Assessee was found to be deriving its income from dividends received from mutual funds and equity shares interest from investment of capital in partnership firm.
Based on the information supplied by Assessee pursuant to notice issued under Sections 143(2) ad 142(1) of the Income Tax Act, 1961 (Act), the Assessee was found to be deriving its income from dividends received from mutual funds and equity shares interest from investment of capital in partnership firm.
For the purposes of present dispute, the Assessee in the regular course of its business had invested a sum of money during the relevant year in a Dividend plan to earn dividend but the investment made was prematurely redeemed. The Assessee as claimed had booked this profit as a short-term capital gain. The Assessing Officer (AO) treated this as stock-in-trade of Assessee and accordingly revenue so generated was taken as business income of the Assessee.
It was the case of Revenue that the impugned transaction of the Assessee was in the usual course of business of trading in shares and securities and not for making static investments. Assessee, on the other hand, contended that merely because the securities were not kept for their full term and were redeemed before the stipulated period, profits on premature redemption cannot be treated as earned in the conduct of business of sale as also transfer of shares and securities, but on premature redemption of an investment.
The Court observed that the Assessee is not a business entity in the nature of a manufacturing unit or marketing concern which, making departure from its normal business or marketing activities, had acquired a ‘capital asset’ as distinguished from ‘business asset’.
When sale and purchase of shares, debentures and other securities are subjected to vagaries of market forces which considerably affect quantum of profits and also at times results into losses, investments enuring for fixed returns are safe and are sometimes used by investment companies to offset their possible losses in trading of other scrips. Impugned deposit, accordingly, was not at all an activity made in departure from the normal business activity of the Assessee.
Merely because such deposit was made in a not freely tradeable fund with a tenurial investment plan yielding high income and was shown as an investment in books of accounts of the Assessee, it was held as not sufficient to conclude that the deposit was intended to be converted into long term or short term capital asset. By no means can such a step by the Assessee could be construed as a bid to increase its capital freezing its volatility of liquidity. If the Assessee, an investment company, would venture to enhance its capital by foreclosing liquidity, then it will lose dynamics of its business and would become static earning only from interest or dividends received from its fixed and capitalised investments. Such an investment company then would lose the vibrance of its business. Such deposits are usually made by the investment companies like the Assessee, as a strategy and pursuant to intelligent planning as stock in profitable trade, yielding fixed income when other derivatives may be in a situation of great flux giving no clear picture of high or low tides.
Hence, it was held that the impugned deposit was clearly made in the usual course of its activity of trading in money and in the discharge of its normal business. Even though it was in the nature of tenurial investment, redemption of such investment during the same previous year of investment speaks volumes of the intention of the Assessee that it had not intended to use such deposit as a capitalised investment.
It was further held by the Court that merely because there was a single transaction of deposit, that does not leads to a conclusion that the investment was in the nature of raising capital as to constitute trade, it is not necessary that there should be a series of transactions of purchase and sale. The deposit was made by the Assessee to earn profits on its deposit and thus it was in the nature of stock-in trade. The act of the Assessee was held to be maneuverability and manipulation used as a consistent course, blinding the vision of the revenue to reduce its tax liability, which can never be held as either ‘tax planning’ or ‘tax organization’ or ‘tax management’ but a manipulation to frustrate the tax effect and legal provisions for which actually, there is no escape for the assessee. The plea of the Revenue was accordingly allowed.
[The Commissioner of Income Tax-II, Ludhiana vs. M/s Pooja Investment Pvt. Ltd., Ludhiana]
(P&H HC, 11.04.2014)