Urudavan Investment & Trading (P.) Ltd. v. Additional CIT

Case Laws Analysis
Applied CIT v. Gopal Purohit 2010 TaxPub(DT) 1272 (Bom-HC)
Distinguished Wallfort Shares & Stock Brokers Ltd. v. Income Tax Officer & Anr. 2005 TaxPub(DT) 1742 (Mum-Trib)

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The Tax PublishersITA No. 6997 (Mum) of 2011 2013 TaxPub(DT) 1128 (Mum-Trib) : (2013) 056 SOT 0069 INCOME TAX ACT, 1961 --Income--Accrual Cent tax--During assessment proceedings, it was noticed by assessing officer that in return of income for relevant assessment year, i.e., 2008-09 assessee declared profits on transactions relating to future and options (F&O). It also declared loss on account of certain scripts and also earned profit out of cent tax but did not offer said profit for tax in relevant year and offered said profit in tax for next year 2009-10. He recognized said profit as profit of assessee in year under consideration and added same to its income on ground that when assessee in matter of F & O had debited notional loss, it should have credited notional gain/profit to P & L A/c as income. Commissioner (Appeals), however, deleted addition. *Held:* Was justified. As appreciated value of stock was realized in next assessment year, profit/gain being Cent tax was accrued and assessable in next year 2009-10. It is a settled law that the accounting principles, which are applicable to the any stock in trade is equally applicable to the open positions of F & O. The notional loss is allowable as long as there are no contingencies are attached and the notional gains should be allowed in the year of realization based on the principle of prudence. The question is what if there is difference between the anticipated profits quantified in an year and the actual profits realized thereafter. On finding that there is no dispute on the fact that the appreciated value of stocks is realized and afforded to tax in the next year. Therefore, the order of the Commissioner (Appeals) on this issue does not call for any interference. [Para 18] Income Tax Act, 1961 Section 5 INCOME TAX ACT, 1961 --Head of income--Business loss or short-term capital loss Loss suffered on redemption of units of mutual funds --Assessee-company was engaged in business of trading and investment in share and securities. Assessee had purchased units of mutual funds and subsequently it earned dividend income out of these units. However, assessee sold all its units in January and March 2008. Due to redemption of units it incurred loss and claimed same as business loss, however, assessing officer treated same as short-term capital loss. Commissioner (Appeals) on applying principle of res judicata and consistency allowed same as business loss. *Held:* Was not justified. Revenue authorities have not compared position of relevant year with earlier years issue is therefore remanded back. It is a settled position that for applying the principle of res judicata as well as the rule consistency, the facts become relevant and the orders of assessing officer/Commissioner (Appeals) do not contain any whispers on this important aspect. The judgment of Honble High court of Bombay in the case of Gopal Purohit has set certain guidelines to determine whether shares gains assessable as STCG or business profits. [Para 12] Apart from the facts, the 'circumstances' are also equally relevant in matters of applying the 'rule of consistency' qua the issue relating to the principle of 'res judicata'. On this issue, there is need for furnishing of related facts by the assessee and the revenue authorities need to give finding on the same. The expression 'circumstances' may refer to comparability of applicable law, tax rates, loss -profits issues, relevance of provisions relating to dividend stripping issues etc. The comparison for treatment and consistency must involve the data of many years. Impugned order of the Commissioner (Appeals) is in adequate and contains blanket conclusions on principle of consistency and res judicata without bringing facts of many years on to the records. In that sense; the order of the Commissioner (Appeals) can't be categorized as a speaking one in the matter. [Para 14] It is an undisputed fact that the dividend stripping provisions have been brought into statute in the year 2002 and amended subsequently in the year 2005 and it may contribute against the rule of consistency in matters relating to the 'circumstances' discussed above. Of course, the arguments of counsel relating to entries in the books of account as stock-in-trade consistently may likely go in favour of the assessee. Unfortunately, the fact relating to entries is one of the many parameters set for concluding if a transactions is of business nature or otherwise. Further, counsel's reliance on the order of the Tribunal on the validity of Commissioner's order under section 263 is misplaced as the issue in the review order relates to the valuation of the bonus units of MFs and not on if the units are held as stock-in-trade or investments. [Para 15] Further, it is also relevant to mention that the assessee claims that he holds the units/shares both as stock in trade and partly as investments and he can rightly hold so. Computation chart depicts the relevant details of business income/loss and the capital gains/loss. Assessing officer needs to examine the basis on which the entries are made by the assessee in the books. [Para 15] Fact of the present case is that the frequency and number of transactions are undisputedly too low, earning of dividend appears to be a dominant intention in acquisition of the two units of MFs, obviously the scrips are few, figures appear of high value, it does not appear that the assessee has the intention of holding on to the units as investment, the conduct of the assessee in dealing with the shares over the years is also relevant factor and adequate facts for determining the same are not brought on to the records etc. Therefore, no single criterion shall decide the issue on hand i.e., if the units of two MFs i.e., (UTI select fund & UTI Nifty index fund) purchased by the assessee in October/December 2007 for Rs. 78 cr (out of which the borrowed funds are Rs 42.25 cr) and sold in January/March 2008 i.e after 90 days of holding and after earning dividend of Rs 30,82,83,539, for the loss of Rs. 42,01,31,205 are to be held as stock in trade or as investments?. In any case, one keep all the issues/question open and direct them to the assessing officer for fresh examination and decision in the set aside assessment. In the set aside proceedings before the assessing officer, the assessee is required to file adequate data for establishing the claim. assessing officer is directed to admit evidences or additional evidences that may help for substantiating the claims. Assessing officer shall grant reasonable opportunity of being heard the assessee. [Para 15] SUBSCRIBE FOR FULL CONTENT

The Tax PublishersITA No. 6997 (Mum) of 2011
2013 TaxPub(DT) 1128 (Mum-Trib) : (2013) 056 SOT 0069

INCOME TAX ACT, 1961

--Income--Accrual Cent tax--During assessment proceedings, it was noticed by assessing officer that in return of income for relevant assessment year, i.e., 2008-09 assessee declared profits on transactions relating to future and options (F&O). It also declared loss on account of certain scripts and also earned profit out of cent tax but did not offer said profit for tax in relevant year and offered said profit in tax for next year 2009-10. He recognized said profit as profit of assessee in year under consideration and added same to its income on ground that when assessee in matter of F & O had debited notional loss, it should have credited notional gain/profit to P & L A/c as income. Commissioner (Appeals), however, deleted addition. Held: Was justified. As appreciated value of stock was realized in next assessment year, profit/gain being Cent tax was accrued and assessable in next year 2009-10.

It is a settled law that the accounting principles, which are applicable to the any stock in trade is equally applicable to the open positions of F & O. The notional loss is allowable as long as there are no contingencies are attached and the notional gains should be allowed in the year of realization based on the principle of prudence. The question is what if there is difference between the anticipated profits quantified in an year and the actual profits realized thereafter. On finding that there is no dispute on the fact that the appreciated value of stocks is realized and afforded to tax in the next year. Therefore, the order of the Commissioner (Appeals) on this issue does not call for any interference. [Para 18]

Income Tax Act, 1961 Section 5

INCOME TAX ACT, 1961

--Head of income--Business loss or short-term capital loss Loss suffered on redemption of units of mutual funds --Assessee-company was engaged in business of trading and investment in share and securities. Assessee had purchased units of mutual funds and subsequently it earned dividend income out of these units. However, assessee sold all its units in January and March 2008. Due to redemption of units it incurred loss and claimed same as business loss, however, assessing officer treated same as short-term capital loss. Commissioner (Appeals) on applying principle of res judicata and consistency allowed same as business loss. Held: Was not justified. Revenue authorities have not compared position of relevant year with earlier years issue is therefore remanded back.

It is a settled position that for applying the principle of res judicata as well as the rule consistency, the facts become relevant and the orders of assessing officer/Commissioner (Appeals) do not contain any whispers on this important aspect. The judgment of Honble High court of Bombay in the case of Gopal Purohit has set certain guidelines to determine whether shares gains assessable as STCG or business profits. [Para 12] Apart from the facts, the 'circumstances' are also equally relevant in matters of applying the 'rule of consistency' qua the issue relating to the principle of 'res judicata'. On this issue, there is need for furnishing of related facts by the assessee and the revenue authorities need to give finding on the same. The expression 'circumstances' may refer to comparability of applicable law, tax rates, loss -profits issues, relevance of provisions relating to dividend stripping issues etc. The comparison for treatment and consistency must involve the data of many years. Impugned order of the Commissioner (Appeals) is in adequate and contains blanket conclusions on principle of consistency and res judicata without bringing facts of many years on to the records. In that sense; the order of the Commissioner (Appeals) can't be categorized as a speaking one in the matter. [Para 14] It is an undisputed fact that the dividend stripping provisions have been brought into statute in the year 2002 and amended subsequently in the year 2005 and it may contribute against the rule of consistency in matters relating to the 'circumstances' discussed above. Of course, the arguments of counsel relating to entries in the books of account as stock-in-trade consistently may likely go in favour of the assessee. Unfortunately, the fact relating to entries is one of the many parameters set for concluding if a transactions is of business nature or otherwise. Further, counsel's reliance on the order of the Tribunal on the validity of Commissioner's order under section 263 is misplaced as the issue in the review order relates to the valuation of the bonus units of MFs and not on if the units are held as stock-in-trade or investments. [Para 15] Further, it is also relevant to mention that the assessee claims that he holds the units/shares both as stock in trade and partly as investments and he can rightly hold so. Computation chart depicts the relevant details of business income/loss and the capital gains/loss. Assessing officer needs to examine the basis on which the entries are made by the assessee in the books. [Para 15] Fact of the present case is that the frequency and number of transactions are undisputedly too low, earning of dividend appears to be a dominant intention in acquisition of the two units of MFs, obviously the scrips are few, figures appear of high value, it does not appear that the assessee has the intention of holding on to the units as investment, the conduct of the assessee in dealing with the shares over the years is also relevant factor and adequate facts for determining the same are not brought on to the records etc. Therefore, no single criterion shall decide the issue on hand i.e., if the units of two MFs i.e., (UTI select fund & UTI Nifty index fund) purchased by the assessee in October/December 2007 for Rs. 78 cr (out of which the borrowed funds are Rs 42.25 cr) and sold in January/March 2008 i.e after 90 days of holding and after earning dividend of Rs 30,82,83,539, for the loss of Rs. 42,01,31,205 are to be held as stock in trade or as investments?. In any case, one keep all the issues/question open and direct them to the assessing officer for fresh examination and decision in the set aside assessment. In the set aside proceedings before the assessing officer, the assessee is required to file adequate data for establishing the claim. assessing officer is directed to admit evidences or additional evidences that may help for substantiating the claims. Assessing officer shall grant reasonable opportunity of being heard the assessee. [Para 15]