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2011 (12) TMI 553 - AT - Income TaxShare transaction - capital gain or business income - Held that - The action of the Authorities below is not in consistence with the law. The ld. CIT(A) has erred in not accepting the assessee s claim of concessional rate of tax u/s 111-A of the Act, in keeping with Gopal Purohit (2009 (2) TMI 233 - ITAT BOMBAY-G ). Liability side shown share application money forfeiture under the head reserve and surplus - Held that - The receipt was on capital account, since the amount was received on account of share capital, having no relevance with trade. As such, the receipt cannot be treated as income.
Issues Involved:
1. Classification of Short Term Capital Gain as Business Income. 2. Taxability of Share Application Money Forfeiture. Issue-wise Detailed Analysis: 1. Classification of Short Term Capital Gain as Business Income: The primary issue was whether the short term capital gain of Rs. 24,05,283/- should be treated as business income, thereby denying the concessional tax rate under Section 111A of the Income Tax Act. - Assessment Officer's (AO) Observations: The AO noted that the assessee had shown significant trading activity in shares and had substantial stock in trade but minimal investments. The AO argued that the transactions classified as short term capital gain were actually business transactions aimed at tax advantage. The AO relied on Supreme Court decisions in "G. Venkataswami Naidu & Co. v. CIT" and "CIT v. Sutlej Cotton Mills Supply Agency Limited." - Assessee's Argument: The assessee contended that it had been an investor and trader in shares since 1995, maintaining separate classifications for investments and trading. The intention at the time of purchase, as recorded in audited books, was to hold shares as investments. The assessee cited the case "CIT v. N.S.S. Investments (P) Ltd." and argued that it was entitled to the concessional tax rate under Section 111A. - CIT(A) Decision: The CIT(A) upheld the AO's decision, stating that the assessee failed to distinguish between investment and business income, did not maintain separate books or DEMAT accounts, and thus was not entitled to the concessional tax rate. - Tribunal's Findings: The Tribunal found the AO's observations factually incorrect, noting that the assessee had declared short term capital gains in previous years and had maintained a consistent investment strategy. The Tribunal cited "Gopal Purohit v. JCIT" and "CIT v. Gopal Purohit" to support the assessee's claim. The Tribunal concluded that the assessee's intention, as evidenced by audited books and consistent classification in balance sheets, indicated genuine investment activity. Therefore, the short term capital gain should not be classified as business income, and the assessee was entitled to the concessional tax rate under Section 111A. 2. Taxability of Share Application Money Forfeiture: The second issue was whether the forfeited share application money of Rs. 25,00,000/- should be treated as taxable income in the assessment year 2007-08. - Assessment Officer's (AO) Observations: The AO treated the forfeited share application money as a revenue receipt, citing "CIT v. Sundaram Iyengar and Sons Pvt. Ltd." The AO argued that the amount was unclaimed credit and should be added to the assessee's income. - Assessee's Argument: The assessee argued that the forfeiture occurred in the financial year 2004-05, and the amount was a capital receipt, not taxable as income. The assessee provided evidence of the share application process, extensions granted, and the eventual forfeiture, asserting that the amount was correctly classified as capital reserve. - CIT(A) Decision: The CIT(A) upheld the AO's decision, questioning the genuineness of the share applicants and the documents provided by the assessee. The CIT(A) focused on the creditworthiness of the applicants and found the evidence insufficient. - Tribunal's Findings: The Tribunal noted that the forfeited amount was not received during the assessment year 2007-08 and thus could not be taxed in that year. The Tribunal referred to "Multan Electric Supply Co. Ltd." and "Asiatic Oxygen Ltd. v. DCIT," concluding that forfeiture of shares is a capital receipt and not taxable as income. The Tribunal found the CIT(A)'s reasoning unsustainable, as the forfeiture had occurred in a previous financial year and was correctly classified as a capital reserve. Conclusion: The Tribunal allowed the assessee's appeal, holding that the short term capital gain should be treated as such and not as business income, thereby entitling the assessee to the concessional tax rate under Section 111A. Additionally, the Tribunal ruled that the forfeited share application money was a capital receipt and not taxable as income in the assessment year 2007-08.
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