ST: Where department had refunded sale proceeds of seized goods after reasonable period from date of direction of Settlement Commission to that effect, High Court ordered department to pay interest at 9 per cent in exercise of writ jurisdiction
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[2013] 35 taxmann.com 221 (Bombay)
HIGH COURT OF BOMBAY
Vishnu M. Harlalka
v.
Union of India*
DR. D.Y. CHANDRACHUD AND A.A. SAYED, JJ.
WRIT PETITION NO. 1136 OF 2011
APRIL 3, 2013
Section 83 of the Finance Act, 1994 read with section 11BB of the Central Excise Act, 1944 and Article 226 of the Constitution of India - Application of certain provisions of Excise Act - Interest on delayed refunds - Assessee's goods were seized and put to auction – Settlement Commissioner directed -revenue to refund proceeds of sale to assessee, after adjusting sums due to it, in accordance with section 150 of Customs Act, 1962 as applicable to central excise and service/tax - After assessee's repeated reminders, said refund was granted after 2.5 years from order of Settlement Commission - Assessee sought interest on delayed refund -HELD : All statutory powers have to be exercised within a reasonable period even when no specific period is prescribed by a provision of law -Argument that Customs Act/Excise Act provided for payment of interest only in respect of a refund of duty and, hence, assessee was not entitled to interest on balance of sale proceeds was not valid - Acceptance of such argument would mean that despite an order of competent authority directing Department to grant/a refund, Department can wait for an inordinately long period without granting a refund in compliance with said directions - That would be destructive to rule of law and cannot be upheld - Since assessee was deprived of a refund of its monies legitimately due to him in pursuance of an order of Settlement Commission, High Court awarded interest at rate of 9 per cent in exercise of powers under Article 226 of Constitution [Paras 8 to 11] [In favour of assessee]
EDITOR'S NOTE
| ■ | To save such disgrace and to avoid interest on refund at 9 per cent, section 11BB of Central Excise Act, 1944 and section 27 of Customs Act, 1962 must be amended to provide that if any sum refundable/payable by Department is not paid within 3 months from date of application, interest at 6 per cent per annum would be payable. | |
| ■ | Similar issue had come up earlier in respect of interest on delayed refund of pre-deposit and ultimately, section 35FF of Central Excise Act, 1944 had to be enacted. |
V.M. Doiphode for the Petitioner. Pradeep S. Jetly for the Respondent.
JUDGMENT
Dr. D.Y. Chandrachud, J - Rule. Learned counsel for the Respondents waive service. By consent, the Rule is made returnable forthwith. The writ petition is taken up for hearing and final disposal, by consent and on the request of learned counsel.
2. The Settlement Commission by an order dated 9 November 2009 passed under Section 127C(5) of the Customs Act, 1962, directed as follows :
| (i) | The customs duty was settled at Rs. 5,48,381/- which was already paid; | |
| (ii) | Interest of Rs. 32,660/- was paid by the Petitioner; | |
| (iii) | Immunity was granted from payment of a penalty in excess of Rs. 50,000/-; and | |
| (iv) | Immunity was granted from fine in lieu of confiscation in excess of Rs. 1.00 lakh. |
3. The Settlement Commission also granted an immunity from prosecution under the Customs Act, 1962 (`the Act'). The Settlement Commission further issued the following direction :
"Release of Goods/Sale Proceeds : The Bench holds that the applicant is entitled to release of the seized goods on payment of fine and penalty adjudged as above. Since the seized goods are reported to have already been auctioned, the Bench directs the Revenue to refund to the applicant the amount remaining in balance after adjustment of expenses and charges as payable in terms of Section 150 of the Customs Act, 1962 and further adjustment of fine and penalty adjudged as above."
4. The Petitioner addressed a communication on 9 January 2010 to the Commissioner of Customs (Import) to implement the order of the Settlement Commission. This was followed by a further representation dated 20 January 2010 and an Advocate's notice dated 17 May 2010. In response to a query under the Right to Information Act, documents were supplied to the Petitioner which indicated that the Superintendent of Customs put up a proposal for the payment of the sale proceeds after adjustment of expenses and charges under Section 150 of the Act on 6 January 2010. The Commissioner of Customs (Exports) granted his approval on 7 May 2010 and on 1 June 2010 a refund order was proposed. Despite this no refund was granted. The Petitioner's advocate once again submitted a letter dated 16 December 2010 seeking implementation of the order of the Settlement Commission.
5. These proceedings under Article 226 of the Constitution were filed on 27 June 2011 for implementing the order of the Settlement Commission dated 9 November 2009 and for a refund of the balance due to the Petitioner with interest.
6. During the pendency of the proceedings, this Court was informed on 23 January 2013 by the Revenue that an amount of Rs. 15,40,309/- was paid to the Petitioner on 20 May 2012. The only surviving issue related to the payment of interest on which the Revenue was required to file an affidavit-in-reply.
7. A reply has been filed by the Deputy Commissioner of Customs. The submission in the reply is that the amount paid to the Petitioner pursuant to the order of the Settlement Commission represents the balance of sale proceeds of the goods auctioned or disposed of after adjustments under Section 150 of the Act. According to the Revenue, since the amount paid does not represent the amount of duty or interest, the provisions of Sections 27 and 27A of the Act are not applicable. It has also been stated in the reply that a cheque of Rs. 15,40,309/- was paid to the Petitioner on 23 May 2012.
8. Section 27 provides for an application by a person claiming refund of duty and interest, if any, paid or borne by him before the expiry of one year from the date of payment. Section 27(2) requires an order to be passed on the receipt of an application subject to the satisfaction of the Assistant Commissioner of Customs that the whole or part of the duty or interest paid by the applicant is refundable. Section 27(2)(a) stipulates that if any duty ordered to be refunded under Section 27(2) to an applicant is not refunded within three months from the receipt of the application, interest shall be paid at such rate not below 5% and not exceeding 30% p.a. as fixed by the Central Government. Section 150(2) provides for an application of the sale proceeds of goods where any goods not being confiscated goods are not sold under the provisions of the Act. The proceeds have to be applied for the payment of (i) expenses of sale, (ii) freight and other charges to the carrier, (iii) duty, if any; (iv) charges to the person having custody of the goods; and (v) any amount due to the Central Government from the owner of the goods, under the provisions of the Act or under any law relating to customs. The balance is to be paid to the owner of the goods.
9. The Settlement Commission directed the authorities to refund to the Petitioner the balance of the sale proceeds after adjustment of expenses and charges under Section 150 of the Act. This order was passed on 9 November 2009. Though no period was stipulated in the order of the Settlement Commission for the grant of refund, the entire exercise ought to have been carried out within a reasonable period of time. A refund in the present case was not granted to the Petitioner despite several representations. Moreover, as the documents which have been revealed in pursuance of a query under the RTI Act now demonstrate, though a refund was duly sanctioned by the Commissioner, no refund was paid over till the petition was filed. All statutory powers have to be exercised within a reasonable period even when no specific period is prescribed by a provision of law. It can be no defence to urge that the Customs Act, 1962 provides for the payment of interest only in respect of a refund of duty and interest and hence the Petitioner would not be entitled to interest on the balance of the sale proceeds which were directed to be paid by the Settlement Commission. Acceptance of the submission would mean that despite an order of the competent authority having jurisdiction, directing the Department to grant a refund, the Department can wait for an inordinately long period; perhaps for years together without granting a refund in compliance with the directions of the Settlement Commission. This would be destructive to the rule of law and cannot be countenanced. The Petitioner has been deprived of a refund of its monies legitimately due to him in pursuance of an order of the Settlement Commission. There is absolutely no reason or justification for the unexplained delay. Hence, in exercise of the jurisdiction of this Court under Article 226 of the Constitution, an order awarding the payment of interest would be necessary.
10. In the circumstances, we dispose of the petition by directing the Respondents to grant to the Petitioner and pay over, within a period of eight weeks from today, interest computed at the rate of 9 per cent per annum. Since the Commissioner of Customs had approved the proposal for sanctioning the refund on 7 May 2010 (which period would be a reasonable period after the order of the Settlement Commission for the grant of a refund), we direct that the Petitioner would be entitled to interest computed at the rate of 9 per cent per annum from 8 May 2010 until the payment was made to the Petitioner by a cheque dated 23 May 2012.
11. The petition stands disposed of. There shall be no order as to costs.
IT : Reassessment to disallow bad debts held not justified
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[2013] 35 taxmann.com 297 (Gujarat)
HIGH COURT OF GUJARAT
Ferromatik Milacron India (P.) Ltd.
v.
Assistant Commissioner of Income-tax, Circle - 4*
AKIL KURESHI AND MS. SONIA GOKANI, JJ.
SPECIAL CIVIL APPLICATION NO. 2565 OF 2013
APRIL 8, 2013
Section 147, read with section 36(1)(vii), of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts [To disallow bad debts] - Assessment year 2006-07 - For relevant assessment year, Assessing Officer sought to reopen assessment proceedings on ground that bad debts claimed by assessee had not passed through its books of account and, therefore, said claim was wrongly allowed - It was undisputed that Assessing Officer had initiated reassessment proceedings after expiry of four years from end of relevant assessment year - It was also apparent that full facts were available on record before Assessing Officer in form of declarations made in returns as well as through correspondence during course of scrutiny assessment - Whether in aforesaid circumstances, having regard to proviso to section 147, Assessing Officer was not justified in initiating reassessment proceedings - Held, yes [Paras 6 & 7] [In favour of assessee]
B.S. Soparkar for the Petitioner. Manish Bhatt and Mrs. Mauna M. Bhatt for the Respondent.
ORDER
Akil Kureshi, J - Heard learned counsel for the parties for final disposal of the petition.
2. The petitioner has challenged a notice dated 10-2-2012 as at Annexure-A to the petition issued by the respondent Assessing Officer under section 148 of the Income-tax Act, 1961 ("the Act" for short), seeking to reopen assessment year 2006-207 which was previously framed after scrutiny.
3. At the request of the petitioner, respondent supplied reasons recorded by him for issuing such notice. Such reasons read as under :
"It is noticed that the assessee had claimed bad debts of Rs. 90,879/- in its profit and loss accounts. On verification of computation of income it was noticed that the assessee had claimed bad debts of Rs. 9,42,126/- and reduced its taxable profit. Since, the amount of Rs. 9,42,126/- was not passed through the books of account, the same is not allowable as expenditure. Thus the income of the assessee is under assessed by amount of Rs. 9,42,126/-. In view of above, I have reason to believe that the income of the assessee is under assessed by amount of Rs.9,42,12 6/-."
4. The petitioner thereupon raised objections to the notice for reopening under communication dated 1-2-2013. Such objections were disposed of by the Assessing Officer on 22-2-2013 rejecting the same. Hence the petition.
5. From the events recorded by the Assessing Officer, his objection for the petitioner's claim of bad debt of Rs. 9.42 lakhs (rounded off) appears to be that only sum of Rs. 90,879/- was during the year under consideration reflected in Profit and Loss account. Amount of Rs. 9.42 lakhs(rounded off) had not passed through the books of account, same is therefore, not allowable as expenditure. In short, the Assessing Officer's objection was that such sum claimed did not satisfy requirement of section 36(1)(vii) of the Act.
6. Having heard learned counsel for the parties, we recall that impugned notice has been issued beyond a period of four years from the end of relevant assessment year. It would therefore, have to be ascertained whether there was any failure on part of the assessee to disclose truly and fully all necessary facts for the assessment. In this context, we may recall that in the reasons itself, the Assessing Officer has recorded that "on verification of computation of income it was noticed that...". Thus the material on the basis of which the reasons are recorded form part of the original record. Further neither any order rejecting the petitioner's objection nor before us the Revenue contends that the belief of the Assessing Officer that income chargeable to tax has escaped assessment, is based on any material outside of the record. Additionally, we also notice that during the original scrutiny assessment, the petitioner under its communication dated 23-11-2009 had made following statement in support of the claim for deduction :
"3. The company makes a provision for doubtful debts, were recovery of outstanding debt is doubtful. The provision so made for doubtful debts is disallowed in return of income. The outstanding debt was scrutinised and debt which was non-recoverable was only actually written off to customer's account by crediting to customer's account. The debts so written off to customer's account are only claimed as bad debts deduction."
7. Thus full facts were there before the Assessing Officer in the form of declarations made in the returns filed as well as through correspondence during the course of scrutiny assessment. This therefore, is not a case where the assessee is stated to have failed to disclose truly and fully all material Acts necessary for assessment.
8. In the result, impugned notice 10-2-2012 is quashed. Petition is disposed of.
IT: Where Assessing Officer failed to point out any defect in method of accounting or any inherent defect in books of account maintained by assessee, section 145 could not be invoked for rejecting books of account
IT: Disallowance of expenses cannot be made on ad hoc or lump sum basis without assigning any justification or reasoning
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[2013] 35 taxmann.com 279 (Allahabad - Trib.)
IN THE ITAT ALLAHABAD BENCH
Deputy Commissioner of Income-tax, Circle-3, Varanasi
v.
Subhash Chand Agrawal*
BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NO.148 (ALL.) OF 2012
[ASSESSMENT YEAR 2009-10]
[ASSESSMENT YEAR 2009-10]
APRIL 18, 2013
I. Section 145 of the Income-tax Act, 1961 - Method of accounting - Rejection of accounts [Gross profit rate] - Assessment year 2009-10 - In course of assessment proceedings, Assessing Officer noticed that a low rate of G.P. was declared by an assessee as compared to previous year - It rejected books of account of assessee and made addition by applying G.P. rate of 4 per cent and proportionately enhanced sale in place of 3.30 per cent disclosed by assessee - Whether for rejecting system of accounting followed by assessee, Assessing Officer must refer to inherent defect in system and record a clear finding that correct profit cannot be deduced from books of account maintained by assessee - Held, yes - Whether addition was unjustified - Held, yes [Paras 9.3, 10 & 11][In favour of assessee]
II. Section 143 of the Income-tax Act, 1961 - Assessment - Addition to Income [Where addition held not justified] - Assessment year 2009-10 - Assessee received interest on FDR with HDFC Bank and bank had deducted TDS on interest - Assessing Officer made addition of interest on ground that assessee had failed to file reconciliation for interest receipt as per AIR information - On appeal, Commissioner (Appeals) after considering reconciliation filed by assessee found that both amounts of TDS deducted on interest as per AIR information and TDS deducted by bank tallied - On basis of above finding, Commissioner (Appeals) deleted addition - Whether in absence of any contrary material, order of Commissioner (Appeals) was to be confirmed - Held, yes [Para 12][In favour of assessee]
III. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Personal expenses] - Assessment year 2009-10 - Assessing Officer made addition on account of various expenses - It also had disallowed 20 per cent of vehicle expenses and 20 per cent depreciation on car on account of personal use of vehicles by assessee - Commissioner (Appeals) noted that disallowance had been made on ad hoc and lump sum basis without assigning any justification or reasoning - Whether Commissioner (Appeals) had rightly deleted ad hoc additions - Held, yes - Whether vehicle running expenses and depreciation on car had to be disallowed on account of personal use at a reasonable rate of 5 per cent - Held, yes [Para 13][Partly in favour of assessee]
FACTS-I
| ■ | The assessee was engaged in the business of trading as well as manufacturing of coal and coal products. During the assessment proceedings, the Assessing Officer noticed that the assessee had declared Gross Profit (G.P.) rate of 3.30 per cent as against G.P. rate of 6.17 per cent and 4.73 per cent in earlier year. It was also noticed by Assessing Officer that the various expenses claimed in trading account are not verifiable as they are not properly vouched. | |
| ■ | The Assessing Officer asked the assessee to explain and justify the fall in G.P. rate and after considering the assessee's submission he rejected the books of account of assessee by invoking section 145(3) and applied G.P. rate of 4 per cent on proportionately enhanced sale in place of 3.30 per cent disclosed by assessee and accordingly, calculated the amount of addition of Rs. 23, 63,115. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the addition. | |
| ■ | On revenue's appeal: |
HELD-I
| ■ | It is to note that under section 145(1), the income chargeable under the head 'Profits and gains of business or profession' or 'Income from other sources' has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income profits and gains cannot properly be deducted therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under sub-section (3) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation has to be made upon such basis and in such manner as the Income-tax Officer may determine. However, if the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make the assessment in the manner provided in section 144. Section 145 is mandatory and the revenue is bound by the assessee's choice of a method regularly employed unless by that method the true income, profits and gains cannot be arrived at. | |
| ■ | In other words, section 145 enacts that for the purpose of section 28 (Profits and gains of business, profession and vocation) and section 56 (Income from other sources), income, profit and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains of business or profession or vocation in accordance with the method employed by the assessee. Therefore, in case where the Income-tax Officer or the taxing authority finds that in maintaining accounts, the assessee has regularly employed a particular method and does not make any investigation to find or does not find any defect in the accounts and accept the accounts as they are, he is bound to compute the income in accordance with the accounts maintained by the assessee. Therefore, when the assessee represents to the taxing authority that its accounts are maintained by a method of accounting regularly employed, he expects the Income-tax Officer to act upon such method and compute the income accordingly. [Para 9.2] | |
| ■ | The basic question for consideration is, whether the assessee has been following an acceptable method of accounting for declaring its income and whether the method employed by the assessee is such that correct profits cannot be deduced from the accounts of the assessee, so that the provisions of section 145 could apply. In the instant case the assessee has followed a consistent system of accounting and regularly employing the same system of accounting for computing its income from year to year. It is also not in dispute that this system of accounting was not found to be defective by the Income-tax Officer. It must be said at the outset that the choice to account for income on an acceptable basis is that of the assessee, and not the department. This is, however, not an unlimited choice, because the Income-tax Officer has always the liberty to examine the system of accounting regularly employed by the assessee, to determine whether the system of accounting is defective, and whether by following such system of accounting, correct profits can be deduced from the account books maintained by the assessee. If, on such scrutiny, the Income-tax Officer comes to the conclusion that with reference to the method of accounting followed by the assessee, correct profits cannot be deduced, it is open to him to apply the provisions of section 145 and make the assessment in an appropriate manner. | |
| In the instant case, there is no material to indicate why the Income-tax Officer considers the system of accounting regularly followed by the assessee to be defective, or the system of accounting followed to be such that correct profits cannot be deduced therefrom. The Income-tax Officer's power to substitute a system of accounting for the one followed by the assessee, flows from the provisions of section 145. It is, therefore, imperative that before rejecting the system of accounting followed by the assessee, the Income-tax Officer must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee. As already observed above, there is no finding to that effect in this case. The Income-tax Officer's view that there could be a better system of accounting is no reason to the application of the provisions of section 145, especially in view of the fact that this system of accounting is followed by the assessee uniformly and regularly for the past several yeas, and was accepted by the department without quarrel. It is not open to the Income-tax Officer to intervene and substitute a system of accounting different from the one which is followed by the assessee, on the ground that the system which commends to the Income-tax Officer is better. [Para 9.3] | ||
| ■ | In the instant case, it is found that the Assessing Officer has failed to point out any single defect in the method of accounting followed by the assessee. He failed to point out any inherent defect in books of account maintained by the assessee. The Assessing Officer has simply rejected the books of account on the basis that the assessee had declared lower Gross Profit. Whereas, the assessee has furnished the reasons for fall in Gross Profit. [Para 10] | |
| ■ | The Commissioner (Appeals) after detailed discussion found that the action of the Assessing Officer in invoking section 145(3) was not in accordance with law. The Commissioner (Appeals) also examined enhancement made in turnover by the Assessing Officer and found that there was no justification in enhancing the turnover and applying arbitrary Gross Profit of 4 per cent. The Commissioner (Appeals) found force in assessee's submission and reasons for fall in Gross Profit and found that the effective Gross Profit, after considering additions made by the Assessing Officer comes to 6.43 per cent, such Gross Profit was not declared by the assessee in the past. In the light of detailed discussion, particularly under the facts and circumstances of the case, the revenue has failed to point out any contrary material to the finding of Commissioner (Appeals). Therefore, there is no infirmity in the order of the Commissioner (Appeals) in deleting the addition of Rs. 23,63,115 made by the Assessing Officer. Order of the Commissioner (Appeals) on the issue is confirmed. [Para 11] |
FACTS-II
| ■ | The assessee received interest of Rs. 20,304.86 on FDR with HDFC Bank and bank had deducted TDS of Rs. 2,123.91 on interest. | |
| ■ | The Assessing Officer found that as per AIR information assessee had received total interest of Rs. 17,730 and on same TDS of Rs. 2,123.91 was deducted. He made the addition of Rs. 17,730 on ground that the assessee had failed to file reconciliation for interest receipt of Rs. 17,730. | |
| ■ | On appeal, the Commissioner (Appeals) on considering the reconciliation filed by assessee observed that TDS amount was tallied in both cases, hence, the assessee had neither concealed the particulars of income nor evaded any tax and deleted the addition made by the Assessing Officer. | |
| ■ | On revenue's appeal: |
HELD-II
| ■ | The assessee has furnished reconciliation and the revenue has failed to point out any contrary material against that reconciliation. In the light of the fact, the Commissioner (Appeals) deleted the addition after considering the reconciliation filed by the assessee in respect of interest account and TDS. The revenue has not pointed out any contrary material to the finding of Commissioner (Appeals). In the light of the fact, order of the Commissioner (Appeals) is confirmed. [Para 12] |
FACTS-III
| ■ | The Assessing Officer made addition of Rs. 5000 out of various travelling and conveyance expenses, Rs. 8000 out of general expenses, Rs. 27,300 out of vehicle expenses on account of personal use and Rs. 23,798 depreciation on car at the rate of 20 per cent on account of personal expenses, totalling to Rs. 64,098. | |
| ■ | On appeal, the Commissioner (Appeals) noticed that disallowance had been made on ad hoc and lump sum basis without assigning any justification or reasoning and deleted the disallowances made by Assessing Officer. | |
| ■ | On revenue's appeal: |
HELD-III
| ■ | The Commissioner (Appeals) has rightly deleted the ad hoc addition of Rs. 5,000 out of travelling and conveyance expenses, Rs. 8,000 out of general expenses. However, the Commissioner (Appeals) also deleted addition of Rs. 27,300 being 20 per cent of vehicle expenses and 20 per cent depreciation on car Rs. 23,798 on the ground that the ad hoc disallowance cannot be made but the Assessing Officer has disallowed these expenses on account of personal use of vehicles by the proprietor. The Assessing Officer disallowed 20 per cent which is found to be excessive. It is found that 5 per cent disallowance on account of personal use will be reasonable. Therefore, the disallowance is restricted to 5 per cent instead of 20 per cent made by the Assessing Officer. The Assessing Officer is directed to calculate the amount of disallowance at the rate of 5 per cent out of vehicle expenses and depreciation on vehicle instead of 20 per cent made by the Assessing Officer. [Para 13] |
CASES REFERRED TO
CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC) (para 9.3), Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 (SC) (para 9.4), CIT v. A. Krishnaswamy Mudaliar [1964] 53 ITR 122 (SC) (para 9.5), Md. Umer v. CIT [1997] 101 ITR 525 (Patna) (para 9.6), Sunil Siddharthbhai v. CIT[1985] 156 ITR 509/23 Taxman 14W (SC) (para 9.7), CIT v. S.M. Chitnavis [1932] 2 Comp. Cas. 464 (PC) (para 9.7), CIT v. Tata Iron & Steel Co. Ltd. [1977] 106 ITR 363 (Bom.) (para 9.7), CIT & EPT v. Chari and Ram [1949] 17 ITR 1 (Mad.) (para 9.7), CIT v. Srimati Singari Bai[1945] 13 ITR 224 (All.) (para 9.7), CIT v. K. Doddabasappa [1964] 54 ITR 221 (Mys.) (para 9.7), Juggilal Kamlapat, Bankers v. CIT [1975] 101 ITR 40 (All.) (para 9.7), CIT v. Anandha Metal Corpn. [2006] 152 Taxman 300 (Mad.) (para 9.7), Calcutta Co. Ltd.. v CIT [1959] 37 ITR 1 (SC) (para 9.7), CIT v. Margadarsi Chit Funds (P.) Ltd. [1985] 155 ITR 442/[1984] 19 Taxman 73 (AP) (para 9.7), CIT v. Gotanlime Khanij Udyog [2002] 256 ITR 243/120 Taxman 779 (Raj.) (para 9.7) and CIT v. Smt. Poonam Rani (Delhi) [2010] 326 ITR 223/192 Taxman 167 (Delhi)(para 9.7)
T.P. Shukla for the Appellant. Arvind Shukla and O.P. Shukla for the Respondent.
ORDER
A.L. Gehlot, Accountant Member - This is an appeal filed by the Revenue against the order dated 12.03.2012 passed by the ld. CIT(A), Varanasi for the Assessment Year 2009-10.
2. The Revenue has raised as many as 8 grounds of appeal but effectively there are 3 grounds of appeal. The first one is that the CIT(A) has wrongly deleted the addition of Rs.23,63,115/- being extra profit. The second one is in respect of deletion of addition of Rs.17,730/- on account of interest income of FDR and the third one is in respect of deletion of addition of Rs.64,098/- out of various expenses.
3. The brief facts of the case are that the assessee is engaged in the business of trading as well as manufacturing of coal and coal products. During the assessment proceedings the Assessing Officer noticed tat the assessee has declared Gross Profit (G.P.) rate of 3.30% in the year under consideration A.Y. 2009-10 as against G.P. rate of 06.17% and 4.73% in A.Y. 2007-08 in earlier years. The assessee was asked to explain and justify the fall in G.P. rate. It was also asked to the assessee to explain that various expenditure claimed in trading account are not verifiable as expenses towards loading and unloading, labour charges & transportation are not found properly vouched and supported by proper bills & vouchers. The payments were made through self-made vouchers. The Assessing Officer, after considering the assessee's submission, rejected the books of accounts by invoking section 145 (3) of the Act and applied G.P. of 4% in place of 3.30% disclosed by the assessee. The Assessing Officer accordingly calculated the amount of addition of Rs.23,63,115/- as under :- (Paragraph nos.5 & 6, page no.3)
"5. In view of above discussion the trading expenses are not fully verifiable and provisions of 145(3) is applicable as far as account sets of M/s Subhash Coal Traders are concerned. Considering the details and submission filed before me, non verifiability of books of accounts as discussed above and also past history of the case, and applicability of 145(3) in case of M/s Subhash Coal Traders it will be reasonable and justifiable to apply G.P. rate at 4% in place of 3.30% disclosed by the assessee.
6. Total turnover in the M/s Subhash Coal Traders is Rs.3025497416/-. Applying G.P. rate of 4% on proportionately enhanced and rounded off sale of Rs.327700000/- the G.P. comes to Rs.13108000/- deducting from this G.P. disclosed at Rs.10744885/- the extra profit worked out at Rs.2363115/- which is added in the income of M/s Subhash Coal Traders.
(Extra profit addition Rs.23,63,115/-)"
4. The Assessing Officer also made addition of Rs.17,730/- on the ground that as per AIR information it was found that Rs.17,730/- was amount of interest and on the same amount TDS was deducted at Rs.2,123/-. The assessee has failed to file reconciliation for interest receipt of Rs.17,730/-. The Assessing Officer has also made addition of Rs.5,000/- out of various travelling and conveyance expenses, Rs.8,000/- out of general expenses, Rs. 27,300/- out of vehicle expenses on account of personal use and Rs.23,798/- depreciation on car @ 20% on account of personal expenses, totaling to Rs.64,098/-.
5. The Assessing Officer also made additions of various expenses, totaling o Rs.64,098/-
6. The CIT(A) deleted the addition of Rs.23,63,115/- as under :- (Paragraph nos.5 & 6)
"5. As evident from the assessment order and as discussed above, the Assessing Officer has made additions under the head sale of Rs.22,02,584/- an extra profit addition of Rs.23,63,115/- by invoking provisions of section 145(3), it appears that all above additions have been made through the rejection of books of accounts under section 145(3) but no such evidence has been found in the assessment order to show that all additions are covered under section 145(3).
So far as the issue relating to invocation of provisions under section 145(3) of the Income Tax Act is concerned, it is also beyond doubt, that it was the open intention of the Assessing Officer to reject the books of account under section 145(3) without giving opportunity to the assessee to explain facts of the case. The Assessing Officer himself in his order accepted the some of the expenses is reasonable but merely on the ground that the assessee has made payment through self made voucher under the head freight to truck drivers and labour for unloading and loading of coal provision of section 145(3) cannot be invoked. It is known facts that the labour are unorganized sector and can not form basis of rejection of books of accounts. Though the appellant already submitted detailed reply before the Assessing Officer and also produced books of accounts and bills/vouchers and other record also. On going through the case records and impugned order under section 143(3), it is observed that it was the Assessing Officer's open contention to reject the books of account and to invoke the provisions of section 145(3) merely on the ground of certain deficiencies in the accounts. In this regard, it is held that while recording the satisfaction on the issue of correctness and completeness of books of account as stipulated in section 145(3), the Assessing Officer cannot trivialize the reason and basic need behind which law requires maintenance of books of account as stipulated in section 44AA of the Income Tax Act. The expression "Whether the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee" made in section 145(3) must be construed in conjunction with the purpose behind maintenance of such books of accounts as convey in the expression
"Every person carrying on legal …… shall keep and maintain such books of account and other documents as may enable the (Assessing) Officer to compute his total income in accordance with the provisions of this Act" under section 44AA of the Income Tax Act. Therefore, any adverse inference of the Assessing Officer on the issue of correctness or completeness of books of accounts does not go against the assessee until there is clear cut finding of the Assessing Officer that whether or not he is able to compute total income of the assessee with such books of account in accordance with the provisions of Act.
In view of above position, the Assessing Officer's action with regard to invocation of provisions under section 145(3) of the Income tax Act is not lawfully sustainable, hence the same is revoked.
6. Further, I observe that the Assessing Officer has enhanced the sale Rs.32,77,50,000 from 32,54,97,461/- and enhanced the sale at Rs.22,02,584/- without giving any reason except mentioned that the total turnover in the M/s Subhash Coal Trader is Rs.3625497416/- applying G.P. rate of 4% on proportionately enhanced and rounded off sale of Rs.32,77,50,000/-. I considered the submission of the assessee and perused the case records of the assessee and find force that the Assessing Officer before enhancement of sales has not given any queries and reason to the assessee. Though the assessee has submitted quantities and qualitative details, produced stock register, purchase and sale register and other related record. The enhancement of the sales is an arbitrary and not legal and regular. The Assessing Officer has not given any opportunity to the assessee to rebut the same and addition made by the Assessing Officer can not be sustained accordingly assessee gets relief of this count.
Further, Assessing Officer has made extra profit addition of Rs.23,63,115/- in the account of M/s Subhash Coal Trader. I considered the submissions of the Authorized Representative submitted before us during the course of hearing of the case and perused the case records of the assessee. It is seen that some of the expenses pertaining to payment of labour and truck drivers against freight on purchase are fully verifiable and freight and labour payment has been paid by the assessee on said purchases. The Assessing Officer has accepted in his order the fall of gross profit due to EMD debited Rs.42,47,420/- and entry tax debited at Rs.66,19,909/- and expenditure incurred may be treated that towards business expediency but the payment made to unorganized sector of labours has not been accepted without any material brought on records. I find force in the submission of the assessee that the labour payment has been made for shifting of coals on the basis of Rs.35/- per tone and on payment of freight above Rs.50,000/- TDS has been deducted. And deposited accordingly hence the both expenses are fully verifiable and vouched. I further found force in the submission of appellant Authorised representative that the total expenditure under the head trading account is increased Rs.1,01,96,635/- and if the said expenditure excluded the G.P. will come to 2,09,41,520/- in place of Rs.1,07,44,885/- and which will give G.P. rate of 6.43%. The expenditure debited to the Trading account wholly and exclusively for the business purposes and allowable under section 37 of the Income Tax Act 1961. The addition to the profit of the assessee made solely on the ground that it was low without giving the specific finding that the accounts of the assessee were not correct and complete or that the income could not be properly determined and deduced from the accounting method employed by the assessee, is not justified. The mere fact that there was a less rate of gross profit declared by an assessee as compared to the previous year would not by itself be sufficient to justify the addition.
In view of above actual position addition made under the head extra profit addition Rs.23,63,115/- is hereby deleted."
7. The CIT(A) also deleted the addition of Rs.17,730/- as under :- (Paragraph no.7)
"7. As regard the addition made by the AO under the head interest received from HDFC Bank at Rs.17,730/- as per AIR information. I carefully considered the submission of the appellant Authorised Representative and case records of the assessee the assessee has received interest of FDR from HDFC Bank and bank has deducted TDS on interest which details as under :-
| Date | Interest Amount | TDS Amount | |
| 28.06.2008 | 5.08 | - | |
| 01.07.2008 | 310.49 | - | |
| 26.12.2008 | 3944.01 | - | |
| 26.12.2008 | 5091.58 | 1082.05 | |
| 26.12.2008 | 1719.93 | 58.25 | |
| 31.03.2009 | 8665.32 | 892.53 | |
| 31.03.2009 | 884.04 | 91.05 | |
| TOTAL | 20304.86 | 2123.91 |
It is observed as per AIR information the total interest has received by the assessee Rs.17,730/- and TDS of Rs.2123.91 the assessee shown the interest on FDR with HDFC Bank Rs.20304.86 and TDS Rs.2123.91. The TDS amount of Rs.2123.91 tallied in both the case but in the AIR information interest only has shown Rs.17,730/- in place of Rs.20,304.86 hence the assessee has not concealed the particulars of income nor evasive any tax. Hence the addition made by the Assessing Officer is uncalled for and is hereby deleted. Assessee gets relief of Rs.17,730/-."
8. The CIT(A) also deleted the addition made by the Assessing Officer on account of various expenses as under :- (Paragraph no.8)
"8. As regard, the Assessing Officer has made addition under the head expenses claim in profit & loss account of Rs.82,098/-. I have gone through the facts of the case, submissions of the assessee and reason given by the Assessing Officer in the assessment order for invoking addition on the following heads :-
SUBHASH COAL TRADERS :-
| S.NO. | PARTICULARS | DEBITED TO THE PROFIT & LOSS ACCOUNT | DISALLO WANCES | |
| 1 | Travelling & Conveyance | 68445.00 | 5000.00 | |
| 2 | General Exp. | 103023.00 | 8000.00 | |
| 3 | Vehicle Exp. | 136537.00 | 27300.00 | |
| 4 | Depreciation on car | 118492.00 | 23798.00 | |
| SONEBHADRA COKE PRODUCT:- | ||||
| S.NO. | PARTICULARS | DEBITED TO THE PROFIT & LOSS ACCOUNT | DISALLO WANCES | |
| 1 | Staff Welfare | 48574.00 | 5000.00 | |
| 2 | Travelling & Conveyance | 77900 | 7000.00 | |
| 3 | General Exp. | 27195.00 | 3000.00 | |
| 4 | Generator Maintenance exp. | 31137.00 | 3000.00 | |
It is noticed that disallowances mentioned above have been made on ad-hoc and lump sum basis without assigning any justification or reasoning. It is observed that the Assessing Officer has made disallowance merely on the ground maintained that being not fully verifiable. This working of the Assessing Officer only shown that the disallowances have been made capriciously without properly measuring actual extent of unverifiability. The case clearly gets hit by the decision in the case of M/s Chandra Confectionary P. Ltd. reported in 2003(2) MTC 1022, wherein it has been held by the Hon'ble I.T.A.T. Bench, Lucknow that such ad-hoc disallowances, without assigning any reasons and without pointing out any defect, are unjustifiable. In view of above factual position, the disallowances mentioned in above are herby deleted."
9. We have heard the learned Representatives of the parties and records perused. The crux of the issue to be examined in this case whether the Assessing Officer is justified in estimating the extra profit particularly under the circumstances where he did not reject the books of account in accordance with section 145(3) of the Act.
9.1 To examine the issue, we would like to refer relevant provisions of section 145 and related scheme of the Act which are as under:-
"145. (1) Income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144]"
9.2 It is to note that under section 145(1), the income chargeable under the head "Profits and gains of business or profession" or "Income from other sources" has to be computed in accordance with the method of accounting regularly employed by the assessee, unless in the opinion of the Income-tax Officer, the income, profits and gains cannot properly be deduced therefrom or the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee. Under the sub-section (3) of section 145 in any case where the accounts are correct and complete to the satisfaction of the Income-tax Officer but the method employed is such that, in the opinion of the Income-tax Officer, the income cannot properly be deduced therefrom, then the computation has to be made upon such basis and in such manner as the Income-tax Officer may determine. However, if the Income-tax Officer is not satisfied about the correctness or completeness of the accounts of the assessee or where no method of accounting has been regularly employed by the assessee, the Income-tax Officer may make the assessment in the manner provided in section 144. Section 145 is mandatory and the Revenue is bound by the assessee's choice of a method regularly employed unless by that method the true income, profits and gains cannot be arrived at. In other words, section 145 enacts that for the purpose of section 28 (profits and gains of business, profession or vocation) and section 56 (income from other sources), income, profit and gains must be computed in accordance with the method of accounting regularly employed by the assessee. Therefore, if the assessee regularly employs a particular method of accounting and if no defects are found in the method or maintenance of accounts, the taxing authority is bound to compute the profits and gains of business or profession or vocation in accordance with the method employed by the assessee. Therefore, in case where the Income-tax Officer or the taxing authority finds that in maintaining accounts, the assessee has regularly employed a particular method and does not make any investigation to find or does not find any defect in the accounts and accept the accounts as they are, he is bound to compute the income in accordance with the accounts maintained by the assessee. Therefore, when the assessee represents to the taxing authority that its accounts are maintained by a method of accounting regularly employed, he expects the Income-tax Officer to act upon such method and compute the income accordingly.
9.3 The basic question for consideration is, whether the assessee has been following an acceptable method of accounting for declaring its income and whether the method employed by the assessee is such that correct profits cannot be deduced from the accounts of the assessee, so that the provisions of s. 145 of the IT. Act could apply. In the case under consideration the assessee has followed a consistent system of accounting and regularly employing the same system of accounting for computing its income from year to year. It is also not in dispute that this system of accounting was not found to be defective by the ITO. It must be said at the outset that the choice to account for income on an acceptable basis is that of the assessee, and not of the Department. This is, however, not an unlimited choice, because the ITO has always the liberty to examine the system of accounting regularly employed by the assessee, to determine whether the system of accounting is defective, and whether by following such system of accounting, correct profits can be deduced from the account books maintained by the assessee. If, on such scrutiny, the ITO comes to the conclusion that with reference to the method of accounting followed by the assessee, correct profits cannot be deduced, it is open to him to apply the provisions of s. 145 of the I. T. Act and make the assessment in an appropriate manner. In the present case, there is no material to indicate why the ITO considers the system of accounting regularly followed by the assessee to be defective, or the system of accounting followed to be such that correct profits cannot be deduced there from. The ITO's power to substitute a system of accounting for the one followed by the assessee, flows from the provisions of s. 145 of the I. T. Act. It is, therefore, imperative that before rejecting the system of accounting followed by the assessee, the ITO must refer to the inherent defect in the system and record a clear finding that the system of accounting followed by the assessee is such that correct profits cannot be deduced from the books of account maintained by the assessee. As already observed above, there is no finding to that effect in this case. The ITO's view that there could be a better system of accounting is no reason to the application of the provisions of s. 145 of the I. T. Act, especially in view of the fact that this system of accounting is followed by the assessee uniformly and regularly for the past several years, and was accepted by the Department without quarrel. It is not open to the ITO to intervene and substitute a system of accounting different from the one which is followed by the assessee, on the ground that the system which commends to the ITO is better. There are any number of Court pronouncements where it has been held that provisions of section 145 are mandatory and the proper method of accounting regularly followed by an assessee is binding on the assessing authorities. As early as in the case of CIT v. Sarangpur Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC), the Judicial Committee of the Privy Council noted that even if the profit brought out in the accounts is not the true figure for income-tax purpose, the same would be compulsory basis of computation of income if the true figure can be accurately deduced there from. Incidentally, this judgment of the Privy Council has been cited and relied upon in a number of judgments delivered thereafter by the Hon'ble Supreme Court and various High Courts in India.
9.4 In Keshav Mills Ltd. v. CIT [1953] 23 ITR 230 the Hon'ble Supreme Court held that the provisions of section 13 of 1922 Act (corresponding to section 145 of 1961 Act) was compulsory on the income-tax authorities and imposed upon them an obligation to accept the mode of accounting regularly adopted by the assessee except in cases when the proviso to that section came into operation. The profits earned and credited in the books of account were to be taken as the basis for computation of income.
9.5 In CIT v. A. Krishnaswamy Mudaliar [1964] 53 ITR 122 the Supreme Court reiterated that the Income-tax Officer is bound to compute the profits by appropriate adjustments from the accounts maintained by an assessee where a system of account is regularly employed. The Court held:
"The only departure made by section 13 of the Indian Income-tax Act from the legislation in England is that whereas under the English legislation, the Commissioner is not obliged to determine the profits of a business venture, according to the method of accounting adopted by the assessee, under the Indian Income-tax Act, prima facie, the Income-tax Officer has for the purpose of sections 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate adjustments from the accounts maintained taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting. But where in the opinion of the Income-tax Officer, the profits cannot properly be deduced from the system of accounting adopted by the assessee it is open to him to adopt a more suitable basis for computation of the true profits."
9.6 In the case of Md. Umer v. CIT [1997] 101 ITR 525 the Hon'ble Patna High Court have categorically stated at page 530, "once, therefore, the method of accounting employed by the assessee has been regularly employed and income, profits and gains can properly be deduced from such regularly employed method of accounting, that is the end of the matter for the purpose of proviso to sub-section (1) of section 145".
9.7 The profit or loss made by the businessman from that business, as aptly described in the case of Sunil Siddharthbhai v. CIT [1985] 156 ITR 509/23 Taxman 14W (SC) at page 521 remains in the "Womb of future". The measurement of periodic income is, to that extent, a matter of estimation on the basis of certain acceptable principle of accounting. For this reason, on the same facts and circumstances, the computation of business income may differ depending upon the method of accounting employed. In other words, it is not the legal position that on identical facts, the same amount of income should be assessable in the cases of all the assessees. This position has been clearly recognised by the Hon'ble Supreme Court in the case of A. Krishnaswamy Mudaliar (supra) that the quantum of allowance permitted to be deducted from the profits and gains of business would differ according to the system of accounting. In the case of CIT v. S.M. Chitnavis [1932] 2 Comp. Cas. 464 (PC), Lord Russel held that if a method of accounting is regularly employed then the assessee ought to get the advantage and suffer disadvantage of that system of accounting, and even though it may happen that in a particular year the revenue may gain in another year the assessee may gain. The Hon'ble Bombay High Court held in the case of CIT v. Tata Iron & Steel Co. Ltd. [1977] 106 ITR 363 that if the method of accounting followed by an assessee cannot be said unreasonable, the same has to be given effect to even if a better method can be visualised. Following judgments may also refer on the issue:-
CIT & EPT v. Chari and Ram [1949] 17 ITR I (Mad) ;
CIT v. Srimati Singari Bai [1945] 13 ITR 224 (All) ;
CIT v. K. Doddabasappa [1964] 54 ITR 221 (Mys) ;
Juggilal Kamlapat, Bankers v. CIT [1975] 101 ITR 40 (All).
CIT v. Anandha Metal Corpn. [2006] 152 Taxman 300 (Mad.)
R.B. Jessaram Fetehchand (Sugar Dept.) v. CIT [1970] 75 ITR 33 (Bom.)
Calcutta Co. Ltd.. v CIT [1959] 37 ITR 1 (SC)
CIT v. Margadarsi Chit Funds (P.) Ltd. [1985] 155 ITR 442/[1984] 19 Taxman 73 (AP)
CIT v. Gotanlime Khanij Udyog [2002] 256 ITR 243/120 Taxman 779 (Raj)
CIT v. Smt. Poonam Rani (Delhi) [2010] 326 ITR 223/192 Taxman 167 (Delhi)
9.8 These are all decisions which lend support to the proposition that the Department is bound by the assessee's choice of accounting regularly employed unless it can be said that the method of accounting followed by the assessee does riot reflect the true income. The AO after a careful scrutiny, came to the conclusion that the system of accounting employed by the assessee is consistent and regular and the ITO, therefore, is not entitled to interfere with the system of accounting followed by the assessee, unless it is possible for him to point out inherent defects in books of account and bring the case within the terms of s. 145 of the I. T. Act.
10. In the light of above discussion, in the case under consideration, we find that the Assessing Officer has failed to point out any single defect in the method of accounting followed by the assessee. He failed to point out any inherent defect in books of account maintained by the assessee. The Assessing Officer has simply rejected the books of account on the basis that the assessee has declared lower G.P. Whereas, the assessee has furnished the reasons for fall in G.P. which has been reproduced by the CIT(A) in his order at page nos.15, 16 & 17 as under :-
| "a. | Due to enhancement of sales Rs.325497416.00 in place of 78529214.00 for the A.Y. 2008-09 and which comes to 246968202.00 and increase sales at 314.49% and increase in G.P. Rs.10744885.00 from 4844270.00. It is accepted accounting principle that if the sales will increase percentage of Gross profit will go in decrease. | |
| b. | That the appellant has already mentioned the reason in fall of gross profit due to reason that :- |
| (a) | the appellant has debited EMD amount of Rs.4247420.00 which copy has already submitted during the course of hearing of the case which copy is enclosed as per book page no.87E it is hereby submitted that the Learned A.O. has already accepted the EMD for gone debited to the profit & loss account. In Para no.4 of page no.2 of sub-clause 1 the Assessing Officer has mentioned that (EMD for gone amount of Rs.4247420.00 was first time debited in the books. It is also submitted that the assessee has virtually booked the material for purchase but the certain reasons the coal was not lifted an security amount/booking amount deposit was to be for gone by the assessee. The expenditure incurred may be treated towards businesses expediency. The submission of this point filed by the assessee appears to be reasonable. | |
| (b) | The appellant has already mentioned in his reply to increase the entry tax Rs.6619919.00 has increased during the year in comparison to the A.Y. 2008-09 of 670694.00 which has already accepted to reason fall of G.P. by the assessing officer vide para no.4 page no.2 of sub-clause 2. | |
| (c) | That the coal freight payment by the appellant has increased Rs.44636248.00 during the year in comparison to yearly year Rs.9642986.00 due to increase of purchase. | |
| (d) | That the appellant has made payment of loading and unloading charges during the year Rs.4443090.00 in comparison to assessment year 2008-09 Rs.534051.00. | |
| (e) | That the total expenditure increased during the year Rs.10196635.00 in comparison to the assessment year 2008-09. If the said expenditure excluded the G.P. will come to 20941520.00 in place of 10744885.00 which will give gross profit rate 6.43%. This expenditure debited to the profit & loss account wholly and exclusively for the business purposes and allowable under section 37 of the income Tax Act, hence due to the aforesaid reason the G.P. has decreased 3.30% which is fully allowable and the enhancement of the gross profit from 3.30% to 4% is liable to be deleted. The Hon'ble Gauhati High Court in the case of Aluminum Industries Pvt. Ltd. v. CIT [1995] 80 Taxman 184 has given finding that the addition made straight on ground of low profit and less profit rate can not be sustained "The addition to the profit of the assessee made solely on the ground that it was low without giving the specific finding that the accounts of the assessee were not correct and complete are that the income could not be properly determined and deduced from the accounting method employed by the assessee, is not justified. The mere fact that there was a less rate of gross profit declared by an assessee as compared to the previous year would not bay itself be sufficient to justify the addition. |
In the light of the aforesaid submission the enhancement of gross profit from 3.30% to 4% and made extra profit addition Rs.2363115.00 is highly arbitrary and fanciful. It is not legal and regular and not according to private opinion. The Hon'ble Madras High Court in the case of Mysore Fertilizer Company v. CIT [1966] 59 ITR 268 has already given finding that the estimate must not be arbitrary beg and fanciful but must be legal and regular it according to the rules of reason and justice not according to private opinion. Hence the addition made by the assessing officer may kindly be deleted in the interest of justice."
11. The CIT(A) after detailed discussion found that the action of the Assessing Officer in invoking section 145(3) was not in accordance with law. The CIT(A) also examined enhancement made in turnover by the Assessing Officer and found that there was no justification in enhancing the turnover and applying arbitrary G.P. of 4%. The CIT(A) found force in assessee's submission and reasons for fall in G.P. and found that the effective G.P., after considering additions made by the Assessing Officer comes to 6.43%, such G.P. was not declared by the assessee in the past. In the light of detailed discussion, particularly under the facts and circumstances of the case, the Revenue has failed to point out any contrary material to the finding of CIT(A). We, therefore, do not find any infirmity in the order of CIT(A) in deleting the addition of Rs.23,63,115/- made by the Assessing Officer. Order of CIT(A) on the issue is confirmed.
12. As regards addition of Rs.17,730/-, we notice that the assessee has furnished reconciliation and the Revenue has failed to point out any contrary material against that reconciliation. In the light of the fact, the CIT(A) deleted the addition after considering the reconciliation filed by the assessee in respect of interest account and TDS. The Revenue has not pointed out any contrary material to the finding of CIT(A). In the light of the fact, order of the CIT(A) is confirmed.
13. As regards the disallowance of various expenses, we find that the CIT(A) has rightly deleted the adhoc addition of Rs.5,000/- out of travelling and conveyance expenses, Rs.8,000/- out of general expenses. However, the CIT(A) also deleted addition of Rs.27,300/- being 20% of vehicle expenses and 20% depreciation on car Rs.23,798/- on the ground that the adhoc disallowance cannot be made but the Assessing Officer has disallowed these expenses on account of personal use of vehicles by the proprietor. The Assessing Officer disallowed 20% which is found to be excessive. We find that 5% disallowance on account of personal use will be reasonable. We, therefore, restrict the disallowance to 5% instead of 20% made by the Assessing Officer. The Assessing Officer is directed to calculate the amount of disallowance @ 5% out of vehicle expenses and depreciation on vehicle instead of 20% made by the Assessing Officer.
14. In the result, appeal of the Revenue is partly allowed.
SECTION 65(105)(zzm) OF THE FINANCE ACT, 1994 - AIRPORT SERVICES - DEVELOPMENT FEE CHARGED AT AIRPORTS IS LIABLE TO SERVICE TAX
CIRCULAR M.F. (D.R.) INSTRUCTION [F.NO.106/COMMR(ST)/2009, DATED 8-7-2011
Representations have been received seeking clarification regarding leviability of service tax on the Development Fees charged at Airports particularly at Mumbai and Delhi by Mumbai, International Airport Pvt. Ltd. and Delhi International Airport Pvt. Ltd.
2. The matter have been examined. In this regard, attention is drawn to letter Dy. No. 106/Commr. (ST)/2Q09 Pt. (TRU), dated 13-10-2010 circulated by DGST, Mumbai, for raising protective demands in the matter. Service tax is being paid on the Passenger Service Fee (PSF) and User Development Fee (UDF) and a distinction is sought to be drawn between these and the DF. The stated purpose of permitting the levy of DF is to fund for upgradation, expansion or development of the airport.
3. As per Section 65(105)(zzm) of the Finance Act, 1994, 'airport service' is defined as any service provided or to be provided by airports authority or by any other person in any airport or a civil enclave. Section 65(3d) defines airport authority as "Airports Authority of India constituted under section 3 of the Airports Authority of India Act, 1994 (55 of 1994) and also includes any person having the charge of management of an airport or civil enclave". Section 68(1) of the Finance Act provides that every person providing taxable service to any person shall pay service tax at the rate specified in section 66. Further section 67(1) of the Finance Act, 1994 provides that where service tax is chargeable on any taxable service with reference to its value then such value shall be the gross amount charged by the service provider for such service provided or to be provided by him. In this case the Mumbai International Airport Pvt. Ltd. and Delhi International Airport Pvt. Ltd. are operating Mumbai and Delhi airports respectively and are providing service which is chargeable to service tax under Section 66(105)(zzm) of the Finance Act, 1994, Similarly at other airports which are operated by Airport Authority of India the said service is provided by Airport Authority of India and chargeable to service tax under the said section. The Service Tax is payable on the gross amount charged from the passengers for providing such service. It is immaterial how the gross amount charged for the service is treated in the books of the service provider and to what use it is being put to. Service tax is being levied under the Finance Act, 1994 and its leviability has to be solely determined under the provisions of this Act. The factum that gross amount charged for the service is being split into two parts, of which one portion is being used for a specific purpose by the service provider, is not relevant for the purpose of determining the value of the service. The value shall be determined only under the provisions of section 67 of the Act.
4. In view of the above it is clarified that Development Fee is chargeable to service tax under the 'airport service'.
5. It is further clarified that the contents of this letter reflect the interpretation of the law and does not override any statutory legal provisions. It is accordingly communicated that immediate action may please be taken to safeguard revenue on the above lines.
Introduction
1. The issue whether the gains arising from sale/dealing of shares are taxable under the head "Capital Gains" or under "Business Income" has been increasingly engaging the attention of the assessees, the tax department and, consequently, of the judiciary. The litigation on the issue has tended to only multiply. The question has attained greater relevance in the cases where an assessees (immaterial of whether it is an individual, firm, company or any other entity) have engaged in a series of frequent transactions and the turnover is high. The question also assumes relevance in cases where an assessee bifurcates his gains (on some rational, systematic and consistent basis by applying criteria such as the period of holding, or the actual/constructive delivery of shares, etc.) into Capital Gains or Business income, i.e., where he maintains a dual portfolio comprising of a trading portfolio and an investment portfolio and, consequently, has income both under the head "Capital Gains" as well as under "Business Income".
This article analyzes the issue with reference to the provisions of the Income-tax Act, 1961, the guidelines/circulars issued by the Central Board of Direct Taxes and the judicial pronouncements on the issue.
Tax treatment in cases of gains from sale/dealing of shares
2. The tax treatment in such cases would depend upon the fact whether the said activity has been undertaken by the assessee as an "investor" with a view to partake in the short/medium/long-term fortune of the investee-companies as opposed to that of a "trader" with a view to benefit from fluctuation in prices? Such a distinction, at a first glance, might seem to be exceedingly simple but in practice is complex and difficult.
2.1 Treatment under the Income-tax Act, 1961 - Income under the head "Profits and Gains of Business or Profession" is to be computed in the manner specified in sections 28 to 44 of the Income-tax Act, 1961 and, correspondingly, trading assets are dealt with under section 28 of the Act. Similarly, Capital Gains are to be computed in accordance with sections 45 to 55A of the Act. "Capital Assets" are defined in section 2(14) of the Act to include property of any kind held by an assessee whether or not connected with the business or profession. Long-term capital assets and gains are defined in section 2(29A)/(29B) and short–term capital assets and gains are defined in sections 2(42A)/(42B) of the Act.
2.2 Treatment in view of guidelines/circulars issued by the CBDT
2.2.1 CBDT's Instruction No. 1827, dated 31-8-1989 - The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 [F. No. 181/1/89-IT(AI), dated 31-8-1989] had initially brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital assets) and shares held as stock-in-trade (trading assets). After discussing a number of judicial decisions pronounced on the subject the CBDT had emphasized on fact that "although the tests laid down by the Courts may help determine the issue in particular cases, the decision will ultimately turn on the facts of each case."
2.2.2 CBDT's office memorandum, dated 13-12-2005 – Tests to distinguish between shares held as stock-in-trade and shares held as investments - The CBDT has also issued guidelines on tests for distinction between shares held as stock-in-trade and shares held as investment vide office memorandum, dated 13.12.2005 [F. No. 149/287/2005-TPL]which are reproduced as under:—
"Circumstances to be considered by the Assessing Officers in determining whether a person is a trader or an investor in stocks:-
| (i) | Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity; | |
| (ii) | Whether, the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or for earning dividends and interest. | |
| (iii) | Whether scale of activity is substantial; | |
| (iv) | Whether transaction were entered into continuously and regularly during the assessment year. | |
| (v) | Whether purchases are made out of own funds or borrowings; | |
| (vi) | The stated objects in the Memorandum and Articles of Association in the case of corporate assessee; | |
| (vii) | Typical holding period for securities bought and sold; | |
| (viii) | Ratio of sales to purchase and holding. | |
| (ix) | The time devoted to the activity and the extent to which it is the means of livelihood. | |
| (x) | The characterization of securities in the books of account and balance sheet as stock-in-trade or investment. | |
| (xi) | Whether the securities purchased or sold are listed or unlisted. | |
| (xii) | Whether investment is in sister/related concerns or independent companies. | |
| (xiii) | Whether transaction is by promoters of the company. | |
| (xiv) | Total number of stock dealt in | |
| (xv) | Whether money has been paid or received or whether these are only book entries". |
The above Memorandum also advised the Assessing Officers that no single criteria listed would be decisive and that the total effect of all these parameters should be considered to determine the nature of an activity.
2.2.3 CBDT's Circular No. 4/2007, dated 15-6-2007 on the issue - The Central Board of Direct Taxes has vide Circular No. 4/2007, dated 15-06-2007 [F. No. 149/287/2005-TPL] after discussing a number of judicial decisions on the subject pronounced by the Supreme Court and the Authority of Advance Rulings emphasized on the fact that "it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated a capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, i.e., capital gains as well as business income." The said Circular has also advised the Assessing Officers that "the above principles should guide them in determining whether, in a given case, the shares are held by the assessees as investments (and, therefore, giving rise to capital gains) or as stock-in-trade (and, therefore, giving rise to business profits). The Assessing Officers have been further advised that "no single principle would be decisive and that the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade?" The said Circular has discussed on the following judicial decisions:-
2.2.3.1 JUDICIAL PRONOUNCEMENTS ON THE ISSUE DISCUSSED IN THE ABOVE CIRCULAR
| ♦ | Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. | |
| CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC) | ||
| ♦ | The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment, was a question of law. This was a mixed question of law and fact. | |
| CIT v. H. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 (SC) | ||
| ♦ | 13. .............................................................. |
| "(i) | where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; | |
| (ii) | the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; | |
| (iii) | ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. |
| ** | ** | ** |
33. We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account, i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits."
Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR – New Delhi)
2.3 CBDT's guidelines/instructions vis-Ã -vis Judicial pronouncements - The above guidelines/instructions/circulars issued by the CBDT also need to be viewed in the context of judicial pronouncements. These Judicial pronouncements have been briefly given hereunder:—
| ♦ | It is fairly clear that where a person in selling his investment realizes an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realization of the investment but an act done of making profits. The distinction between the two types of transactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realizing a security or a gain in an operation of profit making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was trading transactions, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade? The surplus realized on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realizing his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in a higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business? |
Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC)
| ♦ | Mere fact that an investment company periodically varies its investment does not necessarily mean that the profits resulting from such variation are taxable under the Income-tax Act. Variation of its investments must amount to dealing in investments before such profits can be taxed as income under the Income Tax Act. |
Dalhousie Investment Trust Co. Ltd. v. CIT [1967] 66 ITR 473 (SC)
| ♦ | In deciding whether a venture is in the nature of trade no rigid formula can be applied. The total impression must be gathered from all the relevant facts and circumstances. | |
| In a transaction of purchase and re-sale where the purchase is made solely and exclusively with the intention to re-sell at a profit and the purchaser has no intention of holding the property for himself or otherwise using it, the presence of such an intention is a relevant fact and unless offset raises a strong presumption that the adventure is in the nature of trade. |
Premji Bhimji v. CIT [1971] 81 ITR 179 (Cal.)
| ♦ | In order that it may be held that a person is undertaking a trade or business, or entering into an adventure in the nature of trade, it is essential that the particular transactions under scrutiny should have been entered into with the intention of earning a profit. Though that is not a conclusive test it is certainly an essential test before such a conclusion can be drawn; but such a case is quite different from the case of a person purchasing property with the dominant intention of using it himself or enjoying it himself but at the same time expecting that at some future date if it goes up in value he may take advantage of the rise in the price. | |
| If a person invests money in land intending to hold it, enjoys its income for sometime, and then sells it at a profit, it would be a case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale, though profitable, are outside the domain of adventure in the nature of trade. | ||
| Though intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that, when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception. |
Bhogilal H. Patel v. CIT [1969] 74 ITR 692 (Bom.)
| ♦ | It is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. |
P. M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC)
| ♦ | The term "adventure in the nature of trade" clearly suggests that the transaction itself cannot properly be regarded as trade or business. It is characterized by some of the essential features that make up trade or business but not by all of them; and so even an isolated transaction can satisfy the description of an adventure in the nature of trade. It is impossible to evolve any formula which could be applied to determine the character of an isolated transaction. However, the following factors are relevant: Was the purchaser a trader and was the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? What is the nature of the commodity purchased and re-sold and in what quantity was it purchased and re-sold? If the commodity purchased is generally the subject matter of trade and if it is purchased in very large quantities it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity and thereby make it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and resale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture? The total effect of all the relevant factors and circumstances would determine the character of the transaction. |
CIT v. Himalayan Tiles & Marble (P.) Ltd. [1975] 100 ITR 177 (Bom.)
| ♦ | A number of principles have been enumerated succinctly and in the narrow compass of a few sentences:- |
| "(a) | The commodity purchased plays an important role in deciding whether a person was indulging in an adventure in the nature of trade or was making an investment? | |
| (b) | Whether the transaction was an isolated one or formed part of a series of transactions showing a tendency to indulge in trade is another important factor; | |
| (c) | The fact that the property bought has been sold within a short time does not by itself indicate that the transaction was in the nature of trade; | |
| (d) | If land has been purchased or a commodity which normally is not treated as a stock-in-trade has been purchased, the presumption is that the intention was to make an investment and not to indulge in an adventure in the nature of trade, and | |
| (e) | If the property purchased was capable of yielding income then again the inference was that an investment was intended and not an adventure." |
Michael A. Kallivayalil v. CIT [1976] 102 ITR 202 (Ker.)
| ♦ | Where there is an isolated transaction, some of the indicia for testing whether the transaction was a transaction in the nature of investment or of an adventure in the nature of trade are:- |
| (a) | Was the purchase a trade and where the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? | |
| (b) | What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? | |
| (c) | Did the purchaser, by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily resaleable? | |
| (d) | What were the incidents associated with the purchase and resale? | |
| (e) | Were they similar to the operations usually associated with trade or business? | |
| (f) | Are the transactions of purchase and sale repeated? | |
| (g) | In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? | |
| (h) | Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assessee or whether they represent borrowed money? |
G.Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC)
| ♦ | In order to determine whether profit arising on sale is business income, the following tests can be applied:— |
| • | The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment? If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, if would furnish a valuable guideline; | |
| • | The second test is why and how and for what purpose the sale was effected subsequently? | |
| • | The third test is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee, whether it has been treated as stock-in-trade, or has been shown in the books of account and balance sheet as an investment? This inquiry, though relevant, is not conclusive; | |
| • | The fourth test is how the assesee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments? This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation; | |
| • | The fifth test normally applied in cases of firms and companies is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity? | |
| • | The most important test is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, an inference can readily be drawn that the activity is in the nature of business. |
CIT v. Rewashanker A. Kothari [2006] 283 ITR 338/155 Taxman 214 (Guj.)
| ♦ | According to the Assessing Officer as well as the Tribunal, the shares were held as an investment of the assessee and, therefore, the profit earned by the assessee on the sale of the shares was to be treated as capital gains. However, the CIT was of the view that the shares were the stock-in-trade of the assessee and, therefore, profit earned on the sale thereof could not be treated as capital gains but as business income; | |
| It was noted by the Tribunal that in earlier assessment years, the assessee had shown the shares held in BT Tech Net Ltd., as an investment right from the date of purchase and this was shown as such in the balance sheet of the assessee, which was filed alongwith the return of income. No objection was taken to this position in the earlier years. However, the CIT had not decided that it was not an investment without there being any change in facts and, therefore, the Tribunal held that there was no occasion for the CIT to take a contrary view than what was disclosed and accepted on earlier occasions; | ||
| ♦ | Even on merits, the Tribunal came to the conclusion that the shares held by the assessee in BT Tech Net Ltd. were an investment and, therefore, any profit earned on the sale thereof was required to be treated as capital gains. Whether the shares were held by the assessee as an investment or stock-in-trade was a matter of fact, and we do not find any perversity in the view taken by the Tribunal that the shares were held as an investment. |
CIT v. Gulmohar Finance Ltd. [2008] 170 Taxman 483 (Delhi)
| ♦ | Capital gains viz-a-viz business income – sale of shares, there is nothing, in law, which prohibits a trader in shares to invest in shares. The intention of the assessee is relevant to determine whether he is carrying on the business in shares or investments. It was found that the assessee had been holding shares for a long time and had been utilizing the surplus funds only for the investments. Both, CIT(A) and Tribunal had concurrently found as a fact that assessee was dealing as also investing in shares while maintaining separate books of account and receipts from sale of shares in question was assessable under the head capital gains. Finding was not perverse, hence, no substantial question of law arose. |
CIT v. S. Rammaamirtham [2008] 217 CTR 206 (Mad.)
| ♦ | We were of the view that the Tribunal had not committed any error in the opinion expressed by it. The assessee held the shares as an investment and there was nothing to show that the investment was converted into stock-in-trade of the business of the assessee. In fact, the business of the assessee appeared to have been that of running a restaurant. It was true that one of the objects mentioned in the Memorandum of Association was with respect to buying and selling of shares but that was neither the business of the assessee nor was there any material on record to show that the assessee was regularly dealing in shares. | |
| The Supreme Court in Raja Bahadur Kamakhya Narain Singh(supra) took the view that the treatment given to a transaction in the books of account is of importance. As noted above, the assessee had shown its shareholding in JPIL as an investment and not a stock-in-trade of business. As already noted, there was nothing to show that the shares were converted into stock-in-trade. | ||
| Under these circumstances, the Commissioner as well as the Tribunal were justified in holding that the claim of the assessee for capital gains was justified and that the Assessing Officer was not correct in taking the income of the assessee from the sale of shares as business income. |
CIT v. Ess Jay Enterprises (P.) Ltd. [2008] 173 Taxman 1 (Delhi)
| ♦ | Whether where shares were never treated by assessee as stock-in-trade and they were held for earning dividend only, profit on sale of shares in question was to be treated as capital gains instead of as business income, as adopted by Assessing Officer? |
CIT v. N.S.S. Investments (P.) Ltd. [2007]158 Taxman 13 (Mad.)
| ♦ | The mere volume of transactions by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings, as each year is an independent year of the assessment, but in order to maintain consistency it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts. | |
| In the facts of the instant case, the assessee was holding the shares as an investment from year-to-year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude, but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains, both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction would not change the nature of transaction, which were being assessed as income from capital gains in the past several years. The Assessing Officer was to be directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. |
Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mum.)
| ♦ | The assessee was in the business of investments in shares and securities and it was never in the business of trading in shares. The term 'business' is defined in sec. 2(13). The "capital asset" is defined in sec. 2(14). The test to decide whether it is an investment or an adventure in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business and even multiple transactions sometimes are deemed as investments. So, the criteria for deciding whether it is investment or business is that of the intention of the assessee, viz., whether assessee's real intention is to invest or the intention is in the nature of trade. As per the memorandum of association of the assessee-company, it could be seen that the assessee-company was incorporated to engage in the business of investment. The finding given by the Tribunal was that the assessee had no intention to trade in shares. Hence, the purchase of shares could not be business asset in the hands of the assessee. The assessee had rightly offered the same under the head "Capital gain". The Tribunal also correctly arrived at a conclusion that it was only an investment activity and held that the profits derived from the sale of shares were subject to capital gain. The reasons given by the Tribunal were based on valid materials and evidences and there was no error or legal infirmity in the order of the Tribunal so as to warrant interference. Under the circumstances, no substantial question of law arose. |
CIT v. Trishul Investments Ltd. [2008] 305 ITR 434 (Mad.)
| ♦ | Reference may also be made to a recent judgment of the Mumbai Bench of the Income Tax Appellate Tribunal in the case ofGopal Purohit v. Jt. CIT [2009] 29 SOT 117 (Mum.), wherein the following observations have been made:- | |
| "In the present case, the assessee is also maintaining separate records for both types of transactions. Further, in the present case, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature, i.e., one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee's case on a more strong footing. Hence, in our view, the ratio of this decision would squarely apply to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain, depending upon the period of holding." | ||
| ♦ | The Hon'ble High Court in the case of CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom.) had concurred with the view of the Income Tax Appellate Tribunal with the following remarks:— | |
| "Held, dismissing the appeal, (i) that it was open to the assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, and this warranted no interference. | ||
| (ii) That there should be uniformity in treatment and consistency when facts and circumstances for different years were identical particularly in the case of the same assessee. | ||
| (iii) That entries in the books of account alone are not conclusive in determining the nature of income." | ||
| While delivering the above judgment the High Court had opined that it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, that there should be uniformity in treatment and consistency when facts and circumstances are identical, particularly in the case of the assessee and that entries in books of account along are not conclusive in determining the nature of income. Subsequently, the Special Leave Petition filed by the Department against the said judgment had been dismissed by the Hon'ble Supreme Court vide judgment, dated 15-11-2010 passed in the case of CIT v. Gopal Purohit [S.L.P. (Civil) No. 32891 of 2010 reported at 334 ITR 308 (Statutes)] | ||
| ♦ | The Delhi High Court in a recent judgment delivered on 9-1-2013 in the case of CIT v. Avinash Jain [2013] 214 Taxman 260/30 taxmann.com 133 has upheld the decision of the Hon'ble Income Tax Appellate Tribunal deleting the addition made by the Ld. Assessing Officer by holding that the intent and purport of the CBDT's Circular No. 4/2007, dated 15-6-2007 is that a taxpayer could have two portfolios, namely, an investment portfolio and a trading portfolio. The assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case, whenever the shares are sold and gains are made, the gains would be capital gains and not profits of any business venture. In this connection the following observations made by the Learned Judges are relevant and topical. | |
| "5. Before us the Ld. Counsel for the revenue submitted that while the CBDT's Circular only mentioned that it was "possible" for a taxpayer to have two portfolios, namely, an investment portfolio and a trading portfolio, the Tribunal has misunderstood the said Circular by holding that the Circular had "allowed" the assessee to maintain two types of portfolios. Although technically the Ld. Counsel for the revenue may be right, but that really does not make any difference when the entire circular is considered. The intent and purport of the circular is to demonstrate that a taxpayer could have two portfolios, namely, an investment portfolio and a trading portfolio. In other words, the assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case whenever the shares are sold and gains are made the gains would be capital gains and not profit of any business venture. In the latter case, any gains would amount to profits in business. This has been made clear by the CBDT's Circular in the remaining portion of the Circular itself. | ||
| 6. On the facts, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have held that the short-term capital gains and the long-term capital gains in the present case were out of the investment account and were not related to the trading account of the assessee. That being the position, no interference with the decision of the Tribunal is called for. No question of law arises for our consideration." |
Conclusion
3. In the light of the above discussions, it seems abundantly clear that the dominant judicial, administrative and professional opinion is that there is no bar on an assessee for maintaining two portfolios, viz., an investment portfolio and a trading portfolio. However, while accounts in respect of the said activities should not only be separately maintained, but, in addition a systematic criteria needs to be adopted and consistently applied to bifurcate the various transactions into each of the portfolios. In the case of an investment activity the intention to acquire and hold the underlying securities should be evident from the underlying facts and records. The transactions should invariably be backed by actual/constructive delivery of shares.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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