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2015 (12) TMI 1816 - AT - Income TaxCorrect head of income - Profits realized on sale of shares - business income or capital gain - long term capital gain or short term capital gain - period of holding of the shares - HELD THAT - Schedule L (on Investments) to the Balance Sheet enclosed along with return that long term investments are stated at cost less permanent diminution in value of investments only. The Investments(Other than Trade) of 44.71 crores as on 31 March 2006 are detailed in Schedule F of the Balance Sheet. The aforesaid investments are made upon the decision made by Board of Directors and with clear intention to hold the aforesaid Capital Assets as investment. The intention of the assessee is therefore never to make profit from sales as in the case of trading activities. The intention is to have steady and substantial capital appreciation and earn dividends if any from such investment. As regards trading stock where the assessee intends to make profits such stock has been disclosed in Schedule I of the Balance sheet showing a closing value of 30.85 crores on 31 March 2006. The accounting policy for trading of shares is disclosed in Schedule L of the Balance sheet which states that closing stock of securities is valued at cost of market price which ever is lower. Thus the intention of the assessee is very much clear as to what stocks are to be treated as business stock and what to be treated as investment stock. The Policy and treatment of stock transaction are clearly reflected in the Balance sheet of the assessee. We thus fully concur with the finding of the Learned CIT(Appeals) that the profit of 34, 61, 63, 879 in respect of shares sold during the year (including gain of 29, 05, 58, 750 realized on sale of shares of Dawar India Ltd. ) has been rightly treated by the assessee as long term capital gain and thus the Learned CIT(Appeals) has rightly held that the assessee is eligible for exemption under sec. 10(38) of the Act on the said long term capital gain. The First Appellate Order in this regard is thus upheld. The ground Nos. 1 and 2 are accordingly rejected. It is also clear that 84% gains from capital gains were long term and only 15% was from short term investment. It is always material that the intention of the assessee which is to be seen while determining the nature of the transaction conducted by the assessee. On perusal of the holding period of the shares it is seen that the assessee transacted in 85 scripts had holding period of more than 400 days ( Dabur India holding was more than 6900 days) 29 scripts had holding period of more than 365 days (Appendix A). Besides all the scripts sold were STT paid and all were delivery based. Accrual of interest income - AO made addition on the basis of special auditor s report that assessee had not shown interest income received from Dawar Foods Ltd. - HELD THAT - The submission of the assessee remained that assessee had advanced an amount of 6 crores to Dawar Foods Ltd. initially at the interest rate of 10% however during the year on mutual consents the rate was reduced from 10% to 8.5%. The Assessing Officer had not accepted this explanation of the assessee but the Learned CIT(Appeals) has accepted the same with this finding that it is a settled principle of law that only real income is to be taxed. In this regard he has followed the ratios laid down in the case of CIT vs. Shoorji Ballabdass Co. 1962 (3) TMI 6 - SUPREME COURT . We thus do not find reason to interfere with the First Appellate Order in this regard. The same is upheld. The ground No. 3 is accordingly rejected. Benefit of charging of the gain u/s 111A - HELD THAT - It is not the finding of the Assessing Officer or the Learned CIT(Appeals) that these shares were shown as stock in trade or the assessee was not correct in showing these shares as investment. We thus do not find infirmity in the claim of the assessee that the profit accrued on sale of these shares was short term capital gain and the assessee was eligible for claiming charging of the gain under the provisions laid down under sec. 111A of the Act. We thus while setting aside the orders of the authorities below in this regard direct the Assessing Officer to accept the claim of the assessee and allow the benefit of charging of the gain under sec. 111A of the Act. Addition u/s 14A - HELD THAT - Interest receipt is more than the interest payment in respect of financial activities and the Assessing Officer has also not disputed the reserves available with the assessee. We are thus of the view that the Learned CIT(Appeals) has rightly deleted the disallowance. The same is upheld.
Issues Involved:
1. Classification of income from sale of shares as business income or capital gains. 2. Treatment of interest income. 3. Disallowance of expenses under Section 14A. 4. Treatment of gains from mutual funds as speculation business. 5. Disallowance of interest expenses on loans/advances for non-business purposes. Detailed Analysis: 1. Classification of Income from Sale of Shares: - Long Term Capital Gains (LTCG) vs. Business Income: The Revenue argued that the assessee systematically engaged in trading shares, treating the income as business income. The assessee contended that shares were held as investments, supported by the method of accounting and financial statements. The ITAT upheld the CIT(A)'s decision that the LTCG of Rs. 34,61,63,879 should be treated as capital gains, eligible for exemption under Section 10(38), based on the intention, holding period, and treatment in the books of accounts. - Short Term Capital Gains (STCG) vs. Business Income: The assessee claimed STCG of Rs. 6,23,34,129, which the AO treated as business income due to frequent transactions. The ITAT found that the assessee's primary intention was investment, not trading, and directed the AO to treat the gains as STCG under Section 111A, considering the holding period and STT paid on transactions. 2. Treatment of Interest Income: - The AO added Rs. 9 lakhs as interest income, which the assessee argued was reduced by mutual consent from 10% to 8.5%. The CIT(A) accepted the assessee's explanation, emphasizing that only real income should be taxed. The ITAT upheld this decision, referencing the principle from CIT vs. Shoorji Ballabdass & Co. 3. Disallowance of Expenses under Section 14A: - The AO disallowed expenses of Rs. 5,33,768 under Section 14A against exempted income. The ITAT, agreeing with the CIT(A), found no infirmity in the assessee's claim and allowed the expenses, emphasizing the need for consistency with accounting principles. 4. Treatment of Gains from Mutual Funds as Speculation Business: - The Revenue argued that trading in mutual funds should be treated as speculation business under Explanation to Section 73. The ITAT disagreed, noting that the assessee's primary business was not speculative and upheld the CIT(A)'s decision to treat the gains as capital gains. 5. Disallowance of Interest Expenses on Loans/Advances for Non-Business Purposes: - The AO disallowed Rs. 3,89,53,657 as interest expenses, claiming the funds were used for non-business purposes. The CIT(A) found that the assessee had sufficient reserves and deleted the disallowance. The ITAT upheld this decision, noting that the interest receipts exceeded the interest payments and the reserves were undisputed. Conclusion: - The ITAT dismissed the Revenue's appeals and partly allowed the assessee's appeals, affirming the CIT(A)'s treatment of LTCG and STCG, the non-realization of interest income, and the disallowance of expenses under Section 14A. The ITAT also upheld the CIT(A)'s decision on interest expenses and the treatment of mutual fund gains. The judgment emphasized the importance of the assessee's intention, the treatment in books of accounts, and consistency with accounting principles.
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