Principal Commissioner of Income Tax-7 v. Pavitra Commercial Ltd

S. RAVINDRA BHAT, J

A. K. CHAWLA, J FEBRUARY 09, 2018 rc

* IN THE HIGH COURT OF DELHI AT NEW DELHI Date of decision: 09.02.2018 + ITA 146/2018 & CM APPL. 5059/2018 ITA 149/2018 ITA 150/2018 & CM APPL. 5080/2018 PRINCIPAL COMMISSIONER OF INCOME TAX-7..... Appellant Through Mr. Sanjay Kumar, Adv. versus PAVITRA COMMERCIAL LTD. ..... Respondent Through None. CORAM: HON'BLE MR. JUSTICE S. RAVINDRA BHAT HON'BLE MR. JUSTICE A. K. CHAWLA HON'BLE MR. JUSTICE S. RAVINDRA BHAT (ORAL) % In these appeals, the questions of law urged for various years are, as follows : 1) Whether the decision of the ITAT affirming the Appellate Commissioner's view with respect to the assessee's claim of capital gain – rather than business income as held by the Assessing Officer is justified? 2) Whether the ITAT was justified in holding that under the mercantile system of accounting, interest income accrued on basis of the assessee's contention that recovery as well as interest (on such deposits) is doubtful? 2. On the first question, this Court notices that the AO brought to tax substantial amount for the concerned Assessment Year rejecting the assessee's claim of capital gains. The assessee was engaged in the business of investment and securities and had at the relevant time maintained a distinct portfolio in respect of stock in trade and investment. For the particular year, the assessee acquired shares in certain companies that underwent amalgamation. Those companies, which had investment portfolio containing shares of the companies in which the assessee had holdings, were treated as stock in trade. The assessee shifted some of the shares to its investment account and later sold them during the Assessment Year. The AO rejected the assessee's claim and held the profits to be business income. In doing so, the AO relied upon the judgment of the Supreme Court in Dalhousie Investment Trust Co. Ltd. v. CIT, Central Calcutta, (1968) 68 ITR 486 (SC) and other rulings. The CIT(A) upon re-appraisal of the facts and consideration of the authorities, held as follows : "4.3 I have carefully considered the facts of the case, order of the AO and submissions made by the ld. AR. The central point of dispute in this ground of appeal is regarding the head of income under which the profit earned on shares/mutual funds is taxable. The appellant has vehemently claimed that as per the regular consistently followed policy of the company, the appellant had certain share portfolio under the category of investments on which long term and short terms capital gains have been disclosed, whereas on the sale of shares held as stock in trade profit earned have been disclosed as business income. On the other hand the AO is of the view that the entire income earned by the appellant on sale of shares and mutual funds is taxable as business income. It is noted that the finding of the A0 is primarily based on the notes of audit, wherein it is stated that during the year the appellant company has acquired the amalgamating companies which were engaged in the trading of shares. The appellant is pleading that the observation of the ld. AO is misconceived as it is a matter of record that the companies which have been amalgamated the appellant company were also holding these shares as investment. It is further emphasized by the ld. AR that the AO has misinterpreted the general terminology of the notes of the accounts/audit wherein even the sale of investments are termed as trading in shares. After considering the rival submissions and various case laws quoted by the AO as well as relied upon by the ld. AR, I am of the considered view that in the facts and circumstances of the instant case the view taken by the AO does not appear correct, it is seen from the records of the appellant that the appellant company had distinct portfolio of shares and mutual funds under two categories i.e investments and stock in trade. The contention of the ld. AR, that it is not open for the AO to summarily reject the decisions of the Board of directors of the company as it i