- In a case where a company is dealing in the sale and purchase of shares, prima-facie the profits derived from the sale and purchase of shares would be treated to be business income of the assessee since the assessee is a trader in shares, that does not mean that a trading firm cannot make long term investment in shares and income from sale of such shares may fall under the head of capital gains but when a trading firm is involved the onus would be heavily on such a firm to show that this investment was actually a long term investment
[2010] 6 taxmann 83 (HP)
HIGH COURT OF HIMACHAL PRADESH
Ankita Deposits and Advances Pvt. Ltd.
v.
CIT
ITA Nos.33 & 34 of 2008
June 18, 2010
FACTS
For the relevant years in question the assessee had filed returns declaring income and one of the main heads of income was by sale of shares. The assessee, however, claims that this income was not business income but was capital gains since it had invested the funds of the company in the said shares as a long term business investment. The returns filed under Section 143(1) were accepted as a matter of course. Later the Assessing Authority on perusal of the computation of income came to the prima facie view that the assessee engaged in the business of the trading of shares and the income shown as a long term capital gain should in fact be computed under the head of business income. He accordingly issued notice under section 148 to the Assessee. The assessee filed reply to the notice. A questionnaire was also handed over to the assessee by the Assessing Officer and the assessee was required to file replies thereto. The main ground raised by the assessee was that during the assessment years 1999-2000, 2000-01 and 2001-02 the assessee had clearly reflected the shares in question as investment and therefore, the revenue could not change the nature and character of this investment.
The Assessing Officer found that whenever loss of shares was declared the assessee would show the loss under the heading of income of business of profession but when it made a profit it would try and show the income under the head of long term capital gains. The reason for this is obvious. Long term capital gains are taxable only @ 10% whereas income from business is taxable @ 30%. The Assessing Officer came to the conclusion that the main motive of the assessee was to avoid payment of tax and, therefore, held that the income derived from the sale of shares was business income and held the assessee liable to pay tax and penalty thereon. Aggrieved by the order of the Assessing Officer the assessee filed an appeal before the Commissioner of Income-tax, who after hearing the same passed a detailed order rejecting the contention of the assessee. Thereafter, the assessee filed an appeal before the Income-tax Appellate Tribunal, which has also been rejected. Hence, the present appeals.
HELD
It is not disputed that the main nature of business carried on by the assessee is trading and investment in shares. It is a company dealing in the sale and purchase of shares. We are of the considered view that in such a case, prima-facie the profit derived from the sale and purchase of shares would be treated to be business income of the assessee since the assessee is a trader in shares. This does not mean that a trading firm cannot make long term investment in shares and income from sale of such shares may fall under the head of capital gains but when a trading company is involved the onus would be heavily on such a company to show that this investment was actually a long term investment.
The law is very well-settled that the onus is on the assessee to show that his investment is a long-term investment. Whether a particular holding of shares is by way of long-term investment or is a stock in trade is a matter solely within the knowledge of the assessee who holds the shares. Normally, it is the assessee alone who would be in a position to produce evidence whether he has maintained any distinction between those shares which are stock in trade and those shares which are long term investment. Another important principle of law is that the initial intention of the assessee as to whether he holds the shares as stock in trade or his investment is relevant and has to be taken into consideration while deciding the nature of holding of the assessee. Normally, when the assessee is engaged in the business of buying and selling the shares, the profit or loss on such shares would be the profit and loss of such business unless the assessee establishes that the shares in question were bought as a long term investment. In the profit and loss account in the year ending 1995-96 the assessee suffered loss of Rs.five lakh on the shares. It had also received some income. The loss in the sale of shares was adjusted against the income by treating it as a loss from business. The entire holding of the assessee company in various shares including the shares of the company sale of which led to the profit with which we are concerned was valued and reflected as stock in trade. Similar is the position for the assessment years 1996-97, 1997-98 and 1998-99. It is only thereafter that the assessee started reflecting the stock of shares of Information Technology under the head of investment. Earlier in the year 1998-99 the profit made from the sale of shares of this very company (Information Technology) was reflected in the profit and loss account. It is apparent that due to issuance of bonus shares and splitting of shares the value of the shares of Information Technology rose sharply and realizing that the company would be liable to pay 30% tax, the assessee started claiming the profits realized from sale of these shares as long term capital gains. After going through the entire record the revenue authorities have come to the conclusion that the shares of Information Technology was purchased by the assessee not by way of assessment but by way of trading. This is a pure finding of fact and not of law. It is true that the principles of law have to be applied and the question as to whether certain shares had been purchased by way of trade or by way of investment may be a mixed question of fact and law but if the authorities have properly considered the legal position then the resultant finding is basically a finding of fact.
JUDGMENT
Per Deepak Gupta, J.
1. Both these appeals involve identical questions of law. They only relate to different assessment years, therefore, they are being decided by a common judgement. No question of law has been framed in ITA 34 of 2008. However, the following question of law has been formulated in ITA No. 33 of 2008:
"Whether the Company dealing with the share holding can change its stand by
converting certain shares to be their long term capital asset?"
2. Shri B.C. Negi, learned counsel for the appellant submitted that in fact this question of law is not properly framed. He further submitted that another important question of law which arises is whether the Assessing Officer had jurisdiction to issue notice under Section 148 of the Income-tax Act, 1961.
3. The first question which arises is whether a party at the time of final hearing can be permitted to raise a substantial question of law which has not been framed earlier. Section 260A of the Incometax
Act reads as follows:-
260A. (1) An appeal shall lie to the High Court from every order passed in appeal by the Appellate Tribunal, if the High Court is satisfied that the case involves a substantial question of law.
(2) [The Chief Commissioner or the Commissioner or an assessee aggrieved by any order passed by the Appellate Tribunal may file an appeal to the High Court and such appeal under this sub-section shall be—]
(a) filed within one hundred and twenty days from the date on which the order appealed against is [received by the assessee or the Chief Commissioner or Commissioner];
(b) 92[***]
(c) in the form of a memorandum of appeal precisely stating therein the substantial question of law involved.
(3) Where the High Court is satisfied that a substantial question of law is involved in any case, it shall formulate that question.
(4) The appeal shall be heard only on the question so formulated, and the respondents shall, at the hearing of the appeal, be allowed to argue that the case does not involve such question:
Provided that nothing in this sub-section shall be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law
not formulated by it, if it is satisfied that the case involves such question.
(5) The High Court shall decide the question of law so formulated and deliver such judgment thereon containing the grounds on which such decision is founded and may award such cost as it deems fit.
(6) The High Court may determine any issue which—
(a) has not been determined by the Appellate Tribunal; or
(b) has been wrongly determined by the Appellate Tribunal, by reason of a decision on such question of law as is referred to in sub-section
(1). [(7) Save as otherwise provided in this Act, the provisions of the Code of Civil Procedure, 1908 (5 of 1908), relating to appeals to the High Court shall, as far as may be, apply in the case of appeals under this section.]
4. A bare reading of the aforesaid provision clearly shows that an appeal to the High Court under Section 260-A can only be filed if a substantial question of law is involved in the appeal. It is the duty of the High Court to frame the substantial questions of law at the time of the admission of the appeal. In terms of sub-section (4) of Section 260A, normally the appeal should only be heard on the question of law so formulated and the respondent would have a right to urge that the question so framed is not a substantial question of law or the question so framed does not arise in the appeal. However, the proviso to this sub-section clearly lays down that nothing in sub-section shall in any manner impinge on the right of the Court to hear, for the reasons to be recorded, the appeal on any other substantial question of law not framed by it, if it is satisfied that the case involves such question.
5. The Apex Court in Kondiba Dagadu Kadam vs. Savitribai Sopan Gujar and others, (1999) 3 SCC 722, was dealing with the provisions of Section 100 of the Code of Civil Procedure, which are almost identical to the provisions of Section 260A. The relevant portion of the judgement with which we are concerned, reads as follows:-
"3. After the amendment a second appeal can be filed only if a substantial question of law is involved in the case. The memorandum of appeal must precisely state the substantial question of law involved and the High Court is obliged to satisfy itself regarding the existence of such question. If satisfied, the High Court has to formulate the substantial question of law involved in the case. The appeal is required to be heard on the question so formulated. However, the respondent at the time of the hearing of the appeal has a right to argue that the case in the court did not involve any substantial question of law. The proviso to the section acknowledges the powers of the High Court to hear the appeal on a substantial point of law, though not formulated by it with the object of ensuring that no injustice is done to the litigant where such question was not formulated at the time of admission either by mistake or by inadvertence."
6. In Krishanchand v. Ramkrishna, 1993 MPLJ 655, a Single Judge of the High Court of Madhya Pradesh held that if at the admission stage the High Court formed an opinion that a particular question of law did not arise in the case or that it was not a substantial question of law it would deprive the High Court of its jurisdiction to permit a rehearing on that question of law at the stage of final hearing. On behalf of the respondent, it is urged that since questions of law relating to Section 147 were submitted for being framed by the appellant but were not actually framed, the presumption is that the High Court at the admission stage did not find these questions to be suitable questions of law and therefore, the appellant cannot be permitted to raise these questions at the final hearing.
7. Justice C.K.Thakker, in his treatise on the Code of Civil Procedure has submitted that the view of the Madhya Pradesh High Court does not appear to be correct. The observations of the learned author are as follows:-
"It is, however, submitted that the above view is not sound and does not lay down correct law. As stated above, at the stage of admission, the court looks at the matter from a bird's eye view and if prima facie satisfied, formulates a substantial question of law. Often such question is taken verbatim from the memorandum of appeal. Further, it is in very rare cases that such substantial question of law is apparent on the face of the record. In these circumstances, Parliament advisedly conferred power on the High Court to hear an appeal on any other substantial question of law, not formulated by it at the time of admission of appeal. The view taken in Krishanchand case (supra) would make the proviso to sub-section (5) nugatory and otiose. Unless compelled, the court will not interpret one provision of law which makes other provision redundant, ineffective and futile. On deeper scrutiny at the time of final hearing of appeal, the parties as well as the court may be able to come to a conclusion on a substantial question of law."
8. We are in respectful agreement with the view of Justice C.K.Thakker. This view is fortified by the pronouncement of the Apex Court in Kondiba Dagadu Kadam (supra). We are also of the view that it is the duty of the Court to do justice and incase a substantial question of law arises, it would be very extremely unfair not to permit the party to raise the substantial question of law only on the ground that such substantial question of law was not framed at the stage of admission of the appeal.
9. Having held so, we are of the view that the question already framed requires to be reframed and a fresh question of law also requires to be framed. We accordingly frame the following questions of law which arises for decision in these appeals:-
1. Whether the Assessing Officer was justified in reopening the assessment proceedings by issuance of notice under Section 148 of the Income-tax Act, 1961 since the Assessing Officer had no reason to believe that any income chargeable to tax has escaped an assessment?
2. Whether the assessee holds the shares which are the subject matter of dispute as an investment or was dealing with such shares as a trader and whether the income derived from such shares should be treated as business income or as a long term capital gain.
10. It is not disputed that for the relevant years in question the assessee had filed returns declaring income and one of the main heads of income was by sale of shares. The assessee, however, claims that this income was not business income but was capital gains since it had invested the funds of the company in the said shares as a long term business investment. The returns filed under Section 143(1) were accepted as a matter of course. Later the Assessing Authority on perusal of the computation of income came to the prima facie view that the assessee engaged in the business of the trading of shares and the income shown as a long term capital gain should in fact be computed under the head of business income. He accordingly issued notice under Section 148 to the Assessee. The assessee filed reply to the notice. A questionnaire was also handed over to the assessee by the Assessing Officer and the assessee was required to file replies thereto. The main ground raised by the assessee was that during the assessment years 1999-2000, 2000-01 and 2001-02 the assessee had clearly reflected the shares in question as investment and therefore, the revenue could not change the nature and character of this investment.
11. It is not disputed that the main nature of business carried on by the assessee is trading and investment in shares. It is a company dealing in the sale and purchase of shares. We are of the considered view that in such a case, prima-facie the profit derived from the sale and purchase of shares would be treated to be business income of the assessee since the assessee is a trader in shares. This does not mean that a trading firm cannot make long term investment in shares and income from sale of such shares may fall under the head of capital gains but when a trading company is involved the onus would be heavily on such a company to show that this investment was actually a long term investment.
12. The Assessing Officer found that whenever loss of shares was declared the assessee would show the loss under the heading of income of business of profession but when it made a profit it would try and show the income under the head of long term capital gains. The reason for this is obvious. Long term capital gains are taxable only @ 10% whereas income from business is taxable @ 30%. The Assessing Officer came to the conclusion that the main motive of the assessee was to avoid payment of tax and, therefore, held that the income derived from the sale of shares was business income and held the assessee liable to pay tax and penalty thereon. Aggrieved by the order of the Assessing Officer the assessee filed an appeal before the Commissioner of Income-tax, who after hearing the same passed a detailed order rejecting the contention of the assessee. Thereafter, the assessee filed an appeal before the Income-tax Appellate Tribunal, which has also been rejected. Hence, the present appeals.
13. At the outset, we first take up the first question as to whether the Assessing Officer could reopen the assessment. The contention of the
assessee is that once the returns filed by it had been accepted by the department for the three previous years in which it was clearly mentioned that the investment in the shares in question was a long term investment the department could not change its opinion and therefore, the notice is without jurisdiction. The learned counsel for the appellant has relied upon following judgements of the Apex Court.
14. In The Income-tax Officer, 1 Ward, District VI, Calcutta and others vs. Lakhmani Mewal Dass, (1976) 3 SCC 757, the Apex Court while dealing with Section 147 before it is amended held as follows:-
"8. The grounds or reasons which lead to the formation of the belief contemplated by Section 147 (a) of the Act must have a material bearing on the question of escapement of income of the assessee from assessment because of his failure or omission to disclose fully and truly all material facts. Once there exist reasonable grounds for the Income-tax Officer to form the above belief, that would be sufficient to clothe him with jurisdiction to issue notice. Whether the grounds are adequate or not is not a matter for the Court to investigate. The sufficiency of grounds which induce the Income-tax Officer to act is, therefore, not a justiciable, issue. It is, of course, open to the assessee to contend that the Income-tax Officer did not hold the belief that there had been such non-disclosure. The existence of the belief can be challenged by the assessee but not the sufficiency of reasons for the belief. The expression "reason to believe" does not mean a purely subjective satisfaction on the part of the Income-tax Officer. The reason must be held in good faith. It cannot be merely a pretence. It is open to the court to examine whether the reasons for the formation of the belief have a rational connection with or a relevant bearing on the formation of the belief and are not extraneous or irrelevant for the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings in respect of income escaping assessment is open to challenge in a court of law.
xxx. xxx… xxx… xxx…
12. The powers of the Income-tax Officer to reopen assessment though wide are not plenary. The words of the statute are "reason to believe" and not "reason to suspect." The reopening of the assessment after the lapse of many years is a serious matter. The Act, no doubt, contemplates the reopening of the assessment if grounds exist for believing that income of the assessee has escaped assessment. The underlying reason for that is that instances of concealed income or other income escaping assessment in a large number of cases come to the notice of the income-tax authorities after the assessment has been completed. The provisions of the Act in this respect depart from the normal rule that there should be, subject to right of appeal and revision finality about orders made in judicial and quasi judicial proceedings. It is, therefore essential that before such action is taken the requirements of the law should be satisfied."
15. Reliance has also been placed on the judgements of the Supreme court cases in Income-tax Officer, Calcutta vs. Selected Dalurband Coal Co. Pvt. Ltd. (1997) 10 SCC 68 and Assistant Commissioner of Income-tax vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. (2008) 14 SCC 208.
16. On the other hand, Shri Kuthiala, learned counsel for the respondent, placed reliance upon the two judgements of the Punjab and Haryana High Court in Punjab Leasing Pvt. Ltd. vs. Assistant Commissioner of Income –tax, (2004) 267 I.T.R. 779, Aditya and co. Vs. Commissioner of Income-tax and another, (2005) 279 I.T.R 47. We need not to refer to these judgements in detail since in our view the law stands settled by the judgement of the Apex Court in Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra) wherein in a very exhaustive judgement the Apex Court has brought out the differences in the provisions prior to the amendment thereof w.e.f. 1st April, 1989 and 1st June, 1999. After considering entire provision the Apex Court held as follows:-
"19. Section 147 authorises and permits the Assessing Officer to assess or reassess income chargeable to tax if he has reason to believe that income for any assessment year has escaped assessment. The word "reason" in the phrase "reason to believe" would mean cause or justification. If the Assessing Officer has cause or justification to know or suppose that income had escaped assessment, it can be said to have reason to believe that an income had escaped assessment. The expression cannot be read to mean that the Assessing Officer should have finally ascertained the fact by legal evidence or conclusion. The function of the Assessing Officer is to administer the statute with solicitude for the public exchequer with an inbuilt idea of fairness to taxpayers.
20. As observed by the Delhi High Court (sic the Supreme Court) in Central Provinces Manganese Ore Co. Ltd. v. ITO [1991 (191) ITR 662], for initiation of action under section 147(a) (as the provision stood at the relevant time) fulfillment of the two requisite conditions in that regard is essential. At that stage, the final outcome of the proceeding is not relevant. In other words, at the initiation stage, what is required is "reason to believe", but not the established fact of escapement of income. At the stage of issue of notice, the only question is whether there was relevant material on which a reasonable person could have formed a requisite belief. Whether the materials would conclusively prove the escapement is not the concern at that stage. This is so because the formation of belief by the Assessing Officer is within the realm of subjective satisfaction (see ITO v. Selected Dalurband Coal Co. Pvt. Ltd. [1996 (217) ITR 597 (SC)]; Raymond Woollen Mills Ltd. v. ITO [1999 (236) ITR 34 (SC)].
21. The scope and effect of section 147 as substituted with effect from April 1, 1989, as also sections 148 to 152 are substantially different from the provisions as they stood prior to such substitution. Under the old provisions of section 147, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed. To confer jurisdiction under section 147(a) two conditions were required to be satisfied: firstly the Assessing Officer must have reason to believe that income, profits or gains chargeable to income tax have escaped assessment, and secondly he must also have reason to believe that such escapement has occurred by reason of either (i) omission or failure on the part of the assessee to disclose fully or truly all material facts necessary for his assessment of that year. Both these conditions were conditions precedent to be satisfied before the Assessing Officer could have jurisdiction to issue notice under section 148 read with section 147(a) But under the substituted section 147 existence of only the first condition suffices. In other words if the Assessing Officer for whatever reason has reason to believe that income has escaped assessment it confers jurisdiction to reopen the assessment. It is, however, to be noted that both the conditions must be fulfilled if the case falls within the ambit of the proviso to section 147. The case at hand is covered by the main provision and not the proviso."
17. In view of the law laid down above, it is apparent that the powers of the Assessing Officer to reopen assessment are very wide. True it is that the word 'reason to believe' does not mean a mere change in opinion. If the Assessing Officer has at any time expressed an opinion or come to a finding on the facts before him and decided the matter in a particular way then just because a different interpretation is possible the Assessing Officer may not have the power to issue a notice under Section 148. However, in case, no opinion has been expressed then whatever be the reason as long as they prima facie satisfy the conscience of the Court, the Court would not interfere in the issuance of a notice. In the present case, as pointed out above, no reasoned findings were given on the returns filed by the assessee for the three previous years. The returns were accepted as a matter of course. It is well known that returns filed by the assessee are accepted to be correct and scrutiny is done in a few cases only. In these cases, later it transpired that in fact the assessee was evading tax by claiming the income from the sale of shares to be long term capital income. The Assessing Officer had, therefore, reason to believe that the assessee was causing loss to the revenue and his action was detrimental to the interest of revenue. The reason
for this prima facie opinion was that when losses were being incurred on the sale of shares the assessee claimed these losses under the head of business income and prior to the assessment year 1999-2000 the assessee had been showing the investment in these very shares as a trading investment and not a long term capital investment. We, therefore, upheld the notice issued under Section 148 and are of the opinion that the Assessing Officer was justified in reopening the assessment. Question No.1 is accordingly decided in favour of the revenue.
18. Coming to the main question of law. A number of authorities have been cited before us, including M/s Investment Ltd. vs. The Commissioner of Income-tax, Calcutta, (1970) 3 SCC 333, The Commissioner of Income-tax (Central), Calcutta vs. M/s Associated Industrial Development Co. (P) Ltd., Calcutta, (1972) 4 SCC 447, The Commissioner of Income-tax, Nagpur vs. M/s Sutlej Cotton Mills Supply Agency Ltd., (1975) 2 SCC 538 as well as Rajesh Jhaveri Stock Brokers Pvt. Ltd. cited above.
19. The law is very well settled that the onus is on the assessee to show that his investment is a long term investment. Whether a particular holding of shares is by way of long term investment or is a stock in trade is a matter solely within the knowledge of the assessee who holds the shares. Normally, it is the assessee alone who would be in a position to produce evidence whether he has maintained any distinction between those shares which are stock in trade and those shares which are long term investment. Another important principle of law is that the initial intention of the assessee as to whether he holds the shares as stock in trade or his investment is relevant and has to be taken into consideration while deciding the nature of holding of the assessee. Normally, when the assessee is engaged in the business of buying and selling the shares, the profit or loss on such shares would be the profit and loss of such business unless the assessee establishes that the shares in question were bought as a long term investment. In the profit and loss account in the year ending 1995-96 the assessee suffered loss of Rs.five lacs on the shares. It had also received some income. The loss in the sale of shares was adjusted against the income by treating it as a loss from business. The entire holding of the assessee company in various shares including the shares of the company sale of which led to the profit with which we are concerned was valued and reflected as stock in trade. Similar is the position for the assessment years 1996-97, 1997-98 and 1998-99. It is only thereafter that the assessee started reflecting the stock of shares of Information Technology under the head of investment. Earlier in the year 1998-99 the profit made from the sale of shares of this very company (Information Technology) was reflected in the profit and loss account. It is apparent that due to issuance of bonus shares and splitting of shares the value of the shares of Information Technology rose sharply and realizing that the company would be liable to pay 30% tax, the assessee started claiming the profits realized from sale of these shares as long term capital gains. After going through the entire record the revenue authorities have come to the conclusion that the shares of Information Technology was purchased by the assessee not by way of assessment but by way of trading. This is a pure finding of fact and not of law. It is true that the principles of law have to be applied and the question as to whether certain shares had been purchased by way of trade or by way of investment may be a mixed question of fact and law but if the authorities have properly considered the legal position then the resultant finding is basically a finding of fact. In the present cases, we find no error in the orders of the revenue. Therefore, we answer the second question against the assessee and in favour of the revenue.
20. The appeals are accordingly dismissed. Both the questions are answered in favour of the revenue and against the assessee. No order as to costs.
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