | |
| ■ | Moreover as held by the Supreme Court in the matter of CIT v. Sutlej Cotton Mills Supply Agency Ltd. [1975] 100 ITR 706 that whether the profit or loss has to be assessed under the head business income or under the head capital gains is primarily dependent upon a finding of fact. In the instant case, the Tribunal after considering all the facts and particularly the fact that the shares sold by the assessee to its holding company were not tradeable in the market like any other normal trading asset concluded that the profit arising from the sale of shares has to be taxed under the head capital gains. In the above view of the matter, the order of the Tribunal deserved to be upheld. [Para 6] |
CASES REFERRED TO
CIT v. Sutlej Catton Mills Agency Ltd. [1975] 100 ITR 706 (SC) (para 1) and Ramnarain & Sons (P.) Ltd. v. CIT [1961] 41 ITR 534 (SC) (para 4).
Abhay Ahuja for the Appellant. J.D. Mistri and Atul K. Jasani for the Respondent.
ORDER
1. In this appeal by the revenue for the assessment year 2005-06 following question of law has been raised for our consideration:-
| (a) | Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in treating the profit on sale of shares of Rs.2,52,75,000/- as capital gain instead of business income ignoring the fact that the transaction in shares carried out by the assessee were adventure in the nature of trade ? | |
| (b) | Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in allowing the exemption under section 47(v) of the I.T. Act, 1961 on sale of shares ignoring the fact that the said transaction has been treated as business income and the shares held by the assessee company were not an investment but shares sold to Piramal Holding Ltd. were actually stock of the assessee and similar transactions have been held as business activity by decision of the Apex Court in the case of CIT v. Sutlej Cotton Mills Agency Ltd.[1975] 100 ITR 706. |
2. The respondent during the relevant previous year sold shares of L & T Crossroads Pvt. Ltd. to its holding company i.e. Piramal Holdings Pvt. Ltd. for a consideration of Rs. 12 crores. In the process, the respondent-assessee earned Rs.2.52 crores which was declared as long term capital gains. Further exemption was claimed in view of Section 47(v) of the Income Tax Act, 1961 (the Act). However, the assessing officer did not accept the contention of the respondent-assessee and inter alia held that the sale of shares by the respondent-assessee to its holding company was not taxable under the head capital gains but were taxable under the head profits and gains of business and profession. The assessing officer inter alia proceeded on the basis that the shares held by L & T Crossroads Pvt. Ltd. was held by the respondent-assessee for a period of 8 months before its sale.
3. In appeal, the CIT(A) upheld the order of the assessing officer and held that the profits on sale of shares was to be taxed as business income. However, the CIT(A) held that the subject shares were held by the respondent-assessee for four years and not eight months as held by the assessing officer.
4. Being aggrieved, the respondent-assessee carried the matter in appeal to the Tribunal. The Tribunal by the impugned order allowed the appeal by holding that the profits made on sale of shares of the private limited company i.e. L & T Crossroads Pvt. Ltd. by the respondent-assessee is profit to be taxed under the head capital gains and not as profit of business. The Tribunal held that the shares of a private limited company are not tradeable in the market and consequently, such shares cannot be considered to be stock in trade. The Tribunal further held that as the shares in L & T Crossroads Pvt. Ltd. were purchased from the funds borrowed / received from its holding company i.e. Piramal Holdings Pvt. Ltd. to the extent of Rs.9.47 crores. This borrowing was not in the nature of a commercial borrowing but more in the nature of the capital being infused in the subsidiary company by the holding company. This is for the reason that no lender would lend an amount to an extent where the net worth of the borrower is less than 1% of the amount lent for investment in shares. The Tribunal recorded a finding of fact that the same was in the nature of introduction of capital rather than commercial borrowing. In these circumstance, the Tribunal concluded that the funds borrowed by the respondent-assessee per se would not lead to the conclusion that the investment is shares were for the purposes of trading. On the aforesaid facts, the Tribunal concluded that the gain of Rs.2.52 crores has correctly been declared by the respondent-assessee as being long term capital gains and the same is not taxable as business income. The Tribunal also placed reliance upon the decision of the Supreme Court in the matter of Ramnarain & Sons (P.) Ltd. v. CIT [1961] 41 ITR 534 to conclude that even if the shares were acquired for the purposes of acquiring control of a company, it cannot be treated as stock in trade.
5. Mr. Abhay Ahuja, learned counsel for the revenue submits that even a single transaction of purchase and sale outside the assessee's line of business may constitute a adventure in the nature of trade. In support reliance was placed upon the decision of the Supreme Court in the matter of Sutlej Cotton Mills Supply Agency (supra). The Supreme Court in the matter of Sutlej Cotton Mills Supply Agency Ltd. (supra) while holding that in given facts even single transaction of purchase and sale may constitute adventure in the nature of trade, yet, the same has to be decided taking into account all the facts and circumstances of the case and not on the application of any single principle or test. We find that the Tribunal has considered the cumulative effect of all the facts and arrived at a conclusion that the transaction was not an adventure in the nature of trade, therefore, classifiable as capital gains.
6. Moreover, as held by the Supreme Court in the matter of Sutlej Cotton Mills Supply Agency Ltd. (supra) that whether the profit or loss has to be assessed under the head business gains or under the head capital gains is primarily dependent upon a finding of fact. In the present case, the Tribunal after considering all the facts and particularly the fact that the shares sold by the respondent-assessee to its holding company was not tradeable in the market like any other normal trading asset, concluded that the gains arising from the sale of shares has to be tax under the head capital gains. In the above view of the matter, the decision of the Tribunal is based on a finding of fact, we see no reason to entertain question (a).
7. So far as question (b) is concerned, it is merely consequential to question (a). The case of the revenue is that Section 47(v) of the Act would not apply as the same applies only to capital gains and not to income taxed as business income. Therefore, this question does not survive in view of the fact that we have found no reason to interfere with the finding of the Tribunal that the gains on sale for shares is to be taxed as capital gains.
8. Accordingly, the appeal is dismissed with no order as to costs.
SKJIT : Merely because shares purchased by assessee were transferred to his demat account on a later date, date of transfer to demat account could not be taken as date of purchase
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[2013] 33 taxmann.com 145 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'C'
Income-tax Officer, Ward - 41(2), Kolkata
v.
Ram Krishna Ghosh*
PRAMOD KUMAR, ACCOUNTANT MEMBER
AND MAHAVIR SINGH, JUDICIAL MEMBER
AND MAHAVIR SINGH, JUDICIAL MEMBER
IT APPEAL NO. 380 (KOL.) OF 2012
[ASSESSMENT YEAR 2005-06]
[ASSESSMENT YEAR 2005-06]
SEPTEMBER 14, 2012
Section 54EC of the Income-tax Act, 1961 - Capital gains - Not to be charged on investment in certain bonds [Transfer of shares to demat account] - Assessment year 2005-06 - Assessee purchased certain shares on 9-1-2003 through share broker - At that time assessee was not having demat account which was opened on 5-3-2004 and aforesaid shares were transferred from broker's demat account to assessee's demat account - Said shares were sold on 23-4-2004 resulting in certain capital gain which was invested in specified bonds - Whether when Assessing Officer did not dispute date of purchases, merely because date of transfer of shares to assessee's demat account was a later date, date of transfer to demat account could not be taken as date of purchase - Held, yes - Whether capital gain on sale of aforesaid shares would be treated as long-term capital gain and assessee would be entitled to benefit under section 54EC - Held, yes [Paras 5 & 6] [In favour of assessee]
FACTS
| ■ | The assessee earned capital gains on sale of certain shares. His claim was that those shares were purchased on 9-1-2003 and sold on 23-4-2004 and, accordingly, the holding period being more than twelve months, those gains were required to be treated as long-term capital gains and he was entitled to exemption under section 54EC. | |
| ■ | As per information available to the Assessing Officer, those shares were transferred from demat account of broker to the demat account of the assessee on 5-3-2004 and back to demat account of broker on 23-4-2004. Accordingly, the Assessing Officer held that the holding period of shares by the assessee was less than twelve months, and gain on sale of such shares was required to be treated as short-term capital gains. In effect, according to the Assessing Officer, the assessee was not eligible for exemption under section 54EC. | |
| ■ | On appeal, the Commissioner (Appeals) noted that the assessee did not have any demat account at the point of time when shares were purchased and it was only on 5-3-2004 that the assessee opened a demat account. He noted that the purchase transaction was supported by the contract note from the broker and also reflected in the balance sheet as on 31-3-2003. Therefore, he directed the Assessing Officer to treat the gain on sale of shares as long-term capital gain and allowed the claim of section 54EC. | |
| ■ | On revenue's appeal: |
HELD
| ■ | Once the Assessing Officer does not dispute the date of purchases, merely because the date of transfer of shares to assessee's demat account is a later date, the date of transfer to demat account cannot be taken as date of purchases. The assessee has given an explanation for delay in transfer to his demat account, and this explanation has not even been challenged or controverted. In these circumstances, Assessing Officer's challenge to the capital gains being treated as long-term capital gains is indeed devoid of legally sustainable basis. Once the Assessing Officer does not challenge genuineness of a transaction, it cannot be open to him to alter the date of purchases, as claimed by the assessee, and once this date remains unchallenged, there is no basis for holding the capital gains as a short-term capital gain. There is not even a whisper of an allegation about genuineness of the transaction even though it is a case of, what is commonly known as, penny stock and the value of the shares has gone up almost 40 times within one year. [Para 5] | |
| ■ | For the aforesaid reasons, the conclusion arrived at by the Commissioner (Appeals) is to be approved. [Para 6] |
P.K. Pramanick for the Appellant. M. Satnaliwala for the Respondent.
ORDER
Pramod Kumar, Accountant Member - By way of this appeal, the Assessing Officer has called into question correctness of Commissioner of Income Tax (Appeals)'s order dated 2nd December, 2011, for the assessment year 2005-06, on the short ground that the "learned CIT(Appeals) has erred in law, as well as on facts, in treating the amount of Rs.10,23,540/- as long-term capital gains instead of short-term capital gains".
2. Briefly, the relevant material facts are like this. It is a case of reopened assessment. During the course of reassessment proceedings, the Assessing Officer noted that the assessee had earned capital gains of Rs.10,23,540/- on sale of 10,500 shares in Sangotri Constructions Ltd. The assessee's claim was that these shares were purchased on 09.01.2003 and sold on 23.04.2004. Accordingly, the holding period being more than twelve months, these gains were required to be treated as long-term capital gains and the assessee was entitled to exemption u/s. 54EC of the Act. The Assessing Officer, however, disputed this claim. As per information available to him from the Income Tax Investigation Wing, these shares were transferred to Demat account of Bubna Stock Broking Services Ltd. to the Demat account of the assessee on 05.03.2004, and back to Demat account of Bubna Stock Broking Services Ltd. on 23.04.2004. Accordingly, in the opinion of the Assessing Officer, the holding period of shares by the assessee was less than twelve months, and gain on ale of such shares was required to be treated as short-term capital gains. In effect, according to the Assessing Officer, the assessee was not eligible for exemption u/s. 54EC. It was in this backdrop that an addition of Rs. 10,23,540/- was made to the returned income of the assessee. Aggrieved, assessee carried the matter in appeal before the CIT(Appeals). Learned CIT(Appeals) noted that the assessee did not have any de-mat account at the point of time when shares were purchased and it was duly on 05.03.2004 that the assessee opened a de-mat account, which explains that the date of purchases by the assessee cannot be taken as date of purchases. After noting this and other arguments of the assessee rather elaborately, the CIT(Appeals) concluded as follows :-
"4. After examining the A.O's order, profit and loss account and documents it is noticed that the assessee had purchased 1050 shares of M/s. Sangotri Construction Ltd. on 09.01.2003 through share broker M/s. Bubna Stock Broking Services Ltd. At that time assessee was not having Demat A/c. was subsequently opened on 05.03.2004 and shares were sold on 23.04.2004 resulting in capital gain of Rs.10,48,950/- which was invested in bonds of REC on 19.10.2004. The purchase transaction is supported by the contract note from the broker and also reflected in the balance sheet as on 31.03.2003. The legal representative of deceased assessee has placed reliance on Circular No. 704 dt. 28.04.1995 in the above written submission. In support of his claim that shares were held for more than 1 year. Keeping in view of this circumstances the A.O. is directed to treat the gain on sales of shares as long term capital gain and allow the claim of Sec. 54EC as per law. Therefore, ground no.1 is allowed".
3. The Assessing Officer is aggrieved and is in appeal before us.
4. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
5. Learned counsel has laid on lot of emphasis on the fact that the revenue authorities have not questioned the bonafides of date of purchase, which is duly supported by the contract note and balance sheet as on 31.03.2004, and, therefore, it is not open to anyone to tinker with the same. His contention is that since date of purchase of shares is unchallenged, and the date of sale of shares is undisputed, and the difference between the two dates is more than one year, the capital gains on the sale of these shares can only be treated as capital gains. We see merits in this plea. Once the Assessing Officer does not dispute the date of purchases, merely because the date of transfer of shares to assessee's de-mat account is a later date, the date of transfer to de-mat account cannot be taken as date of purchases. The assessee has given an explanation for delay in transfer to his de-mat account, and this explanation has not even been challenged or controverted. In these circumstances, Assessing Officer's challenge to the capital gains being treated as long-term capital gains is indeed devoid of legally sustainable basis. Once Assessing Officer does not challenge genuineness of a transaction, it cannot be open to him to alter the date of purchases, as claimed by the assessee, and once this date remains unchallenged, there is no basis for hearing the capital gains as a short-term capital gain. There is not even a whisper of an allegation about genuineness of the transaction even though it is a case of, what is commonly known as, penny stock and the value of the shares has gone up almost 40 times within one year. On these facts, the Assessing Officer does not question or probe genuineness of transaction and yet claims that these gains should be treated as short-term capital gains. We leave it at that.
6. For the reasons set out above, we approve the conclusions arrived at by the CIT(Appeals) and decline to interfere in the matter.
7. In the result, the appeal filed by the Revenue is dismissed.
VARSHA--
Regards,
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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