2014 (2) TMI 890 - AT - Income Tax

Nature of Surplus - Whether the surplus arising to the assessee on account of purchases and sales of Mutual Fund Units is to be considered under the head income from capital gains or income from business Held that - The assessee had all along shown the units purchased by it under the head investment - Assessee was engaged in the business of manufacturing and exporting of leather goods the CIT(Appeals) finding that assessee held the Mutual Fund units as investments has not been effectively rebutted by the Revenue - When the intention of the assessee was only to make investment, sale thereof would only result in capital gains - There is no case for the Revenue that assessee s main business was trading in Mutual Fund Units or shares - the surplus arising to the assessee was rightly considered as income from capital gains there is no reason to interfere in the findings of the CIT(Appeals). Deletion of addition Differences in purchase of Mutual Funds Held that - Revenue has not been able to bring out anything to show that any of the explanations were erroneous or wrong - the Assessing Officer found that the differences in purchases highlighted by him in the assessment order stood explained - CIT(Appeals) has given a finding that discrepancies pointed out by the Assessing Officer were on account of non-application of mind while preparing remand report - Assessee had clearly explained it as Units of Prudential ICICI Floating Rate Fund there is no reason to disbelieve it thus, none of the discrepancies alleged by the Assessing Officer existed the CIT(Appeals) was justified in holding that there was no difference in purchase of units or closing stock of investment in Mutual Fund Units and the additions deleted by the CIT(A) also upheld Decided against Revenue.

Summary

Issues Involved:
1. Treatment of surplus from the sale of shares and securities as capital gain vs. business income.
2. Deletion of an addition of Rs.3,75,95,906/- due to discrepancies in the purchase of Mutual Funds.

Issue-wise Detailed Analysis:

1. Treatment of Surplus from Sale of Shares and Securities:

The Revenue was aggrieved by the CIT(Appeals)'s direction to treat the surplus from the sale of shares and securities as capital gain, while the Assessing Officer (AO) had considered it under "Profits and Gains of Business/Profession." The assessee, engaged in the business of manufacturing and exporting leather goods, had shown the surplus under "capital gains." The AO argued that the transactions in shares and Mutual Funds were conducted to earn profit, with systematic buying and selling constituting a business. However, the CIT(Appeals) noted that the assessee's intention was to hold Mutual Fund units as investments, not for trading. The CIT(Appeals) relied on the decision of the Mumbai Bench of the Tribunal in the case of Bombay Gymkhana Ltd. vs. ITO, which held that gains from the sale of Mutual Fund units held as investments should be treated as capital gains. The Tribunal upheld the CIT(Appeals)'s decision, stating that the Revenue did not effectively rebut the finding that the assessee held the Mutual Fund units as investments. Therefore, the surplus was rightly considered as income from capital gains.

2. Deletion of Addition of Rs.3,75,95,906/-:

The AO made an addition of Rs.3,75,95,906/- due to discrepancies in the purchase of Mutual Funds. The AO noted substantial differences in the purchase details submitted by the assessee on different dates and compiled these differences. The assessee explained that the discrepancies were due to typographical errors and provided a reconciliation statement. The CIT(Appeals) sought a remand report from the AO, who pointed out new discrepancies. The assessee explained these discrepancies, and the CIT(Appeals) found that the discrepancies were due to non-application of mind by the AO while preparing the remand report. The CIT(Appeals) held that the differences in purchases were reconciled by the assessee, and there was no difference in the closing stock. The Tribunal agreed with the CIT(Appeals), stating that the Revenue could not show any errors in the explanations provided by the assessee. The Tribunal found that the CIT(Appeals) was justified in deleting the addition, as there were no discrepancies in the purchase of units or the closing stock of investments in Mutual Fund units.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the CIT(Appeals)'s decisions on both issues. The surplus from the sale of shares and securities was rightly treated as capital gains, and the addition of Rs.3,75,95,906/- was deleted due to the reconciliation provided by the assessee, which explained the discrepancies pointed out by the AO.