2012 (5) TMI 310 - AT - Income Tax

Short term capital gain or business income - dealing in shares and securities - held that - The detail of such investment through computer itself shows that assessee smartly but intentionally switched over its trading business to the investment business to have undue advantage of lower tax rate provided for short term capital gain - 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 - Decided against the assessee

Summary

Issues Involved:

1. Classification of profits from the sale of shares as Short Term Capital Gain (STCG) or Business Income.
2. Treatment of advances received as deemed dividend under section 2(22)(e) of the Income Tax Act.
3. Disallowance under section 14A of the Income Tax Act related to exempt income.

Detailed Analysis:

1. Classification of Profits from Sale of Shares:

The primary issue was whether the profits from the sale of shares should be treated as Short Term Capital Gain (STCG) or Business Income. The assessee, a Private Limited Company dealing in shares and securities, declared STCG of Rs. 4,04,31,925/- and treated it as subject to a 10% tax rate. The Assessing Officer (AO) contended that the profits should be treated as Business Income due to the nature of the transactions, frequency, and magnitude of the trades, and the use of borrowed funds for investments.

The AO observed that the assessee engaged in trading, speculation, and investment activities simultaneously and continuously. The AO noted that the assessee used borrowed funds for substantial investments and frequently engaged in speculative transactions. The AO concluded that the transactions were business activities disguised as investments to benefit from lower tax rates.

The CIT(A) disagreed with the AO for part of the STCG, noting that the assessee had sufficient own funds and had passed a Board Resolution to treat delivery-based shares as investments. The CIT(A) directed the AO to treat Rs. 64,62,293/- and Rs. 2,59,57,750/- as STCG, not Business Income.

Upon appeal, the Tribunal found that the facts of the case were similar to those in Sweet Solutions Ltd., where the Tribunal had ruled in favor of treating the profits as Business Income. The Tribunal emphasized that the short holding periods and frequent transactions indicated a business motive rather than an investment intent. Consequently, the Tribunal held that the profits should be treated as Business Income, reversing the CIT(A)'s decision.

2. Treatment of Advances as Deemed Dividend:

The AO treated advances received from Subhkam Stocks and Shares Ltd. (SSSL) and Sweet Solutions Ltd. (SSL) as deemed dividend under section 2(22)(e) of the Income Tax Act, based on the significant shareholding of a common director, Mr. Rakesh Kathodia, in all three companies. The amounts involved were Rs. 34,08,608/- from SSSL and Rs. 6,69,50,000/- from SSL.

The assessee argued that these transactions were Inter Corporate Deposits (ICDs) and not loans or advances, thus not subject to deemed dividend provisions. The CIT(A) accepted this argument, relying on the Tribunal's decision in Bombay Oil Industries Ltd., which held that section 2(22)(e) does not apply to ICDs.

The Tribunal upheld the CIT(A)'s decision, noting that the Revenue had not provided grounds to challenge the classification of the transactions as ICDs. Furthermore, the Tribunal referenced the Special Bench decision in Bhaumik Colour Pvt. Ltd., which stated that deemed dividend can only be assessed in the hands of a shareholder of the lending company, not a third party.

3. Disallowance under Section 14A:

The assessee received exempt dividend income and claimed Long Term Capital Gain (LTCG) as exempt under section 10(34) and 10(38) of the Income Tax Act, respectively. The AO disallowed Rs. 35,11,555/- under section 14A, applying Rule 8D retrospectively. The CIT(A) reduced the disallowance to Rs. 13,42,846/-.

The Tribunal noted that Rule 8D is not retrospective, based on the jurisdictional High Court's decision in Godrej Boyce Manufacturing Co. Ltd. v. DCIT. The Tribunal remanded the matter to the AO to compute a reasonable disallowance under section 14A, consistent with the High Court's guidelines.

Conclusion:

The Tribunal ruled that the profits from the sale of shares should be treated as Business Income, not STCG. It upheld the CIT(A)'s decision that advances received were not deemed dividends under section 2(22)(e). Finally, it remanded the section 14A disallowance issue to the AO for reconsideration in light of the relevant High Court decision.