2010 (5) TMI 830 - AT - Income Tax

Summary

Issues Involved:
1. Whether the gain of Rs. 69,56,024/- was business income or capital gain.

Summary:

Issue 1: Whether the gain of Rs. 69,56,024/- was business income or capital gain.

The assessee, a non-banking finance company, appealed against the order of the Ld. CIT(A), Kolkata, which upheld the AO's decision that the gain of Rs. 69,56,024/- was business income and not a capital gain. The AO observed that the profit and loss account credited the profit on sale of investment, but the assessee treated it as long-term capital gain exempt u/s 10(38) of the I.T. Act. The AO issued a show cause notice and found the assessee's reply unconvincing, noting that the nature of business described in Form No. 3CD included investment and trading in shares and securities. The AO argued, referencing the Supreme Court judgment in G. Venkataswami Naidu & Co. (35 ITR 594), that the transactions were an adventure in the nature of trade. Consequently, the gain was treated as business income and taxed accordingly. The Ld. CIT(A) confirmed this action.

During the hearing, the assessee's counsel reiterated that the company maintained separate portfolios for trading shares and shares held as investments, with the main income components being interest, dividend, and rental income. The shares in question were held as investments since 01.04.2004, and no purchases or sales occurred until their sale during the year under appeal. The counsel argued that the decisions cited by the AO and Ld. CIT(A) were not relevant to the current context.

The Ld. DR supported the lower authorities' orders. Upon review, the tribunal found that the assessee maintained two separate portfolios, and the shares in question were transferred from stock in trade to investment portfolio on 01.04.2004, with the profit on transfer offered for taxation and accepted by the department. The tribunal referenced CBDT Circular No. 4/2007, which allows for separate portfolios for investment and trading, and concluded that the gain from the sale of these shares should be treated as capital gains, not business income. The tribunal set aside the lower authorities' orders and directed the AO to accept the assessee's claim that the gain was a capital gain.

Conclusion:
The appeal of the assessee was allowed, and the gain of Rs. 69,56,024/- was directed to be treated as capital gain. The order was pronounced in the open court on 14.5.2010.