2012 (12) TMI 335 - AT - Income Tax

Capital gain or business income - Whether the income earned from the activity of purchase and sale of shares could be treated as PGBP or capital gain - Assessee is a sub-broker and has also carried out purchase and sale of shares on own account - Assessee is maintaining two separate portfolios i.e. investment portfolio and trading portfolio Held that - As the assessee has long term and short term capital gain out of the investment portfolio and it is not the case of the Revenue that any point of time the assessee has mixed up the above two portfolio and merely because the assessee had sold the shares in the relevant year and made substantial gain does not mean that transactions of investment portfolio were not as an investor but as a trader. Following the decision in case of Rewashanker A. Kothari (2006 (1) TMI 80 - GUJARAT HIGH COURT) this issue decides in favour of assessee Disallowance of STT u/s 40(ib) (Securities Transaction Tax) - Assessee has debited the STT to the brokerage account and had credited to P&L account by brokerage which is net of STT and other debts Assessee claims that he has not charged security transaction tax and has maintained separate accounts in his books of accounts - Held that - In the absence of the evidence issue required to reexamined. Remand to AO

Summary

Issues Involved:
1. Treatment of Capital Gains as Business Income.
2. Disallowance of Securities Transaction Tax.
3. Disallowance of Loss on Unexpired Contracts Related to Futures and Options.

Issue-Wise Detailed Analysis:

1. Treatment of Capital Gains as Business Income:
The primary issue in this case was whether the income from the sale of shares should be treated as business income or capital gains. The assessee, an individual deriving income from brokerage, shares, and interest, maintained two separate accounts for investment and trading in shares. The Assessing Officer (A.O.) treated the short-term capital gain of Rs. 4,28,039/- and long-term capital gain of Rs. 16,945/- as business income due to several factors, including the volume of transactions, intention of profit rather than dividend, use of creditors' funds, specialized knowledge, and the motive of reducing tax liability. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the A.O.'s decision.

Upon appeal, the Tribunal considered various judicial pronouncements and the assessee's consistent practice of maintaining separate accounts for investment and trading. The Tribunal noted that the assessee's method had been accepted in previous assessments, and there was no evidence of mixing the two portfolios. The Tribunal concluded that the transactions in question were part of the investment portfolio and should be treated as capital gains, not business income. Consequently, the Tribunal directed the A.O. to exclude the long-term and short-term capital gains from business income and tax them separately under the respective heads.

2. Disallowance of Securities Transaction Tax:
The second issue concerned the disallowance of Securities Transaction Tax (STT) amounting to Rs. 1,15,213/-. The A.O. disallowed the deduction under section 40(ib) of the Income Tax Act, 1961, as the assessee had debited the STT to the brokerage account and credited it to the Profit & Loss account net of STT and other debts. The CIT(A) upheld this disallowance.

The assessee contended that the STT related to clients and was not recovered from them, maintaining separate accounts for the same. However, the Tribunal found that there was insufficient supporting material to substantiate the assessee's claim. Consequently, the Tribunal set aside the order of the Revenue Authorities and remanded the matter back to the A.O. for a fresh investigation, directing the A.O. to decide the issue afresh after providing a reasonable opportunity of being heard to the assessee.

3. Disallowance of Loss on Unexpired Contracts Related to Futures and Options:
The third issue involved the disallowance of a net loss of Rs. 2,589/- on unexpired contracts related to futures and options. The assessee chose not to press this ground during the hearing, and the Tribunal, in the absence of any supporting material, rejected the ground as not pressed.

Conclusion:
The Tribunal allowed the appeal partly for statistical purposes. It directed the A.O. to treat the gains from the investment portfolio as capital gains and reconsider the disallowance of STT after further investigation. The ground regarding the loss on unexpired contracts was rejected as it was not pressed by the assessee.