2016 (1) TMI 643 - AT - Income Tax

Sale of shares - long-term-capital-gains or profit and gains of the business - Held that - The assessee s intention for purchasing the shares was purely for investment and to earn gain on a long term investment. Not only this, in earlier years also the assessee s investment in shares have been held to be assessed under the head capital gain , because consistently assessee has been showing investment in shares in his personal Balance sheet purchased out of his own surplus fund. As pointed out by Ld. Counsel, the Ld. AO has misled himself by taking the Balance sheet of the Proprietary concern wherein the assessee had shown certain loan, whereas the investment have been made through personal account which is reflected in the personal Balance sheet, wherein there are sufficient own fund for making the investment. Thus, on these facts and circumstances, we hold that the shares which have been held as investment in the Balance sheet are to be treated as assessable under the head capital gain and not as business income .- Decided in favour of assessee. Disallowance of depreciation - AO has made the disallowance as there was no business activity carried out by the assessee in his proprietary concern Cherry International - Held that - We find that assessee had shown loss from proprietary concern, M/s Cherry International. After including depreciation, the loss has increased to ₹ 2,83,490/-. Even if there was a temporary lull in the business that does not mean depreciation on the assets appearing in the Balance sheet have to be disallowed especially when it has been brought on record that in the subsequent years the assessee s business has again taken-up at a very high scale from where the assessee had shown huge profits. Thus, it cannot be held that simply there was temporarily lull in the business activity in this year the depreciation claimed on the assets is to be disallowed. Accordingly, depreciation claimed by the assessee is allowed. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of long-term-capital-gains as business income
2. Disallowance of depreciation

Analysis:

Issue 1: Treatment of long-term-capital-gains as business income
The appellant challenged the CIT(A)'s decision to treat the long-term-capital-gains on the sale of shares as business income instead of capital gains. The appellant argued that the shares were held for an average period of more than 600 days, showing a pattern of long-term investment. The appellant maintained separate balance sheets for the proprietary concern, share trading income, and personal account, categorizing the shares as investments valued at cost. The AO, however, rejected this argument, citing various case laws and a CBDT Instruction. The AO highlighted the significant gains from the sale of shares, particularly from "Pyramid Saimira," and raised concerns about the purchase timing and alleged market manipulation. Both the AO and CIT(A) concluded that the gains should be treated as business income. The appellant contended that the shares were purchased through IPO, indicating an investment intention, supported by the average holding period and historical treatment of shares as capital gains. The Tribunal agreed with the appellant, emphasizing the investment nature of the shares, the holding period, and the absence of business activities, ultimately allowing the appeal.

Issue 2: Disallowance of depreciation
The AO disallowed depreciation of Rs. 3,85,043, citing the lack of business activity in the appellant's proprietary concern, "Cherry International." The CIT(A) upheld this decision. The appellant argued that there was a temporary lull in business, evidenced by subsequent years' sales and profits, justifying the claimed depreciation on assets appearing in the balance sheet. The Tribunal noted the loss from "Cherry International" and the subsequent increase due to depreciation. Considering the revival of business in later years and the legitimacy of claiming depreciation on assets, the Tribunal allowed the depreciation claimed by the appellant.

In conclusion, the Tribunal allowed the appeal, ruling in favor of the appellant on both issues.