2015 (5) TMI 1082 - AT - Income Tax

Treatment of income earned from sale and purchase of shares - short term capital gains or business income - Held that - Memorandum and Articles of Association of the assessee company does not allow it to trade in shares and it has been consistently investing its money as an investor in shares. No borrowed funds have been used for making the share transactions. The assessee has also earned substantial income from long term capital gain and also dividend income. All these facts prove beyond doubt that the intention of the assessee has always been to invest the money in shares and not the trading in shares. High frequency of the transactions cannot be the sole factor in holding the assessee as a trader. Even there is no minimum holding period of shares is prescribed under the statute for treatment of the same as short term capital gain. Thus in our view, the assessee has to be treated as an investor and the income earned from purchase and sale of shares is to be treated as short term capital gain. - Decided in favour of the assessee. Dividend stripping - Held that - The Assessing Officer noted that the assessee had purchased and sold shares of three companies within the time prohibited under section 94(7) of the Act which had resulted in loss. The Assessing Officer, therefore, reduced the loss suffered by the assessee to the extent of dividend earned which was computed at ₹ 2,983, and added back the same to the income of the assessee. The learned CIT(A) upheld the addition. No infirmity in the impugned order on this issue and this addition is accordingly confirmed. Disallowance of deduction under section 35D - Held that - Asssessee debited ₹ 3,204 to the Profit & Loss account as preliminary expenses. The Assessing Officer noted that the capital employed was ₹ 2,00,000 and deduction of preliminary expenses was allowable only to the extent of ₹ 500. He, therefore, disallowed the deduction of balance of ₹ 2,704. The learned A.R. for the assessee has not advanced any arguments on this issue. No infirmity in the order of the learned CIT(A) while upholding the disallowance on this issue. Thus, the ground raised by the assessee is dismissed.

Summary

Issues involved:
1. Treatment of income from sale and purchase of shares - short term capital gains or business income.
2. Dividend stripping activity under section 94(7).
3. Disallowance of deduction under section 35D.

Issue 1 - Treatment of income from sale and purchase of shares:
The case involves a dispute regarding whether income earned from the sale and purchase of shares should be treated as short term capital gains, as claimed by the assessee, or as business income, as assessed by the Assessing Officer. The Assessing Officer and the learned CIT(A) held that the assessee was systematically engaged in share transactions with a profit motive, hence treated the income as business income. However, the assessee argued that it had always been treated as an investor, consistently investing surplus profits in shares since 1997. The assessee's intention was to invest in shares, not trade, supported by the absence of borrowed funds for share transactions and substantial income from long term capital gains and dividends. The tribunal, applying the rule of consistency, ruled in favor of the assessee, concluding that the income from share transactions should be treated as short term capital gains, considering the overall facts and circumstances of the case.

Issue 2 - Dividend stripping activity under section 94(7):
The Assessing Officer observed that the assessee had engaged in prohibited share transactions under section 94(7), resulting in a loss. Consequently, the Assessing Officer reduced the loss by the dividend earned and added it back to the assessee's income. The learned CIT(A) upheld this addition, and the tribunal found no fault in the decision, confirming the addition as per the impugned order.

Issue 3 - Disallowance of deduction under section 35D:
Regarding the disallowance of deduction under section 35D, the assessee had debited preliminary expenses of &8377; 3,204 to the Profit & Loss account, but the Assessing Officer disallowed &8377; 2,704 as the capital employed was &8377; 2,00,000, allowing deduction only to the extent of &8377; 500. The learned A.R. did not present any arguments on this issue, and the tribunal found no fault in the learned CIT(A)'s decision to uphold the disallowance, resulting in the dismissal of the ground raised by the assessee.

In conclusion, the tribunal partly allowed the assessee's appeal, ruling in favor of the assessee on the treatment of income from share transactions but confirming the addition related to dividend stripping activity and the disallowance of deduction under section 35D.