2013 (12) TMI 1548 - AT - Income Tax

No merit in the conclusion drawn by the lower authorities for treating the gains arising out of sale of shares as business income rather than capital gain. Addition u/s 2(22)(e) on account of deemed dividend - Held that - We found that Shri Anoop Karwa has more than 10 % voting rights in the share capital of Krishi Dham Seeds Limited, therefore, the provisions of Section 2(22)(e) is clearly applicable for loans and advances so taken by the assessee. Accordingly, the addition made by the Assessing Officer u/s 2(22)(e) was perfectly justified.

Summary

Issues Involved:
1. Classification of income from sale of shares: business income or short-term capital gains.
2. Applicability of Section 2(22)(e) regarding deemed dividends.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue was whether the income from the sale of shares should be classified as "business income" or "short-term capital gains" under the Income-tax Act, 1961.

- Arguments by the Assessee:
- The assessee argued that the shares were purchased as investments, not for trading purposes.
- The shares were shown as investments in the balance sheet and not as stock-in-trade.
- The transactions were delivery-based, and shares were held in Demat accounts.
- The assessee did not engage in speculative activities or frequent trading.
- The intention was to earn dividends and capital appreciation, not to trade.
- Previous years' assessments accepted the gains as capital gains.

- Arguments by the Assessing Officer (AO):
- The AO contended that the volume and frequency of transactions indicated trading activity.
- The assessee borrowed funds for purchasing shares, suggesting a business motive.
- The AO relied on CBDT Circular No. 4/2007, which provides guidelines for distinguishing between stock-in-trade and investment.

- Tribunal's Findings:
- The Tribunal emphasized the intention behind the purchase of shares and their treatment in the books of accounts.
- The shares were consistently shown as investments, and gains were offered as capital gains in previous years.
- The Tribunal noted that the mere frequency of transactions does not convert investment into business activity.
- The Tribunal relied on the principle of consistency and various judicial precedents, including the Supreme Court's decision in CIT v. Ram Kumar Aggarwal & Bros.
- The Tribunal concluded that the gains should be treated as short-term capital gains and not business income.

2. Applicability of Section 2(22)(e) Regarding Deemed Dividends:
The secondary issue was whether loans taken by the assessee from a company in which he held substantial interest should be treated as deemed dividends under Section 2(22)(e).

- Arguments by the Assessee:
- The assessee argued that the shares held by HUF and minor children should not be included in computing the shareholding percentage.
- The assessee relied on judicial precedents which state that for Section 2(22)(e) to apply, the person must be both a registered and beneficial owner of the shares.

- Arguments by the AO:
- The AO included shares held by HUF and minor children, resulting in a shareholding exceeding 10%, thereby attracting Section 2(22)(e).
- The AO relied on judicial precedents which allowed for the inclusion of shares held by family members in determining substantial interest.

- Tribunal's Findings:
- The Tribunal noted that shares held by HUF and minor children are registered in their names and not in the name of the assessee.
- The Tribunal emphasized that both registered and beneficial ownership conditions must be met for Section 2(22)(e) to apply.
- The Tribunal relied on the decision of the I.T.A.T. Special Bench in Bhaumik Color Lab and the Hon'ble Mumbai High Court's affirmation of this principle.
- The Tribunal concluded that the shares held by HUF and minor children should not be included in the assessee's shareholding for the purpose of Section 2(22)(e), and thus, the provisions of deemed dividends do not apply.

Conclusion:
- The Tribunal ruled in favor of the assessee, holding that the income from the sale of shares should be treated as short-term capital gains and not business income.
- The Tribunal also held that the provisions of Section 2(22)(e) regarding deemed dividends do not apply to the loans taken by the assessee, as the shareholding conditions were not met.