2012 (9) TMI 441 - AT - Income Tax

Profit on sale of shares/mutual funds - Business income OR income from capital gain - Held that - That the mere volume of transactions transacted by the assessee would not alter the nature of transactions. Since there is no evidence on record that the assessee traded in the aforesaid shares/mutual funds regularly and frequently, considering the magnitude of transactions in shares/mutual funds and the CBDT circular No. 4 of 2007 of 15-6-2007 itself envisaging the possibility of having two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets, thus the assessee s version that the aforesaid shares/mutual funds were held by way of investment in the years under consideration has to be accepted. Since the DR did not place any material controverting the aforesaid findings of facts recorded by the CIT(A) nor brought to our notice any contrary decision, we have no alternative but to uphold the findings of the ld. CIT(A) - in favour of assessee. Disallowance of the claim of loss on share transaction - CIT(A) allowed it - Held that - On test checking the details and documents pertaining to the claim of loss on future and option shares and the claim of the appellant appears to be supported by vouchers and contract notes which are verifiable with reference to the books of accounts. Therefore, no hesitation to conclude that the assessee has provided the necessary details and discharged the onus cast on it. The Assessing Officer has not brought anything on record to dispute the facts/details furnished by the assessee - as. DR did not place any material controverting the aforesaid findings of facts recorded by the CIT(A) nor brought to our notice any contrary decision the disallowance need to be deleted - decided in favour of assessee.

Issues Involved:
1. Whether the profits from the sale of shares and mutual funds should be treated as business income or capital gains.
2. Whether the disallowance of loss on share transactions in the AY 2007-08 was justified.

Issue-wise Detailed Analysis:

1. Treatment of Profits from Sale of Shares and Mutual Funds:
The primary issue across all four assessment years (AY 2005-06, 2006-07, 2007-08, and 2008-09) was whether the profits from the sale of shares and mutual funds should be treated as business income or capital gains. The Assessing Officer (AO) treated the entire gain from the sale of shares/mutual funds as business income. However, the assessee claimed that these were investments, and the profits should be considered capital gains.

The CIT(A) allowed the assessee's claim, stating that the assessee had distinct portfolios for investments and stock-in-trade. The assessee consistently followed a policy of holding certain shares as investments and others as stock-in-trade. The CIT(A) emphasized that the intention of the assessee at the time of purchase was crucial and that the assessee had treated these shares as investments in its books of accounts. The CIT(A) referred to various judicial precedents, including the decisions of the Hon'ble Mumbai High Court in the case of CIT Vs. Gopal Purohit, which upheld the distinction between investment and trading portfolios.

The Tribunal upheld the CIT(A)'s findings, noting that the assessee maintained separate portfolios for investments and trading, and the transactions in question were shown as investments in the books of accounts. The Tribunal also referred to the CBDT Circular No. 4/2007, which acknowledges the possibility of having two portfolios. The Tribunal concluded that the mere volume of transactions does not alter the nature of the transactions, and the gains from the sale of shares/mutual funds should be treated as capital gains.

2. Disallowance of Loss on Share Transactions (AY 2007-08):
In the AY 2007-08, the AO disallowed a loss of Rs.2,90,97,550/- on share transactions, claiming that the assessee did not provide sufficient details or produce contract notes and vouchers. The assessee contended that the details and contract notes were produced before the AO, but the AO did not accept them due to their voluminous nature.

The CIT(A) verified the assessment records and found that the details and documents were indeed produced and test-checked by the AO. The CIT(A) concluded that the loss was supported by vouchers and contract notes and was verifiable with reference to the books of accounts. The CIT(A) emphasized that additions cannot be made based on suspicion, surmises, and conjectures, citing several Supreme Court judgments.

The Tribunal upheld the CIT(A)'s findings, noting that the AO did not provide any contrary evidence to dispute the assessee's claim. The Tribunal found no reason to interfere with the CIT(A)'s decision to allow the loss on share transactions.

Conclusion:
The Tribunal dismissed the Revenue's appeals for all four assessment years, upholding the CIT(A)'s decisions that the profits from the sale of shares and mutual funds should be treated as capital gains and that the disallowance of loss on share transactions in the AY 2007-08 was not justified.

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