2016 (1) TMI 605 - AT - Income Tax

Assessment of Capital gain arising on sale of shares as Business income - Held that - As it cannot be said that the assessee s intention at the time of purchase of shares was to hold them as investments. In our view, the assessee s conduct and surrounding circumstances discussed above would show that the assessee has actually intended to deal in shares as a trader only. Hence, in our view, the Ld CIT(A) was justified in confirming the assessment of profit arising on sale of shares as business income of the assessee. Valuation of the closing stock of shares - cost or market value - Held that - Though the assessee valued the shares At cost in the books, it claimed before the assessing officer that the valuation should be done at lower of cost or market value of shares. The said claim was rejected by both the tax authorities. We notice that the assessing officer has observed that the assessee has chosen to value its closing stock of shares at cost in its books of account and further the Profits and gains from business has to be arrived at in accordance with the method regularly followed by the assessee. The AO has further pointed out that the closing stock of the first year becomes opening stock of the succeding year and hence the ultimate tax effect would be nil. In our view, there is merit in the stand taken by the assessing officer. As observed by him the Profits and gains of business has to be arrived at the method of accounting regularly followed by the assessee. Since the assessee has chosen to value its closing stock of shares at Cost price, we are of the view that the tax authorities are justified in rejecting the claim of the assessee to value the shares at lower of cost or market value.

Summary

Issues:
Assessment of Capital gain arising on sale of shares as "Business income," Non-allowing of expenses if profit on sale of shares is assessed as Business income, Rejection of claim to value closing stock of shares at lower or cost or market value.

Analysis:

1. Assessment of Capital Gain as Business Income:
The appellant's appeals were against the order assessing profit on the sale of shares as "Business income." The appellant argued that the shares were held as investments, not for trading. However, the assessing officer noted high volume trades, losses incurred, and lack of long-term capital gains. The tribunal found that the appellant's conduct indicated share trading intention, supported by balance sheet analysis showing reliance on borrowed funds for share purchases. The tribunal upheld the assessment of profit as business income, considering the appellant's share trading activities and financial structure.

2. Non-Allowance of Expenses:
The appellant claimed deduction of expenses if profit was treated as business income. The tribunal directed the assessing officer to consider all expenses, supporting the appellant's alternative claim.

3. Valuation of Closing Stock of Shares:
The appellant valued closing stock at cost but sought lower of cost or market value. The assessing officer rejected this, stating that profits must follow the regular accounting method. The tribunal agreed, upholding the rejection of the claim to value shares at lower cost or market value.

In conclusion, the tribunal partially allowed the appeals for statistical purposes, confirming the assessment of profit on share sales as business income and rejecting the valuation claim for closing stock. The decision was based on the appellant's share trading activities, financial structure, and accounting practices, aligning with the assessing officer's findings.