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2010 (4) TMI 1069 - AT - Income TaxIncome from sale of shares - business income or capital gain - under which head the profit or gain on the sale of the shares/securities should be taxed? - shares are stock-in-trade of the assessee - HELD THAT - As perused the Balance Sheet filed by the assessee and as per the books of account, the assessee has treated the entire investment in the shares as an investment only and not as a stock in trade. Another important aspect to be considered here is the assessee is not a share broker nor he is having a registration with any Stock Exchange. Moreover, some scripts are held for more than five years and it is not a case of the A.O that there were any derivative transactions by the assessee nor is it a case of the A.O that there were transactions without any delivery. In the present case, both the authorities have not disputed that the transactions are completed with the delivery. The intention of the assessee cannot be read from his mind but it reflects in its conduct, the way he treats the transactions. The assessee has not borrowed any money for investing in shares and used his own surplus funds and these facts have not been disputed by the A.O. The proposition has been accepted by the Board also in Circular No. 4/ 2007 that the assessee is entitled to maintain two portfolios. It is true that the rule of res judicata is not applicable to the Income Tax Proceedings, but at the same time, it is also well settled principles that if there is no change in the facts, then, there should be consistency in the approach of the Revenue authorities while deciding the tax liability of the assessee. The transactions of sale and purchase of the shares by the assessee cannot be treated in the line of trading in the shares nor it can be treated as an adventure in the nature of the trade. We hold that the entire income from the sale and purchase of the shares is to be assessed under the head capital gain as rightly declared by the assessee either Long Term Capital Gain (LTCG) or Short Term Capital gain (STCG) depending upon the period of holding. We, therefore, direct the A.O to accept the capital gains declared by the assessee from the sale of the shares and accordingly, set aside the order of the Ld CIT(A).
Issues Involved:
1. Treating gains from the sale of shares as 'Income from Business' instead of 'Capital Gains'. 2. Disallowance under section 14A of the Income Tax Act. Detailed Analysis: Issue 1: Treating Gains from Sale of Shares as 'Income from Business' Instead of 'Capital Gains' The assessee challenged the order of the CIT(A) which upheld the action of the AO in treating the gains from the sale of shares amounting to Rs. 1,03,21,714/- as 'Income from Business' instead of long-term capital gains of Rs. 96,11,474/- and short-term capital gains of Rs. 19,82,900/-. Facts and Arguments: - The assessee is engaged in Management Consultancy, Investment Advisory, and Equity Research Services, and also deals in investments. - The assessee filed a return of income declaring total income of Rs. 1,03,21,714/-, which included long-term and short-term capital gains. - The AO issued a notice to the assessee asking why the income from the investment in shares should not be assessed as business income. - The assessee contended that it invests in shares and holds them as investments, not as stock-in-trade, and uses its own funds without borrowing. - The AO, however, considered the assessee's activity in shares as a business activity, noting that the main object of the company is Management Consultancy, and the incidental object is to make investments. - The AO observed that the assessee was regularly dealing in shares throughout the year, indicating a profit motive. - The AO relied on various judicial decisions and accounting standards to conclude that the profit/gain earned from dealing in shares is business income. Tribunal's Findings: - The Tribunal noted that the assessee is not registered as a broker or sub-broker and has consistently shown shares as investments in its books of account. - It was observed that a significant portion of the capital gains (83%) comprised long-term capital gains, and the largest gain was from the sale of Infosys shares held for over 6.5 years. - The Tribunal referred to CBDT Circular No. 4/2007, which allows taxpayers to have two portfolios: an investment portfolio treated as capital assets and a trading portfolio treated as stock-in-trade. - The Tribunal emphasized that the intention at the time of purchase, the manner of holding, and the treatment in books of account are crucial in determining the nature of the transaction. - The Tribunal concluded that the transactions in shares were investments and not trading activities, as the assessee used its own funds, held shares for long periods, and received substantial dividends. Conclusion: The Tribunal directed the AO to treat the gains from the sale of shares as capital gains, either long-term or short-term, depending on the holding period, and set aside the order of the CIT(A). Issue 2: Disallowance under Section 14A of the Act The assessee challenged the disallowance of Rs. 84,113/- made by the AO under section 14A, which was upheld by the CIT(A). Facts and Arguments: - The AO disallowed the expenditure on the grounds that it was incurred for earning tax-free dividend income. - The assessee argued that no expenditure was actually incurred for earning the exempt income and hence, no estimation should be made. Tribunal's Findings: - The assessee's counsel submitted that considering the smallness of the amount and as per the instructions of the assessee, this ground was not pressed. Conclusion: The Tribunal dismissed this ground as not pressed. Issue 3: General Ground The appellant sought leave to add, alter, and/or amend any of the grounds of appeal. Conclusion: This ground was considered general in nature and did not require specific adjudication. Final Order: The appeal was partly allowed, with the Tribunal directing the AO to accept the capital gains declared by the assessee and dismissing the disallowance under section 14A as not pressed. The general ground required no specific adjudication. The order was pronounced in the open court on April 30, 2010.
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