2011 (5) TMI 618 - AT - Income Tax

Capital gains or business income - assessee has shown business income in respect of his non-delivery based shares or derivative transactions whereas he has shown capital gains on the delivery based share transactions - Held that -Investment in a particular scrip both in physical delivery and in speculation transaction of F&O cannot be considered different when undertaken at the same time and same nature of transaction on the same day. Therefore one way of analysing the intention of the assessee of trading or investment in a particular scrip is to correlate with the F&O transactions. As noticed earlier the profit in F&O transactions is 5 times the gains earned in share transactions. Therefore in the interest of justice, since complete details are not placed on record to analyse whether the assessee s share transactions are in the nature of business transaction or investment transaction, we are of the opinion that the matter can be restored back to the file of the Assessing Officer to examine the facts and analyse the intention - Appeal are allowed for statistical purpose

Summary

Issues Involved:
1. Treatment of income from share market transactions as capital gains or business income.
2. Disallowance under section 14A.
3. Disallowance of motor car and telephone expenses.

Issue-wise Detailed Analysis:

1. Treatment of Income from Share Market Transactions as Capital Gains or Business Income:

The primary issue in the cross appeals is whether the income derived by the assessee from share market transactions should be treated as capital gains or business income. The Assessing Officer (AO) treated the entire short-term capital gains as business income, while the Commissioner of Income Tax (Appeals) [CIT(A)] partially treated it as business income and partially as capital gains. The CIT(A) determined that repetitive share transactions undertaken more than four times during the year should be considered as business income, resulting in an amount of Rs. 76,94,812 being treated as business income. The CIT(A) confirmed the AO's action to this extent while deleting the balance amount and directing it to be treated as short-term capital gains.

The assessee contested this, arguing that the CIT(A) erred in treating repetitive transactions as trading. The assessee maintained separate portfolios for investment and trading, consistently over time, and argued that transactions in mutual funds and bonus shares should not be considered trading transactions. The assessee also cited the principle of consistency, noting that similar transactions were accepted as capital gains in previous years.

The CIT(A) analyzed the frequency and volume of transactions, the holding period, and the nature of the transactions, concluding that the repetitive transactions indicated trading activity. However, the CIT(A)'s artificial categorization was challenged, particularly regarding transactions in bonus shares and mutual funds, which should not be considered business income.

The Tribunal found that the CIT(A)'s artificial segregation of income as business income and capital gains was not sustainable. The Tribunal noted that the assessee's main activity was manufacturing and export of garments, and the share market transactions were more frequent only in the relevant year. The Tribunal directed the AO to re-examine the transactions, considering the frequency, volume, holding period, and the correlation with Futures & Options (F&O) dealings to determine the nature of the transactions. The issue was restored to the AO for fresh examination.

2. Disallowance under Section 14A:

The AO disallowed amounts under section 14A based on Rule 8D, totaling Rs. 23,435. The CIT(A) confirmed this disallowance. The assessee did not contest this issue before the Tribunal, and hence, it was not addressed in detail in the judgment.

3. Disallowance of Motor Car and Telephone Expenses:

The AO disallowed 1/4th of the motor car expenses amounting to Rs. 3,26,074 and telephone expenses of Rs. 34,261 on an ad hoc basis. The CIT(A) restricted this disallowance to 20% instead of 25%. The assessee did not contest this issue before the Tribunal, and it was not addressed further in the judgment.

Conclusion:

The Tribunal allowed the appeals for statistical purposes, directing the AO to re-examine the treatment of gains on share transactions as business income or capital gains, considering the frequency, volume, holding period, and correlation with F&O transactions. The issues related to disallowance under section 14A and motor car and telephone expenses were not contested and hence, were not addressed further.