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2012 (3) TMI 76 - AT - Income TaxApportionment of Expenses - Real State Business & Textile Business - Site development expenses conversion charges infrastructure development charges shown under Work-in-progress Depreciation dis-allowed - Held That - The entire items of plant and machinery office equipments furniture and fixtures and vehicles have been used by the assessee in the course of carrying out of its business during the period under consideration. Depreciation allowed. Sale of Share and Mutual Fund - Capital Gain OR Business Income - Held That - Investment out of its own fund and not borrowed fund - In books and balance Sheet the same were disclosed as Investments - The investment has not been rotated frequently as all the shares / mutual funds purchased by the assessee were not sold rather the same were held for quite number of days - Dividend Income Earned. Sale/purchase liable to tax as Capital Gain.
Issues Involved:
1. Disallowance of Depreciation 2. Classification of Profit on Sale of Shares and Mutual Funds Issue-wise Detailed Analysis: 1. Disallowance of Depreciation: The Revenue's appeal contested the deletion of disallowance of depreciation amounting to Rs. 3,07,707/- out of Rs. 4,10,227/-. The Assessing Officer (AO) observed that the assessee had claimed depreciation on various fixed assets, including plant and machinery, office equipment, furniture and fixtures, and vehicles. The AO noted that the assessee's primary business activity had shifted to real estate development, with a significant amount spent on real estate operations shown under 'work in progress'. The AO inferred that expenses related to infrastructure should be allocated to the 'work in progress' account and not claimed as expenses in the profit and loss account. Consequently, the AO invoked Section 38(2) of the IT Act, 1961, and made a proportionate disallowance of 75% of the depreciation claimed, allowing only 25%. Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the revenue expenditure incurred in real estate development was debited to the 'work in progress' account and reflected in the profit and loss account. The CIT(A) noted that all fixed assets were used in the course of the assessee's business. The CIT(A) concluded that Section 38(2) was not applicable as the assets were exclusively used for business purposes, citing several judicial precedents. The CIT(A) allowed the full depreciation claim of Rs. 4,10,277/-. The Tribunal upheld the CIT(A)'s decision, agreeing that the AO's observation was incorrect and there was no reason to restrict the depreciation. The Tribunal found the CIT(A)'s order cogent and did not interfere with it. 2. Classification of Profit on Sale of Shares and Mutual Funds: The second issue involved the classification of profit amounting to Rs. 69,68,996/- on the sale of shares and mutual funds. The AO treated this profit as business income, noting that the assessee engaged in regular trading of shares and mutual funds, with substantial transactions and a short holding period, indicating a profit-making motive rather than investment. The assessee argued that the profit should be classified as short-term capital gain, highlighting that the Memorandum of Association did not permit trading in shares, the shares were shown as 'investment' in the books, dividend income was earned, and no borrowed funds were used for the investments. The CIT(A) observed that the transactions were not frequent, the investments were held for a significant period, and the profit on mutual funds could not be treated as business income. The CIT(A) relied on various judicial precedents and concluded that the profit should be assessed as short-term capital gain under Section 111A, taxable at a concessional rate of 10%. The Tribunal upheld the CIT(A)'s decision, noting that the investments were made from the assessee's own funds, the transactions were not frequent, and the investments were held for considerable periods. The Tribunal found the CIT(A)'s order reasonable and did not interfere with it. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on both issues. The full depreciation claim was allowed, and the profit on the sale of shares and mutual funds was classified as short-term capital gain, not business income. The order was pronounced in the open court on 06/01/2012.
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