2016 (3) TMI 490 - AT - Income Tax

Investment portfolio - treated as capital gains OR business income - Held that - We find that the assessee has consistently been in the subsequent assessment years also has given the same treatment to the shares kept in investment portfolio. The very intention of the assessee at the time of purchase was decipherable from the act and conduct of the assessee. The assessee has maintained two portfolios. The profits/loss incurred in respect of trading portfolio has been treated as business income whereas in respect of investment portfolio the assessee has returned the income/loss as capital gains/loss. Even subsequently the long term capital loss claimed by the assessee in respect of the same scripts has been accepted by the AO in assessment order for A.Y. 2011-12. Though the assessee had made the investments by using borrowed funds also but that itself cannot be a sole ground to treat the assessee as a trader in respect of the scripts which had been kept in the investment portfolio especially when the assessee has clearly bifurcated the investment portfolio and trading portfolio and has consistently maintained the same. In view of the above the profit on share transactions relating to investment portfolio of the assessee is ordered to be treated as capital gains and not as business income of the assessee. Appeal of the assessee is therefore allowed. - Decided in favour of assessee Applacablity of provision of section 73 - whether assessee would deemed to be carrying on a speculation business for the purpose of Sec. 73(1)? - Held that - In order to determine whether the exception that is carved out by the explanation applies the legislature has first mandated a computation of the gross total income of the Company. The words consists mainly are indicative of the fact that the legislature had in its contemplation that the gross total income consists predominantly of income from the four heads that are referred to therein. Obviously in computing the gross total income the normal provisions of the Act must be applied and it is only thereafter that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the explanation. Consequently in the present case the gross total income of the assessee was required to be computed inter alia by computing the income under the head of profits and gains of business or profession as well. Both the income from service charges and the loss in share trading would have to be taken into account in computing the income under that head both being sources under the same head. The assessee had a dividend income (income from other sources). Thus the assessee fell within the purview of the exception carved out in the explanation to Section 73 and that consequently the assessee would not be deemed to be carrying on a speculation business for the purpose of Sec. 73(1).See CIT vs HSBC Securities & Capital Markets India (P) Ltd 2012 (6) TMI 715 - BOMBAY HIGH COURT - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of profit on sale of shares as business income or capital gains.
2. Applicability of Explanation to Section 73 of the Income Tax Act regarding speculative transactions.

Issue-wise Detailed Analysis:

1. Classification of Profit on Sale of Shares:

The assessee's appeal contested the treatment of profit on the sale of shares amounting to Rs. 8,69,17,308/- as business income by the lower authorities, arguing it should be treated as capital gains. The Assessing Officer (AO) had observed that the assessee engaged in purchase/sale transactions of shares in 10 listed companies and mutual funds, treating the income from these transactions as business income due to the short holding period and the use of significant borrowings for investments. This was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)].

The Tribunal, after considering the submissions and records, noted that the assessee maintained two separate portfolios: an investment portfolio and a trading portfolio. The profits/losses from the trading portfolio were treated as business income, while those from the investment portfolio were treated as capital gains/losses. The Tribunal observed that the assessee's consistent treatment of these portfolios in subsequent years, including the acceptance of long-term capital loss by the AO in the assessment year 2011-12, supported the assessee's claim. The Tribunal concluded that the intention of the assessee at the time of purchase was to hold the shares as investments, and the use of borrowed funds alone did not justify treating the investment portfolio as a trading activity. Thus, the Tribunal ordered that the profit on share transactions relating to the investment portfolio be treated as capital gains, allowing the assessee's appeal.

2. Applicability of Explanation to Section 73:

The Revenue's appeal challenged the CIT(A)'s decision that the explanation to Section 73 of the Income Tax Act did not apply to the assessee's share transactions, which the AO had treated as speculative. The AO had noted that the assessee's profit & loss account included a profit of Rs. 9,28,34,535/- from dealing in shares, securities, and derivatives, and a loss of Rs. 221,38,13,206/- from share trading, which was set off against future and options income. The AO treated this loss as speculation loss under Section 73, denying its set-off against other business income and adding it back to the taxable income. The AO also increased the share trading loss by Rs. 10 crores, attributing it to interest and other expenditures related to share trading.

The CIT(A) allowed the assessee's claim, relying on various case laws, and concluded that the assessee's Gross Total Income (GTI) primarily consisted of income from other sources, not from speculation business. The CIT(A) held that the loss on share trading was a regular business loss, not a speculation loss, and thus, the explanation to Section 73 did not apply. Consequently, the CIT(A) treated the Rs. 10 crores expenditure as normal business expenditure.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee's GTI mainly comprised income from other sources, and the business income was negative. The Tribunal referred to the Bombay High Court's decisions in "CIT vs HSBC Securities & Capital Markets India (P) Ltd." and "CIT vs Darshan Securities Pvt. Ltd.", which supported the view that Section 73 does not apply to companies whose GTI mainly consists of income from other sources. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal.

Conclusion:

The Tribunal allowed the assessee's appeal, treating the profit on share transactions as capital gains, and dismissed the Revenue's appeal, holding that the explanation to Section 73 did not apply to the assessee's share trading loss, which was treated as a regular business loss. The orders were pronounced in the open court on 31.12.2015.