principle of consistency in assessing profit from sale of shares
Assessee submitted that it was only engaged in investment of shares and that revenue had accepted profit on sale of investment as capital gain in all earlier years .since transaction of shares was in nature of investment in shares, profit received was to be treated as capital gains .Taking into consideration principle of consistency, when facts and circumstances were identical in assessee’s own case in earlier years, transactions of assessee was rightly held as investment in shares chargeable to capital gain
in the ITAT Kolkata Bench ‘C’
Income-tax Officer, Ward-12(1), Kolkata
R.V. Investment & Dealers Ltd.
MAHAVIR SINGH, JUDICIAL MEMBER AND AKBER BASHA, ACCOUNTANT MEMBER
IT APPEAL NOS.586 & 609 (KOL.) OF 2009 C.O. NOS. 32 & 33 (KOL.) OF 2009
[ASSESSMENT YEAR 2005-06]
JUNE 24, 2011
The Assessing Officer found that the assessee-company was engaged in the business of buying and selling of shares/units. The Assessing Officer noted that the main object of the assessee-company was to buy, invest, acquire, subscribe, to hold, dispose of and deal in shares/units etc. and the assessee-company had carried out, in a systematic and organized manner, numerous transactions of buying and selling of shares/units, which constituted its business activities. He assessed the assessee’s income under head ‘business income’ as against those disclosed by the assessee under head ‘capital gains’. The assessee submitted that it was only engaged in investment of shares and that the revenue had accepted profit on sale of investment as capital gain in all earlier years and since such assessment had reached finality, the revenue’s stand in this particular year was against the principle of consistency. On appeal, the Commissioner (Appeals) reversed the order of the Assessing Officer. He held that the investment had been clearly disclosed in the balance sheet. When the shares are accounted for in the books as investment, the volume of transactions/frequency of transaction of such share cannot alter its status from investment to trading. The shares were purchased with the intention of earning dividends in addition to the prospect of making profit on sale of such investment at an opportune moment. He, therefore, held that the assessee-company was an investment company and income earned from sale/purchase of shares was capital gain.
On second appeal:
The revenue mainly contended that the purchase and sale of shares was within a short period. However, it was found from records that such shares had been held by the assessee for a considerable period of time say 3-4 months and even more than year in some of the cases, and, hence facts had not been properly verified. The revenue also contended that shares were purchased with the borrowed fund as well as raising share capital by the assessee. It was found from facts that the assessee had not issued any fresh share capital during the year for which money had been received and indeed it was the only amalgamation of other companies with the assessee which had taken place in respect of which shares had been issued. In some years, there was no issue of any fresh shares for which the assessee had received money and even there was no secured or unsecured loan received. Loan was related to textile business of the assessee-company and same had been squared up in the very next year. The entire investment was out of the assessee’s own fund. [Para 8]
The Assessing Officer had treated value of investment as stock-in-trade and as such he had computed the alleged business income as such as per the requirement of section 145. For making any estimation of income, the Assessing Officer had to first reject the books of account and then proceed. Since the same had not been done by the Assessing Officer, the action of Assessing Officer in such respect suffered from infirmity. On argument of that the assessee had carried on this business in a systematic and organized manner, it was found that the expenses incurred were day-to-day routine expenses necessary for running of the company. Bad debt related to the textile business of the assessee which was carried on in earlier year and had closed since 2002. Since the money in respect of such business was not recovered from the debtors of such textile business, the amount was being written off in a particular year and as such it could not be construed as routine expenses. [Para 9]
In earlier years revenue having accepted such gain as capital gain only and the assessment having reached finality, it could not be contended in subsequent year that such conclusion by the Assessing Officer was erroneous in those years. Besides, the Assessing Officer had passed such orders after due discussion. Therefore, the Rule of Consistency has to be followed although the Principle of Res judicata does not apply to income-tax proceedings, where the facts are identical and issue in hand is the same. In case there is change in facts and circumstances, the decision can be changed but in the present case the revenue could not bring any new fact or evidence which changed the factual position from earlier year, In such circumstances, the Court could not take a different view. [Para 10]
In view of the above factual and legal position, it was to be held that the assessee’s transaction of shares was in the nature of investment in shares and, accordingly, delivery based transactions in the instant case were to be treated as those in the nature of investment and profit received was to be treated either as short-term capital gain or long-term capital gain depending upon the period of holding. Accordingly, it was to be held that the Commissioner (Appeals) had rightly held the transaction of the assessee as investment in shares chargeable to capital gain by taking uniformity in treatment and observing the principle of consistency, when the facts and circumstances identical in assessee’s own case in earlier years. Accordingly, the appeal of revenue was to be dismissed. [Para 13]