2010 (3) TMI 1129 - AT - Income Tax

Nature of income - Income from sale of shares - income from business or profession or Short Term Capital Gain - activity of earning profits through purchase and sale of shares - frequency of transactions - AO held that the entire profits arising from this activity should be assessed under the head income from business or profession and not as short term capital gains as claimed by the assessee - As pointed out that the assessee did not borrow monies for the purpose of acquiring shares and this is sufficient indication that the shares were held only as investment and not as stock-in-trade - CIT(A) endorsed the decision of AO that the gains on the sale of shares should be assessed as business income subject to the normal rates of tax and not as short term capital gain assessable to concessional rate of tax of 10% under the provisions of section 111A. HELD THAT - We uphold the conclusion of the departmental authorities that the sale of shares must be treated as business transactions and that the profits must be assessed as business profits and not as short term capital gains. However, the securities transaction tax paid by the assessee is allowable as a deduction under section 88E, while computing the business profits. AO is directed to ascertain the details of the payment, if any, and allow the same as a deduction. Similarly, the AO is also directed to examine and take an appropriate decision vis-a-vis the assessee s plea that the AO ought to have considered the stock on hand also, instead of taking into account only the shares which were sold, consistent with his view that the assessee is carrying on business in shares. The assessee shall be given sufficient opportunity to adduce evidence in support of this alternative plea which shall be considered by the Assessing Officer before taking a decision on this alternative plea. Thus, the first six grounds are partly allowed. Computation of the total income - adjustment of the future and option loss while computing the total income - whether loss suffered in trading derivatives cannot be considered as speculative loss? - HELD THAT - In the Special Bench case of Shree Capital Services Ltd. Vs. ACIT. 2009 (7) TMI 172 - ITAT CALCUTTA it was held that clause (d) of section 43(5) is prospective in nature and will be applicable to AY 2006-07 onwards. This appeal relates to the AY 2005-06. The Special Bench decision is therefore in favour of the revenue. The loss in futures and options will therefore be speculation loss for the year under appeal and can be adjusted only against speculation profit which the assessee claims to have included in the total income. The AO is directed to verify the claim and allow relief if the claim is found correct. The grounds are allowed. Appeal is partly allowed.

Issues Involved:
1. Classification of profit from share transactions as capital gains or business profits.
2. Adjustment of futures and options loss against total income.
3. Consideration of stock on hand in the assessment.
4. Allowance of securities transaction tax deduction.

Issue-wise Detailed Analysis:

1. Classification of Profit from Share Transactions:
The primary issue in this case was whether the profit on the sale of shares by the assessee should be assessed as capital gains or business profits. The assessee claimed short-term capital gains of Rs. 24,53,960 and sought a tax rate of 10% under section 111A of the Income Tax Act. The assessee argued that the shares were shown as investments in the balance sheet, held at cost price, and not as stock-in-trade. The assessee also highlighted that the shares were not frequently traded and the proceeds were invested in fixed deposits, indicating an investment intention. However, the Assessing Officer (AO) rejected these claims, noting the high frequency of transactions, use of borrowed funds, and the short holding period of shares, concluding that the assessee was engaged in share trading and not investing.

The CIT(A) upheld the AO's decision, emphasizing that the assessee had no other business activity, used borrowed funds, and closely monitored the market, traits of a trader. The CIT(A) also noted that the volume and frequency of transactions indicated a business activity. The Tribunal, after considering the arguments and additional details, found that the shares were held for short periods, and the assessee's conduct suggested a trading intention rather than investment. Therefore, the Tribunal upheld the classification of the profits as business income but directed the AO to allow the deduction for securities transaction tax under section 88E and to consider the stock on hand.

2. Adjustment of Futures and Options Loss:
The assessee contended that the loss of Rs. 4,38,831 from trading in futures and options should be adjusted against the total income. However, referencing the Special Bench case of Shree Capital Services Ltd. Vs. ACIT, it was held that clause (d) of section 43(5) is prospective and applicable from the assessment year 2006-07 onwards. Since this appeal relates to the assessment year 2005-06, the loss in futures and options was considered speculative and could only be adjusted against the speculation profit of Rs. 1,01,636. The AO was directed to verify and allow relief if the claim was correct.

3. Consideration of Stock on Hand:
The assessee argued that if the profits were considered business income, the AO should have also considered the stock on hand and allowed losses on closing stock valuation. The Tribunal directed the AO to examine this plea and take an appropriate decision, providing the assessee an opportunity to present evidence.

4. Allowance of Securities Transaction Tax Deduction:
The Tribunal directed the AO to ascertain the details of securities transaction tax paid by the assessee and allow the deduction under section 88E while computing the business profits.

Conclusion:
The appeal was partly allowed. The Tribunal upheld the classification of share transaction profits as business income, directed the AO to allow the securities transaction tax deduction, consider the stock on hand, and verify the adjustment of futures and options loss against speculation profit.

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