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IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH “A”, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA No. 91/Hyd/2013 Assessment Year: 2009-10 Tanvi Financial Services Pvt. Ltd., Secunderabad.
Dy. Commissioner of Incometax, Circle – 2(2), Hyderabad.
vs.
PAN – AACCT 5778R (Appellant)
(Respondent)
Assessee by : Revenue by : Date of hearing Date of pronouncement
: :
Shri Sunil Kumar Jain & Shri Sanjay Kumar Sharda Shri A. Sitarama Rao 09-01-2017 18-01-2017
O RDE R PER S. RIFAUR RAHMAN, A.M.: This appeal filed by the assessee is directed against the order of CIT(A)- III, Hyderabad, dated 12/11/2012 for AY 2009-10. 2.
Briefly the facts of the case are that the assessee is a company
deriving income from providing finance against the securities, deal in shares and securities etc. It filed its return of income for the AY 200910 on 29/08/2009 admitting total income of Rs. 1,34,97,1340/-. The AO completed the assessment u/s 143(3) determining the total income at Rs. 2,19,96,480/- by making the following disallowances: i) Short term capital gain treated as business income ii) Disallowance of RCC iii) Disallowance of provision 3.
Rs. 77,38,940/Rs. 3,500/Rs. 84,95,856/-
The assessee is in appeal before us against the above
disallowances mentioned at i) and iii).
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2 ITA No. 91/H/2013 Tanvi Financial Services P. Ltd., Sec’bad.
4.
As regards the 1 st issue relates to the addition of Rs.
77,38,940/- treating the short term capital gain on sale of shares under the head ‘income from business’, the facts are that the assessee company derives income from providing finance against securities and in dealing in shares and securities. The company has large stock of shares and deals in the same regularly. In its return of income the assessee had declared short term capital gain of Rs. 57,58,188/- on account of sale of shares. The AO found that the transactions pertained to the main business of the assessee and as such there was no investment involved. By giving the following reasons, the AO assessed the income under the head ‘income from business’: “i) The assessee has itself submitted during the course of assessment proceedings that the company's primary business is to provide finance against the securities besides dealing in shares & securities etc., but not investment in shares. The usage of the word 'deal in shares & securities etc.’ itself clearly defines the intention of the assessee to trade in shares but not to investment in shares. ii) Further it is to state that there is no such provision that if the shares are subscribed In initial public offer then it may not be treated as trading activity, as contended by the: assessee. iii) The intention of the assessee is not to make investment in shares but earn quick profits as can be seen from the period of holding the shares in the annexure submitted the course of hearing” . 5.
Aggrieved by the order of the AO, the assessee preferred an
appeal before the CIT(A) and filed written submissions, which were extracted by the CIT(A) at pages 4 to 6 of his order. After considering the submissions of the assessee, the CIT(A) confirmed the action of the AO by holding that the facts and evidence point out unmistakably to the fact that the entire transaction was organized so as to obtain the quick profits through sale of the shares and it is not only the frequency of the transaction but the intent inferred from the overall circumstances which will determine whether the transactions are in the nature of business or not.
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6.
Aggrieved by the order of the CIT(A), the assessee is in appeal
before us. 7.
Before us, the ld. AR of the assessee submitted that the issue
in dispute is squarely covered by the decision of the coordinate bench of ITAT Hyderabad in assessee’s own case for AY 2008-09 in ITA No. 232/Hyd/2012, order dated 25/03/2013, a copy of which has been filed in the paper book at pages 13 to 19. 8.
Ld. DR conceded to the submissions of the AR of the assessee.
9.
Considered the rival submissions and perused the material facts
on record. Similar issue came up for consideration before the Tribunal in assessee’s own for AY 2008-09 (supra), wherein the coordinate bench has held as under: “8. We have heard both the parties and perused the record as well as gone through the orders of the authorities below. The Assessee is in the business of providing finance by way of loans against securities. They are not in the business of trading in shares. During the year under appeal the Assessee purchased 5 scrips and mostly through initial public offer and sold most of them. According to the Assessee this is only part of investment activities and they have not indulged in trading in shares. They have also shown the balance shares retained at the end of the year as investments. There is nothing on record to indicate that they had indulged in purchase and sale of shares in the earlier occasions. What weighed with the lower authorities was the frequency of purchase and sales. The frequency of purchase and sale alone cannot be the criterion. As explained by the Assessee bulk of shares were obtained from initial public offer and the sale of these shares were spread over more than one transaction. Hence sale of the same shares on more than one day cannot be considered as frequent sales. Whatever was retained was shown as investments. In the circumstances there is nothing to show that the shares sold alone were treated by the Assessee as stock in trade and the balance shares was shown as investment in the balance Sheet. The assessee is in the business providing finance and not trading in shares. Considering all the factors, we conclude that the purchase and sale of shares during the year under appeal can be considered
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as a part of investment activity of the Assessee and is not trading activity. Hence we direct the AO to assess the profit on sale of the shares of Rs 1,19,80,047/- as short term capital gains and not as income from business. Further, we wish to make it clear that it is not our opinion that in every case income earned from sale of shares is to be treated as capital gain. It all depends upon the facts and circumstances of respective case. We also make it clear that our finding in earlier paras is relating to this assessment year only and the assessee cannot make any plea that in all subsequent assessment years also the income is to be assessed under the head ‘income from capital gains’.”
As the issue under consideration is materially identical to that of AY 2008-09, respectfully following the same, we direct the AO to assess the profit on sale of the shares as short term capital gains and not as income from business. Accordingly, this issue is decided in favour of the assessee. 10.
As regards the next issue pertaining to disallowance for loss on
equity stock option amounting to Rs. 84,95,856/-, the AO disallowed the same by observing that the assessee company had debited to P&L A/c a provision for loss on equity stock option/index option, the assessee ought to have added back the same to the income returned which the assessee failed to do so. 11.
Before the CIT(A), the assessee stated that actually it was
holding various stock options and at the end of the year it valued stock options at cost or market value whichever is less. This loss reflects the lower market value of its stocks on the last day of the FY. 12.
While confirming the disallowance made by the AO, the CIT(A)
observed that the assessee has not substantiated its claim through any documentary evidence. No details of any stock options have been provided. It is not even clear whether the stock options belonged to the assessee or to some clients. Moreover, any diminution in the value of the shares of stock or stock options is not to be taken in to the provision.
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13.
Aggrieved by the order of the CIT(A), the assessee is in appeal
before us. 14.
Ld. AR submitted that as per assessee’s accounting policy, loss
on equity stock option of Rs. 84,95,856/- was made in the books of account i.e. the assessee valued its closing stock at cost or market value whichever is lower as per the accounting policy and has accounted for the loss in the value of closing stock. This value has been taken as opening stock value in the next AY i.e. AY 2010-11. He submitted that if this amount is added in the current AY then the same amount should be added to the loss of the next AY 2010-11. The total loss incurred in derivatives in the AY 2010-11 was Rs. 6,55,87,256/-. Further, it was submitted that as the assessee has already made the loss on equity stock option/index option of Rs. 84,95,856/-, the balance amount of Rs. 5,70,91,400/- was recognized under Schedule G in the balance sheet for the AY 2010-11 in Profit/loss on equity stock future/index future and the same was explained vide letter dated 21/12/2011 before the revenue authorities. The AR, therefore, requested the bench to consider the said submissions and delete the disallowance made on this count. 15.
Ld. DR relied on the orders of revenue authorities.
16.
Considered the rival submissions and perused the material facts
on record.
We have noticed that the assessee has submitted
additional evidence due to the fact that ld. CIT(A) has observed in his order that the assessee has not substantiated its claim through any documentary evidence and no details of any stock options have been provided. As a part of paper book, assessee has submitted the copy of the delivery courier statement issued by “PCS Securities Ltd.” and contract notes of “F&O”. These documents were forwarded to AO by the ld. DR for his comments. The AO has submitted in his comments
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6 ITA No. 91/H/2013 Tanvi Financial Services P. Ltd., Sec’bad.
on
04/08/2016
justifying
the
additions
made
but
he
has
not
commented on the additional evidence and also not passed any negative comments on the additional evidence, it shows that he had accepted the additional evidence and the same is in order. Ld. DR also accepted that the evidence submitted by ld. AR is in order due to the fact that AO has not recorded any negative comments on the additional evidence. Hence, the additional evidence submitted by ld. AR is considered to be in order. 16.1 We have noticed that the assessee is following the Accounting Standard consistently over the years. The assessee has declared the above Accounting Policy in notes to accounts, which is part of balance sheet as under: “3. For equity stock option/index option, provision is made for the mark to market loss as on balance sheet date however mark to market profit is not recognized on prudent basis.”
As per the above accounting policy, which is followed consistently over the years and accepted by the department, the assessee is recognizing the mark to market loss, which is the actual loss on carrying amount of investment. As per prudent norms, it is recognized as loss. Since, assessee is following the accounting method, it amounts to actual loss and cannot be termed as ‘provision’. The term ‘Provision” is something which cannot be ascertained as per the information available at the year end. But in this case, assessee has proper information and ascertained the loss at the year end, which is different from ‘provision’. As per the facts of the case, assessee is eligible to claim the loss on stock options and accordingly, ground raised by the assessee is allowed.
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17.
In the result, appeal of the assessee is allowed. Pronounced in the open court on 18 th January, 2017.
Sd/(P. MADHAVI DEVI) JUDICIAL MEMBER
Sd/(S. RIFAUR RAHMAN) ACCOUNTANT MEMBER
Hyderabad, Dated: 18 th January 2017 kv Copy to:1) Tanvi Financial Services Pvt. Ltd., 406 B, 4 th Floor, Minerva Complex, SD Road, Secunderabad – 500 003. 2) DCIT, Circle – 2(2), Hyderabad. 3) CIT(A) - IV, Hyderabad 4 CIT – III, Hyderabad 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File
