2013 (9) TMI 328 - AT - Income Tax

Nature of Income - The dispute is regarding the nature of income from sale and purchase of shares by the assessee - Whether the income from sale and purchase of shares in a particular case should be treated as capital gain or as business income Held that - we have no hesitation to hold that the assessee is engaged in the business of purchase and sale of shares considering the peculiarity of the facts and circumstances in which the transaction has been done - Once it is established that the nature of transactions are such that the assessee is trading in shares, it does not make any difference whether he has transacted in the same shares more than four times or less than four times. - income is liable to taxed as income from business - Decided against the assessee. Claim of Set Off of Business Loss - Held that - In the light of the provisions of Sec. 43(5), the AO was of the opinion that only the income earned from the trading in derivatives before 25.1.2006 is allowed to be set off against the brought forward speculation loss from the activity of trading in derivatives. However, as we have held that the income from shares is to be treated as business income, we accordingly restore this issue back to the files of the AO. The AO is directed to consider the claim of loss in the light of our decision, as per provisions of the law. Disallowance of the Set Off of Loss - Loss disclosed under the head brought forward Long Term Capital loss Held that - As the underlying nature of the transaction was the same i.e. F&O, therefore brought forward losses which were erstwhile treated as speculative losses were allowed to be set off against subsequent years F&O profit - the loss which the assessee claims to set off is Long Term Capital loss and there is no such amendment so far as claim of such loss is concerned. Therefore we do not find any merit in the claim of the assessee to allow set off of Long Term Capital loss against business income - prior to the amendment to Sec. 43(5), F&O transactions were treated as speculative transaction but post amendment, the same was treated as business transaction. Rebate u/s 88E on account of STT paid by the assessee - Interest u/s. 234B and 234C - Whether the CIT(A) erred in not allowing the entire loss arising on account of valuation of closing stock and the shares written off as per the recognized method cost or market value whichever is lower - Held that - The issues were Restored back to the file of the AO. The AO is directed to examine the claim of loss of the assessee in the light of the decision that entire STCG is to be taxed under the head business income, after giving reasonable opportunity of being heard to the assessee Rebate also requires verification by the AO - The AO is accordingly directed to consider the claim of the rebate u/s. 88E as per the provisions of the law after giving a reasonable opportunity of being heard to the assessee.

Issues Involved:
1. Classification of income from sale and purchase of shares as either Short Term Capital Gains (STCG) or business income.
2. Set-off of business loss from Futures and Options (F&O) against income assessable for the year.
3. Disallowance of set-off of brought forward Long Term Capital Loss against business income.
4. Valuation of closing stock and written-off shares.
5. Claim of rebate under section 88E for Securities Transaction Tax (STT) paid.
6. Charging of interest under sections 234B and 234C.
7. Initiation of penalty under section 271(1)(c).

Detailed Analysis:

1. Classification of Income from Sale and Purchase of Shares:
The primary issue was whether the income from the sale and purchase of shares should be treated as Short Term Capital Gains (STCG) or business income. The Assessing Officer (AO) observed that the assessee was engaged in systematic and regular trading of shares, with high volume and frequency of transactions, and thus concluded that the income should be classified as business income. The AO relied on CBDT Circular No. 4 of 2007 and the decision in DCIT Vs. Smt. Deepaben Amitbhai Shah, emphasizing the volume, frequency, continuity, and regularity of transactions. The CIT(A) partially agreed with the AO, treating Rs. 64,02,991/- as business income and Rs. 8,01,787/- as STCG. However, the Tribunal reversed the CIT(A)'s partial relief, holding that the entire amount of Rs. 72,04,778/- should be taxed as business income, given the high frequency and volume of transactions.

2. Set-off of Business Loss from F&O:
The AO allowed the set-off of income from trading in derivatives (F&O) after 25th January 2006 against brought forward speculation losses, as per the proviso (d) to Section 43(5) of the Act. The Tribunal, however, restored this issue to the AO for reconsideration in light of its decision to treat the income from shares as business income.

3. Disallowance of Set-off of Brought Forward Long Term Capital Loss:
The assessee claimed set-off of brought forward Long Term Capital Loss against business income. The Tribunal dismissed this claim, stating that there was no amendment allowing such set-off, unlike the case of F&O transactions where an amendment to Section 43(5) was applicable.

4. Valuation of Closing Stock and Written-off Shares:
The assessee claimed a loss on account of the valuation of closing stock and shares written off. The Tribunal restored these issues to the AO for reconsideration, directing the AO to examine the claims in light of the decision to treat STCG as business income.

5. Claim of Rebate under Section 88E for STT Paid:
The Tribunal directed the AO to verify the claim of rebate under section 88E for STT paid, in light of the decision on the classification of income from shares.

6. Charging of Interest under Sections 234B and 234C:
The Tribunal noted that this issue was consequential to the primary finding on the classification of income and directed the AO to reconsider it accordingly.

7. Initiation of Penalty under Section 271(1)(c):
The Tribunal dismissed this ground as premature.

Conclusion:
The Tribunal allowed the appeals of the Revenue and partly allowed the appeal of the assessee for statistical purposes, directing the AO to reconsider certain issues in light of the Tribunal's findings. The order was pronounced in the open court on 14.12.2012.

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