Sulaxmi Export & Marketing Pvt.Ltd., ... vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL " C " BENCH, AHMEDABAD (BEFORE SHRI MUKUL Kr. SHRAWAT, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 2385/AHD/2011 (Assessment Year: 2008-09)

Sulaxmi Export & V/S Asstt. Commissioner of Marketing Pvt. Ltd. 710, Income Tax (OSD), Circle-8, Mahakant Building Opp. Ahmedabad V.S. Hospital, Ellisbridge Ahmedabad-380006 (Appellant) (Respondent)

PAN: AADCS0294C

Appellant by : Shri Tushar P. Hemani , A.R. Respondent by : Shri M.K. Singh, Sr. D.R.

(आदे श)/ORDER

Date of hearing : 11-03-2015 Date of Pronouncement : 26 -03-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Assessee is against the order of CIT(A)-XIV, Ahmedabad dated 27.07.2011 for A.Y. 2008-09.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a company stated to be engaged in the business of trading in shares. Assessee filed its return of income for A.Y. 2008-09 on 25.09.2008 declaring total loss of Rs. 80,03,910/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order 2 ITA No 2385/AHD/2011 . A.Y. 2008-09 dated 20.10.2010 and the total income was determined at Rs. 8,08,300/-. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who granted partial relief to the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us and has raised the following grounds;-

1. The Order passed by A.O. and partially confirmed by Learned CIT(A) is bad in law and on facts and hence requires to be quashed.

2. The Learned A.O, and C.I.T. (A) have erred in treating the loss of Rs. 88,12,209/- arising out of sales of share of one of the scrips as capital loss as against trading loss shown by the appellant.

3. The Learned A.O. and CIT(A) ought to have considered the contention of the appellant that ;

(i) The appellant's main activity is purchase and sale of shares.

(ii) The shares of particular scrip were shown as investment instead of as stock in trade only for the convenience of identification as the said share were locked in for trading for a period of one year.

(iii) The said shares were meant for trading only.

4. Before us, ld. A.R. submitted that though various grounds have been raised but the only issue is with respect to treating the losses on sale of share as "capital loss".

5. During the course of assessment proceedings and on perusing the balance sheet, A.O noticed that Assessee had shown investment of Rs. 2.3 crores in 1,50,000 equity shares of RPG Life Sciences Ltd. in F.Y. 2006-07. He also noticed that the aforesaid shares were sold in the year under consideration and were shown in the Profit and Loss account as a business transaction. The Assessee was asked to justify its claim of loss and treating the same as 3 ITA No 2385/AHD/2011 . A.Y. 2008-09 business loss. On perusing the details furnished by the Assessee, A.O noticed that 1,50,000 equity shares were allotted to the Assessee @ 158 per share during the F.Y. 2005-06 and the shares was held as investments and was also reflected as investments in the audit balance sheet for A.Y. 2005-06 & 2006-07. The submission of the Assessee that it had converted the shares into stock in trade as on 02.04.2007 was also not found acceptable to the A.O for the reason that in the tax audit report submitted by the Assessee, it was stated by the tax auditor that there was no conversion of capital assets into stock in trade during the year under consideration. Considering all the aforesaid facts, A.O concluded that the loss on sale of equity shares of RPG Life Sciences Ltd amounting to Rs. 88,12,209/- was a "long term capital loss" and cannot be considered as a business transaction and therefore cannot be adjusted against the business income in view of the provisions of Section 71(3) and 74(1) of the Act. He accordingly disallowed the adjustment of loss against the business income. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who upheld the order of A.O by holding as under:-

3.4 Decision I have carefully perused the assessment order and the submissions given by the appellant.

From the perusal of assessment order and the written submission given by the A. O., the following facts come to light.

(i) The appellant is maintaining two portfolio in the balance sheet one for investment and other for trade.

(ii) The main activity of the appellant is purchase and sale of shares.

(iii) As per the accounting policy mentioned in the audit report, the investment are valued at cost and stock in trade are taken at year end and closing at closing market rate or cost whichever is lower.

4 ITA No 2385/AHD/2011 . A.Y. 2008-09

(iv) The appellant purchased the shares of RPG Life Sciences in the F. Y. 2006-07 for an amount of Rs. 2,37,00,000/-. The shares were allotted in preferential issue and were locked in for trading for one year.

The appellant has submitted that the shares of RPG Life Sciences were intended to be a trading scrip and not as investment. For the sake of identification, the shares were placed in the investment account. The submission of the appellant is not acceptable as it is an afterthought. The facts and the circumstances show that the intention of the appellant was to purchase the shares as an investment. The claim that these were put in the investment portfolio for the sake of identification is an afterthought. The intention of the appellant is demonstrated by the fact that the shares are placed in the investment portfolio and were valued at cost. The shares were purchased for a consideration of Rs. 2,37,00,000/- and were shown i.e. at cost in accordance with the accounting policy for valuation of the investment. The fact that the shares have been bought in preferential allotment is also an indicator that this was intended to be an investment. Therefore, the A. O. was justified in treating the loss arising out of the sale of these shares as capital loss and not as trading loss. The ground of appeal is, therefore, dismissed.

4. The fifth ground of appeal is regarding set off of carried forward business loss. Perusal of the assessment order shows that the A. O. has not given any finding regarding non-allowance of set off of. carry forward business loss. However, he is directed to verify the records and allow the set off of carry forward business loss as per the law.

6. Aggrieved by the aforesaid order of ld. CIT(A), Assessee is now in appeal before us.

7. Before us, ld. A.R. reiterated the submissions made before A.O and CIT(A) and further submitted that the shares which were acquired by the Assessee was subject to lock in period of 1 year and therefore the Assessee thought it fit to debit it to the "investment" account so as to identify such share separately from other shares which were not subject to any lock in period. On 02.04.2007 i.e. at the end of lock in period of 1 year, Assessee 5 ITA No 2385/AHD/2011 . A.Y. 2008-09 transferred the shares from "investment" account to regular "stock in trade"

account and therefore it treated the aforesaid shares at par with other shares being part of stock in trade. He further submitted that since the shares were sold in the normal course of business, the resultant loss was adjusted against the "business income" from trading of shares and the mere accounting treatment in the books of account cannot determine the taxability of any income. He further placed reliance on the decision in the case of CIT vs. Arvind Investments Ltd. 192 ITR 365 (Calcutta). Ld. D.R. on the other hand pointed to the various findings of A.O and supported the order of A.O and ld. CIT(A).

8. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to the treatment of loss on sale of equity shares of RPG Life Sciences Ltd. which were allotted to the Assessee on 23.02.2006. From the perusal of the Balance sheet as on 31st March, 2007, it is seen that the shares of RPG Life Sciences Ltd of Rs. 2.37 crores are reflected under the head of "investment" and are valued at cost which is also in line with the accounting policies ( as reflected in the annual accounts and placed at page 29 of the paper book,). On the other hand, if the Assessee had treated the shares of RPG Life Sciences Ltd. as part of stock in trade, as is the submission before us, then it should have valued the shares at closing market rate or cost whichever is lower which is the policy adopted by Assessee for value stock in trade. The submission of the Assessee that at the expiry of the lock in period i.e. on 02.04.2007, the shares of RPG Life Science Ltd. were transferred to stock in trade is not supported by any evidence more so when the Assessee is a limited Company and is required to follow certain guidelines, procedures prescribed under the Accounting

6 ITA No 2385/AHD/2011 . A.Y. 2008-09 Standards when there is transfer from "investment" to stock in trade. Further, it is also seen that under clause 12A of the Tax Audit Report for A.Y. 2008-09 which is placed at page 84, against the column with respect to particulars of capital asset converted into stock in trade, the auditor has mentioned as Nil meaning thereby that auditor has also certified that there is no conversion of capital asset to stock in trade. The submission of the Assessee that for the practical purposes it had treated the shares as stock in trade cannot be accepted in view of the fact that the Accounting Standard 13 on Accounting of Investments, issued by the Institute of Chartered Accountants of India which is being followed by the Assessee, states that shares, debentures and other securities held as stock in trade are to be accounted for and disclosed similar to the current investment and with respect to current investment in the Accounting Standard, it is stated that it has to be valued at lower of cost and fair value whereas on the other hand, the Assessee has in its books treated the shares as investment and accordingly valued the shares at cost and therefore its contention of holding the shares at stock in trade is also not supported by the method of accounting and its valuation. Before us, ld. A.R. has also not placed any material on record in support of its contention that for the sake of identification, the shares were placed in investment account. Before us, Assessee has also relied on the decision of Calcutta High Court in the case of CIT vs. Arvind Investments Ltd. (supra). We however, find that the aforesaid decision are on different facts and are not applicable to the present facts of the Assessee and therefore not applicable. Considering the totality of the aforesaid facts, we find that no reason to interfere with the order of ld. CIT(A) and thus this ground of Assessee is dismissed.

7 ITA No 2385/AHD/2011 . A.Y. 2008-09

9. In the result, the appeal of the Assessee is dismissed.

Order pronounced in Open Court on 26 - 03 - 2015.

Sd/- Sd/- (MUKUL Kr. SHRAWAT) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad