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2011 (11) TMI 126 - AT - Income TaxShort term capital gain vs Business income- both trading & investment activity carried on- holdings of shares vary between one day to few weeks only- Held that - There is no dispute to the legal proposition that the assessee can have two portfolios i.e one for investment and one for trading and also that mere volume of transaction does not mean that assessee is a trader. It is the intention with which purchase has been made has to be seen. However, in the instant case, the intention of the assessee appears to be whimsical. Purchases in the same scrip on the same day has been divided into speculation and investment. The only intention of the assessee in the impugned case is just to reduce the tax liability by treating a part of the profit as short term capital gain. Hence, profit on account of purchase and sale of shares by the assessee in the instant case has to be treated as income from business. Decided against the assessee. Deemed Dividend-shareholder holding more than 20% shareholding in assessee company is also shareholder of another company which has advanced loan to assessee company- Revenue deeming such loan as dividend in hands of assessee company-Held that - Special Bench of the Tribunal in the case of Bhaumik Colour Pvt. Ltd.(2008 - TMI - 59371 - ITAT Bombay-E) has held that the deemed dividend can be assessed only in the hands of a person who is a shareholder of the lender company and not in the hands of a person other than a shareholder. Above view of the Tribunal has been approved in the case of CIT vs. Universal Medicare Pvt Ltd. (2010 - TMI - 76961 - Bombay High Court) . Merely because the Revenue has not accepted the decision of the Special Bench of the Tribunal cannot be a ground to take a contrary view. Decided against the Revenue.
Issues Involved:
1. Treatment of profit from sale of shares as Short Term Capital Gain (STCG) vs. Business Income. 2. Addition of deemed dividend under Section 2(22)(e) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Treatment of Profit from Sale of Shares as STCG vs. Business Income: - Facts and Background: The assessee, a Private Limited Company engaged in dealing in shares and securities, declared a total income of Rs. 12,78,98,311/- for Assessment Year 2006-07. The assessee reported STCG of Rs. 12,70,35,823/- and adjusted it against brought forward unabsorbed depreciation and short-term capital losses, applying a tax rate of 10%. The AO noted the assessee's activities included trading, speculation, investment, and derivative market transactions, and questioned the classification of profits from these activities as STCG rather than business income. - AO's Findings: The AO observed that the assessee had utilized borrowed funds for investments, engaged in frequent and substantial transactions, and maintained running ledgers with brokers and associates, indicating trading rather than investment activity. The AO concluded that the transactions were business activities disguised as investments to benefit from lower tax rates on STCG. - Assessee's Argument: The assessee argued that the intention at the time of purchase was to hold shares as investments, supported by board resolutions and treatment in the books of accounts. They cited various judicial precedents and CBDT Circular No. 4/2007, which allows for dual portfolios (investment and trading). - CIT(A)'s Decision: The CIT(A) accepted the assessee's claim for STCG on shares held as investments as of 31.03.2005 and on shares purchased and sold during the year, directing the AO to treat these profits as STCG subject to tax at 10%. - Tribunal's Analysis: The Tribunal examined the frequency and volume of transactions, the use of borrowed funds, and the assessee's treatment of shares in the books. It concluded that the transactions exhibited characteristics of trading rather than investment. The Tribunal noted that the assessee's intention seemed to be to reduce tax liability by classifying trading profits as STCG. It emphasized that the principles of res judicata do not apply to income tax proceedings, and each assessment year must be considered independently. - Conclusion: The Tribunal set aside the CIT(A)'s order and restored the AO's decision, treating the profits from the sale of shares as business income rather than STCG. 2. Addition of Deemed Dividend under Section 2(22)(e): - Facts and Background: The AO noted that the assessee had received advances from M/s Subhkam Stocks & Shares Ltd. (SSSL), where a common shareholder held more than 20% shares in both companies. The AO added Rs. 34,08,608/- as deemed dividend under Section 2(22)(e). - CIT(A)'s Decision: The CIT(A) deleted the addition, relying on the Special Bench decision in ACIT v. Bhaumik Colour Pvt. Ltd., which held that deemed dividend can only be assessed in the hands of a shareholder of the lending company. - Tribunal's Analysis: The Tribunal upheld the CIT(A)'s decision, noting that the assessee was not a shareholder of SSSL. It referenced the Bombay High Court's approval of the Bhaumik Colour Pvt. Ltd. decision, affirming that deemed dividend can only be assessed in the hands of the shareholder. - Conclusion: The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal on this ground. Final Outcome: - The Tribunal allowed the Revenue's appeal regarding the treatment of profits from the sale of shares as business income. - The Tribunal dismissed the Revenue's appeal regarding the addition of deemed dividend, upholding the CIT(A)'s deletion of the addition.
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