2015 (3) TMI 1310 - AT - Income Tax

Income from transaction of shares - capital gain or business income - Period of holding of shares - CIT-A treated it as income from capital gain - Held that - We find that Ld. CIT(A) has exhaustively and extensively dealt with the issue and after verification of facts and circumstances, has arrived at the conclusion about the head of income under which the income needed to be assessed. From the facts, we find that assessee had classified the shares in its balance sheet as investment. The holding period for a number of scripts exceeds 365 days. The shares were not purchased but were contributed by partners as their part of capital. In view of the above facts and circumstances, we do not find any infirmity in the order of Ld. CIT(A) and therefore, appeal filed by Revenue is dismissed.

Summary

Issues Involved:
1. Treatment of income as capital gains vs. business income.
2. Addition of Rs. 12 lakhs under Section 69C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Income as Capital Gains vs. Business Income:

The primary issue was whether the income of Rs. 5,27,93,412/- should be treated as capital gains or business income. The assessee firm, engaged in the business of shares, securities, and mutual funds, declared income from capital gains in its return. The Assessing Officer (A.O.) observed that the firm was trading in shares and securities, and thus, treated the declared capital gains as business income. The A.O. cited the tax audit report and various case laws to support this treatment, emphasizing that the firm was used as a vehicle to avoid paying higher taxes on business income by misclassifying it as capital gains.

The A.O. noted that the firm had not claimed any expenses for earning this income, leading to an estimated addition of Rs. 12 lakhs under Section 69C for unaccounted expenses. The A.O. also highlighted the firm's high volume of transactions and lack of administrative expenses, suggesting that the firm was created to evade tax liabilities. The A.O. referenced the Supreme Court's decision in McDowell & Co. Ltd vs. CTO, asserting that the firm's activities were a colorable device for tax avoidance.

The CIT(A) disagreed with the A.O., accepting the assessee's claim that the income should be treated as capital gains. The CIT(A) found that the assessee had two portfolios (investment and trading) and had only sold investments during the relevant year. The CIT(A) noted that the shares were held for more than 12 months, qualifying them as long-term capital assets under the Income Tax Act. The CIT(A) cited the Delhi High Court's decision in CIT vs. Rohit Anand, which supported the classification of such transactions as capital gains. The CIT(A) concluded that the assessee's intention was to hold investments and not to engage in trading for quick profits.

Upon appeal, the Tribunal upheld the CIT(A)'s decision, finding no infirmity in the order. The Tribunal noted that the shares were classified as investments in the balance sheet, held for over 365 days, and contributed by partners as capital. The Tribunal dismissed the Revenue's appeal, affirming the treatment of the income as capital gains.

2. Addition of Rs. 12 Lakhs under Section 69C:

The second issue was the addition of Rs. 12 lakhs by the A.O. under Section 69C for estimated expenses. The A.O. argued that the firm must have incurred some expenses for its high-volume transactions, which were not accounted for. The CIT(A) did not adjudicate on this addition, as the assessee had not raised it as a ground of appeal before the CIT(A).

The Tribunal noted that the assessee did not take up the issue of Rs. 12 lakhs in its grounds of appeal before the CIT(A). Although the CIT(A) mentioned this addition in the order, it was only a reproduction of the assessee's written submissions. Since the issue was not formally raised before the CIT(A), the Tribunal found that the CIT(A) rightly did not adjudicate upon it. Consequently, the Tribunal dismissed the assessee's appeal on this ground.

Conclusion:

Both the appeals filed by the Revenue and the assessee were dismissed. The Tribunal upheld the CIT(A)'s decision to treat the income as capital gains and found no merit in the assessee's appeal regarding the Rs. 12 lakhs addition under Section 69C. The order was pronounced in the open court on 04.03.2015.