2015 (12) TMI 1368 - AT - Income Tax

Transaction of shares - business income or Short Term Capital Gains eligible to concessional tax treatment u/s.111A - Held that - The assessee has indulged in violation of SEBI Regulation while making investment in IPOs. However, whatever amounts the assessee had illegally earned, which could have been assessed as their income, has been taken away by SEBI from them. Once the actual amounts of income earned through the violation of SEBI Regulation have been disgorged by SEBI, ultimately no income has resulted to the assessee. Thus, applying the theory of real income and also relying upon the above decision of Shri Monal Y. Thakkar and Smt. Reetaben R. Thakkar 2015 (7) TMI 913 - ITAT AHMEDABAD we are of the opinion that the sum of ₹ 2,20,76,842/- is to be excluded from the assessee s income. We order accordingly and hold that only the sum of ₹ 34,12,218/- is to be assessed in the hands of the assessee in the year under consideration. We express no opinion about the finding of the CIT(A) that the sum of ₹ 2,20,76,842/- is to be assessed as business income because since we have held that on account of disgorgement the sum of ₹ 2,20,76,842/- is not to be assessed in the hands of the assessee. Once the amount is not to be taxed because it has already been recovered by the SEBI and there is no real income in the hands of the assessee, the question of the head under which it is to be assessed could not arise. Now, we revert back to the question with regard to the head under which the sum of ₹ 34,12,218/- is to be assessed. The entire gain had arisen from the purchase and sales of one share, i.e., FCS share which was purchased once and was also sold once. Thus, there was a purchase and sale of single script at one time during the year under consideration that too with assessee s own fund. This statement of the ld. Counsel has not been controverted. In view of above, we do not find any justification to interfere with the finding of the CIT(A) in this regard upholding assessment of ₹ 2,20,76, 842 (out of Short Term Capital Gains of ₹ 2, 54, 93,060 shown in the appellant s return) as business income instead of as Short Term Capital Gains eligible to concessional tax treatment u/s.111A.

Summary

Issues:
- Revenue's appeal: Treatment of share transaction as short term capital gain
- Assessee's appeal: Validity of assessment order, treatment of short term capital gains, levy of interest, penalty proceedings

Revenue's Appeal - Treatment of Share Transaction:
- The Revenue contested the treatment of a sum arising from a share transaction as short term capital gain, challenging the direction to tax the surplus amount as per Section 111A.
- The CIT(A) divided the capital gain into two portions: one portion assessed as business income due to alleged illegal acquisition of shares, and the remaining sum accepted as income from capital gain.
- The ITAT, considering a similar case, held that once amounts earned through SEBI regulation violation were disgorged, no income resulted to the assessee.
- The ITAT excluded the disgorged amount from the assessee's income, assessing only the remaining sum as capital gain.
- The CIT(A) held the remaining sum to be income from capital gain based on the nature of the investment and specific provisions of Section 111A.
- The ITAT upheld the CIT(A)'s decision, noting the single script transaction with the assessee's own funds, and rejected the Revenue's appeal.

Assessee's Appeal - Validity of Assessment Order and Treatment of Short Term Gains:
- The assessee raised multiple grounds challenging the assessment order, including the treatment of short term capital gains and non-allowance of reduction on account of disgorgement.
- The ITAT rejected the ground regarding the validity of the assessment order as it was not pressed during the hearing.
- The ITAT allowed the assessee's appeal regarding the treatment of short term gains, excluding the disgorged amount and assessing only the remaining sum as capital gain.
- The ITAT directed the Assessing Officer to re-work the interest charges and rejected the general nature grounds of the assessee's appeal.

Conclusion:
- The Revenue's appeal was dismissed, and the assessee's appeal was partly allowed, with the ITAT ruling in favor of the assessee regarding the treatment of short term gains and interest charges.
- The ITAT's decision was based on the principles of real income, SEBI regulation violations, and specific provisions of the Income Tax Act, resulting in the exclusion of disgorged amounts and assessment of the remaining sum as capital gain.