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2011 (11) TMI 403 - AT - Income TaxSale of Shares - Capital Gain OR Business Income - Held That - Assessee passed a resolution to open DEMAT account, it also authorized its Director to deal in purchase and sale of shares moreover on 16.12.2004 the company passed resolution appointing HDFC Asset Management Company Ltd. as its portfolio manager to provide portfolio management and other services. All these indicate the intentions of company to trade in shares with a profit motive mere shares were shown under the head investment cannot alter the situation. Further, merely because the profit on sale of shares was accepted as capital gain in the preceding year will not entitle the assessee to claim it as short term capital gain during the impugned assessment year. - Decided in favor of revenue.
Issues Involved:
1. Treatment of short-term capital gain on the sale of shares as business income. 2. Disallowance under section 14A related to dividend income. Issue-Wise Detailed Analysis: 1. Treatment of Short-Term Capital Gain on Sale of Shares as Business Income: The primary issue in this appeal is whether the profit from the sale of shares should be treated as "short-term capital gain" or "business income." The assessee, engaged in trading and exporting fabrics, declared Rs. 96,06,116/- as short-term capital gain from share transactions. However, the Assessing Officer (AO) treated this amount as "business income," citing that the assessee was actively engaged in share trading on a day-to-day basis and holding multiple DEMAT accounts. The AO noted that the transactions were voluminous and carried out within short spans, indicating an adventure in the nature of trade rather than investment. The assessee argued that the investments were consistently shown as "investments" in the balance sheet and valued at cost, not as stock in trade. The assessee also cited CBDT Circular No. 4/2007, which supports treating such transactions as short-term capital gains. However, the AO relied on various decisions and the same CBDT Circular to conclude that the transactions were business activities. Upon appeal, the CIT(A) upheld the AO's decision, emphasizing that the board resolutions indicated an intention to trade in shares, not invest. The CIT(A) pointed out that trading in shares cannot be equated to investment in shares, and the resolutions clearly conveyed the company's intention to engage in share trading. The Tribunal analyzed the submissions and noted that the legal principles for determining whether the profit is business income or capital gain include factors such as the assessee's intention, the volume and frequency of transactions, and the treatment in the books of accounts. The Tribunal found that the board resolutions and the conduct of the assessee indicated a clear intention to trade in shares for profit, supporting the AO's and CIT(A)'s conclusions. The Tribunal upheld the order of the CIT(A), treating the profit as "business income." 2. Disallowance Under Section 14A Related to Dividend Income: The assessee also challenged the disallowance of Rs. 4,81,400/- under section 14A, computed as per Rule 8D, in respect of dividend income of Rs. 27,53,500/- which was exempt under section 10(34) of the Income-tax Act. The assessee argued that there was no nexus between the expenditure debited to the profit and loss account and the exempt income and that the expenses were day-to-day operational expenses. Both parties agreed that the issue should be remanded to the AO for fresh adjudication in light of the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203. The Tribunal, therefore, restored the issue to the AO for fresh adjudication, allowing the grounds raised by the assessee for statistical purposes. Conclusion: The appeal filed by the assessee was partly allowed for statistical purposes. The Tribunal upheld the treatment of the profit from share transactions as "business income" and remanded the issue of disallowance under section 14A for fresh adjudication by the AO.
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