2015 (8) TMI 1312 - AT - Income Tax

Profit on sale of shares - shares held for less than thirty days - business income or capital grains - Held that - The intention alone is the material factor to determine whether a particular share is held as investment or trading portfolio. In order to find out the intention of the parties, one is to look at the treatment given in the books of account and the conduct of the assessee that apart, the courts have evolved several tests including whether the scrips are bought from the borrowed funds and the period for which the shares are held and the frequency of the trading etc. Applying these principles to the facts of the case, it is very clear that the respondent assessee company from the beginning held the shares under investment portfolio the same is treated as investments in the books of account and where the shares are held for trading purposes the profit arising there on is offered to taxed under the business head. Disallowance of interest - Held that - From the order of CIT(A), it is very clear that the CIT(A) had made a bifurcation between the investment portfolio and trading portfolio and therefore, the same is in line with the provisions of sec. 14A read with Rule 8D of the Income Tax Rules, 1962. Thus, we do not find any reason to interfere with the reasoning given by the CIT(A). Accordingly, the second ground raised by the Revenue is dismissed.

Summary

Issues Involved:
- Classification of profit on sale of shares as business income or capital gains
- Treatment of interest expenditure in connection with income from capital gains or business
- Allowance of proportionate claim out of security transaction tax payment
- Applicability of Explanation to Section 73 of the I.T. Act

Analysis:

Classification of Profit on Sale of Shares:
The Revenue challenged the CIT(A)'s decision regarding the classification of profit on the sale of shares for the assessment years 2006-07 and 2007-08. The Revenue argued that all income arising from stock and derivatives trading should be treated as trading income. However, the appellant contended that maintaining separate investment and trading portfolios is permissible, as recognized by CBDT Circular No. 4 of 2007. The Tribunal noted that the intention of the parties, treatment in books of account, and conduct of the assessee determine whether shares are held for investment or trading. The Tribunal upheld the CIT(A)'s decision, stating that the appellant had maintained shares under the investment portfolio, supported by board minutes, justifying the classification. Therefore, the first ground raised by the Revenue was dismissed.

Treatment of Interest Expenditure:
The second issue raised by the Revenue concerned the disallowance of interest expenditure. The CIT(A) had appropriately bifurcated interest expenditure between the investment and trading portfolios, in accordance with sec. 14A read with Rule 8D of the Income Tax Rules, 1962. The Tribunal found no reason to interfere with this decision, leading to the dismissal of the second ground raised by the Revenue.

Allowance of Tax Rebate:
The third ground of appeal related to the allowance of tax rebate under Section 88A of the Act. The Tribunal found that the CIT(A)'s findings aligned with Section 88A, leading to the dismissal of the third ground.

Applicability of Explanation to Section 73 of the I.T. Act:
The Revenue contended that the provisions of Explanation to Section 73 of the I.T. Act should apply to the case. However, the Tribunal did not delve into this issue in detail in the judgment provided.

In conclusion, the Tribunal dismissed both appeals filed by the Revenue, upholding the decisions made by the CIT(A) regarding the classification of profit on sale of shares, treatment of interest expenditure, and allowance of tax rebate. The judgment was pronounced on 19th August 2015.