2016 (5) TMI 1543 - AT - Income Tax

Characterization of income - income from share trading transaction - short term capital gain or business income - HELD THAT - We find that this issue has not been examined in depth by AO that whether at the time of purchase of shares of SGLPP assessee has borrowed funds specifically to buy the shares, which could have been verified from the bank account of the assessee and secondly whether assessee has maintained separate demat account to demarcate that at the time he bought the shares, his intention was to hold them as investment and to earn capital gain (short term/ long term) therefrom. These are very relevant in this case because assessee s main business is of share trading and short term capital gain of ₹ 78.93 lacs has been earned which becomes further relevant because the total net profit in the audited profit and loss account is shown at 1.09 crores which is inclusive of the short term capital gain of ₹ 78.93 lacs which means that substantial turnover is of business but the substantial profit portion is coming from short term capital gain When we look up to the assessment order, we observe that ld. Assessing Officer has not dealt with the issue relating to interest expenditure nor has he co-related specifically the borrowings of funds with the impugned purchase transaction for buying of equity shares of SGLPP We are of the view that the order of ld. Assessing Officer is cryptic to the extent that proper verification of books of account was not made before making observation that the assessee is deemed to have taken borrowed funds for entering into the transactions of purchase/sales of shares shown in the short term capital gain and further ld. Assessing Officer has also not gone through the books of account to see as to whether assessee has maintained separate demat account which can prove the very intention of the assessee at the time of purchase of shares that they are intended to be held as investment and surplus or deficient, if any, arising in future will be shown as capital gain. - Appeal allowed for statistical purposes.

Summary

Issues Involved:
1. Treatment of short-term capital gains as business income.
2. Verification of borrowed funds for purchase of shares.
3. Maintenance of separate demat accounts for investment and trading purposes.

Detailed Analysis:

1. Treatment of Short-Term Capital Gains as Business Income:
The primary issue in these appeals was whether the short-term capital gains declared by the assessee should be treated as business income. The assessee, engaged in share trading, declared a short-term capital gain of ?78,93,389/- from the sale of shares of SGL PP. The Assessing Officer (AO) treated this as business income, arguing that the assessee's intention was to avoid higher taxes by showing the gains as capital gains subject to a concessional rate of 10% under Section 111A of the Income Tax Act. The AO's decision was based on the fact that the assessee was primarily dealing in shares, had borrowed funds, and paid substantial interest. However, the CIT(A) overturned this decision, stating that the AO's treatment was based on a narrow and myopic outlook. The CIT(A) emphasized that the transactions met the conditions under Section 111A, and the AO did not provide sufficient reasons or issue a show-cause notice before reaching his conclusion. The CIT(A) also noted that the frequency or magnitude of transactions alone is not a decisive factor for treating income as business income.

2. Verification of Borrowed Funds for Purchase of Shares:
The AO's assessment was based on the assumption that the assessee had borrowed funds for purchasing shares, which led to the treatment of the gains as business income. However, the CIT(A) and the Tribunal noted that the AO did not verify whether the funds were specifically borrowed for buying the shares in question. The Tribunal observed that the AO did not examine the assessee's bank accounts to verify this claim. The Tribunal directed the AO to reassess the case, specifically verifying whether the funds used for purchasing the shares were borrowed and whether the assessee maintained separate demat accounts for investment purposes.

3. Maintenance of Separate Demat Accounts for Investment and Trading Purposes:
The Tribunal emphasized the importance of maintaining separate demat accounts to distinguish between shares held for investment and those held for trading. This distinction is crucial in determining the nature of the income (capital gains vs. business income). The Tribunal found that the AO did not verify whether the assessee maintained separate demat accounts, which could indicate the intention behind purchasing the shares. The Tribunal directed the AO to reassess the case, considering whether separate demat accounts were maintained and whether the intention at the time of purchase was to hold the shares as an investment.

Conclusion:
The Tribunal set aside the AO's orders and directed a fresh assessment, emphasizing the need for a detailed verification of the assessee's claims regarding borrowed funds and the maintenance of separate demat accounts. The appeals were allowed for statistical purposes, and the AO was instructed to reassess the cases, considering the Tribunal's observations and providing the assessee with a proper opportunity to present their case.