2010 (8) TMI 989 - AT - Income Tax

Correct head of income - Transaction of sale and purchase of shares - capital gain or business income - period of holding of shares - principle of res judicata - CIT(A) in confirming the treatment of short-term capital gain as business income by the AO - AO noted employing the services of portfolio management consultants and investing borrowed funds for purchase of shares the transactions done by the assessee acquired the character of trading rather than mere investment - HELD THAT - From the chart filed by the learned counsel for the assessee giving the details of shares transacted during the year, it is seen that the shares are held for a few days only and in very few cases for a few months but in no case it is exceeding 200 days. Purchase of shares during the year and selling them frequently in short period, in our opinion, do indicate that the assessee has purchased the shares with a motive to earn profit in a short period. Therefore, the facts of the instant case do not persuade us to hold that the shares were held as investment since these are not held for such a long period so as to treat the same as investment. The frequency and volume of the transactions in the instant case give an impression that the assessee did not intend to acquire the shares with business motive. In the case of an investment a person usually watches the market over a longer period of time before selling of the shares. The earning of dividend and the appreciation of the shares is the primary consideration. It is only a trader who would look for short-term gains from purchase and sale of shares. Therefore, the treatment given by the assessee to the said transactions in the books of account, in our opinion, is not the only determinative factor about the nature of the transactions. The submission of the learned counsel for the assessee that in the preceding year the Assessing Officer has accepted the long-term capital loss on sale of shares and, therefore, the same should be followed this year is also without much force since principle of res judicata does not apply to income-tax proceedings and every assessment is independent. When there are changes in the facts and circumstances, the rule of consistency need not be applied. In this view of the matter, we are of the considered opinion that the activity of frequent buying and selling of shares over a short span of period during the impugned year has to be treated as business being adventure in the nature of trade and the income has to be treated as business income and not as capital gain as claimed by the learned counsel for the assessee. -Decidedagainst assessee. Disallowance of telephone expenses - CIT(A) restricted disallowance of telephone expenses from 10 per cent to 5 per cent and motorcar expenses from 15 per cent to 10 per cent - HELD THAT - The order of the CIT(A) is quite reasonable since personal element in case of telephone expenses and motorcar expenses cannot be ruled out. Since the disallowance of telephone expenses has been restricted at 5 per cent of the total expenses and the disallowance of the motorcar expenses has been restricted at 10 per cent of the total expenses by the CIT(A), the same, in our opinion, is justified and reasonable - Grounds raised by the assessee are accordingly dismissed.

Issues Involved:
1. Treatment of short-term capital gain as business income.
2. Disallowance of telephone expenses.
3. Disallowance of motorcar expenses.

Detailed Analysis:

1. Treatment of Short-term Capital Gain as Business Income:

The primary issue in this case was whether the short-term capital gain of Rs. 10,96,197 declared by the assessee should be treated as business income. The assessee, engaged in the business of iron and steel, had declared this amount as short-term capital gain, which included interest payments and portfolio management fees. The Assessing Officer (AO) reclassified this gain as business income, arguing that the use of borrowed funds and professional portfolio management services indicated trading activity rather than investment.

The CIT(A) upheld the AO's decision, emphasizing that the nature of transactions, frequency, and systematic approach suggested trading rather than investment. The CIT(A) stated, "The manner of transaction in shares also shows that there was no element of pride in possession of shares."

The assessee argued that his primary business was trading in iron and steel, and the shares were held as investments, supported by separate personal accounts and balance sheets. However, the Tribunal found that the frequency and volume of transactions, along with the short holding periods, indicated a trading motive. The Tribunal concluded, "The activity of frequent buying and selling of shares over a short span of period during the impugned year has to be treated as business being adventure in the nature of trade and the income has to be treated as business income and not as capital gain."

2. Disallowance of Telephone Expenses:

The second issue involved the disallowance of telephone expenses. The AO had disallowed 10% of the total telephone expenses, amounting to Rs. 7,320, on an ad hoc basis, considering them personal in nature. The CIT(A) reduced this disallowance to 5%, which was upheld by the Tribunal. The Tribunal found the CIT(A)'s decision reasonable, stating, "Since the disallowance of telephone expenses has been restricted at 5% of the total expenses... the same, in our opinion, is justified and reasonable."

3. Disallowance of Motorcar Expenses:

The third issue concerned the disallowance of motorcar expenses. The AO had disallowed 15% of the motorcar expenses, amounting to Rs. 5,622, considering them personal in nature. The CIT(A) reduced this disallowance to 10%, which was also upheld by the Tribunal. The Tribunal agreed with the CIT(A)'s decision, stating, "Since the disallowance of the motorcar expenses has been restricted at 10% of the total expenses... the same, in our opinion, is justified and reasonable."

Conclusion:

In summary, the Tribunal upheld the CIT(A)'s decisions on all issues. The short-term capital gain was rightly treated as business income due to the nature and frequency of transactions. The disallowances of telephone and motorcar expenses were found to be reasonable and justified. Consequently, both appeals filed by the assessee were dismissed.

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