2013 (1) TMI 868 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of share trading loss as business loss.
2. Classification of the assessee as an investor or a trader in shares.
3. Disallowance of interest expenses.

Summary:

Issue 1: Treatment of Share Trading Loss as Business Loss
The assessee argued that the share trading activities should be considered a business activity, citing high frequency, substantial transactions, voluminous trade, low holding period, and utilization of borrowed funds. The Assessing Officer (AO) rejected this, noting that the assessee is an individual, not a broker, and had declared profits under short-term capital gains in the original return. The AO treated the shares as investments, not inventory. The Tribunal, however, found that the volume, frequency, and regularity of transactions indicated a systematic and organized activity with a profit motive, thus qualifying as a business activity. The Tribunal concluded that the share trading loss should be treated as a business loss.

Issue 2: Classification of the Assessee as an Investor or Trader
The AO and the Commissioner of Income Tax (Appeals) [CIT(A)] classified the assessee as an investor, treating the income from share transactions as capital gains. The CIT(A) noted that the shares were shown as investments in the balance sheet and the claim of business activity was an afterthought. The Tribunal, however, emphasized that the treatment in books is not conclusive. It highlighted that the volume, frequency, and systematic nature of transactions indicated a business activity. The Tribunal ruled that the assessee's activities should be classified as those of a trader, not an investor.

Issue 3: Disallowance of Interest Expenses
The AO disallowed Rs. 28,47,311 out of the total interest expenses of Rs. 71,18,278, attributing only a portion of the interest to the purchase and sale of shares. The CIT(A) upheld this disallowance. The Tribunal, however, ruled that since the activity of sale and purchase of shares was considered a business, the interest expenses on borrowed funds used for purchasing shares are allowable as business expenses. The Tribunal allowed the interest expenses as claimed by the assessee.

Conclusion:
The Tribunal allowed the appeal, ruling that the income from the sale and purchase of shares should be treated as business income. Consequently, the share trading loss was recognized as a business loss, and the disallowance of interest expenses was reversed. The order was pronounced on 30th January 2013.