2016 (6) TMI 251 - AT - Income Tax

Revision u/s 263 - Assessment of income - as per CIT(A) the gain on sale of shares ought to have been assessed by the AO under the head income from business and not under the head short term capital gain - whether interest expenditure should be allowed as deduction while computing the short term capital gain and disallowance of expenses u/s 14A Held that - We find right from A.Y.2001-02 till A.Y.2004- 05 the assessee had two portfolios of shares, one held as investment and the other as stock in trade of business. In respect of shares which were held as investment, gain on transfer of those shares was declared under the head capital gain and the same was accepted by the revenue. It is no doubt true that in those years the assessment was made u/s 143(1) of the Act. Even for A.Y.2006-07 & A.Y.2006-07 the position was the same. The claim of the assessee was accepted u/s 143(1) but for A.Y.2007-08 and 2009-10 assessment was completed u/s 143(3) of the Act. The claim of the assessee has been accepted by the revenue. It is thus seen that only the present A.Y.2005-06 the revenue is taking a stand that the sale of shares held as investment gives rise to income from business. The facts in the present A.Y. are identical to the facts in the other assessment years referred to above. In such circumstances we are of the view that taking a different stand in the present A.Y. would be violation of principles of consistency and the revenue should not be permitted to take such a stand. We are therefore of the view that the gain on sale of shares held as investments will give raise to capital gain and has to be assessed as such. As far as disallowance of interest in computing the short term capital gain is concerned, we are of the view that income of an assessee has to be computed under various heads specified under Section 14 of the Act. Deductions are to be allowed in computing the income under various heads only to the extent it is provided by the Legislature under that very head. The computation of capital gain is provided in Section 48 of the Act. According to Section-48, the only deductions which are allowable are - (1) the cost of acquisition of the asset, (2) the cost of any improvement thereto and (3) expenditure incurred wholly and exclusively in connection with the transfer of the asset. The cost of acquisition means the amount paid for acquiring the asset. Once the asset is acquired, then any expenditure incurred thereafter cannot be considered as the cost of acquisition, since such expenditure would not have any nexus with the acquisition of the asset. If income is generated from the capital asset, depending on the head of income under which it is assessed, deduction can be claimed either u/s.36(1)(iii) or Sec.57(iii) of the Act. The entire scheme of the Act, therefore, reveals that interest component after the date of acquisition and till the date of sale cannot be treated as the cost of acquisition. It is only allowable as a revenue deduction on year to year basis against the income generated from such asset or likely to be generated to the extent provided by the Legislature under different heads. We therefore uphold the order of the AO to this extent.- Decided partly in favour of assessee.

Issues Involved:
1. Treatment of Short Term Capital Gain as Business Profit.
2. Enhancement of Assessment by CIT(A) without complying with Section 251(2).
3. Allowance of Interest Claimed in Computing Short Term Capital Gain.
4. Scope of Assessment Proceedings Pursuant to Order u/s 263.
5. Consistency in Treating Income from Sale of Shares.

Detailed Analysis:

1. Treatment of Short Term Capital Gain as Business Profit:
The Assessee contested the CIT(A)'s decision to treat the Short Term Capital Gain (STCG) of ?1,00,73,530/- as business profit. The CIT(A) concluded that the frequency of transactions, number of scripts, and short duration of holding indicated trading activity rather than investment. Despite the Assessee's arguments that it maintained separate portfolios for investments and stock-in-trade and that most shares were held for more than 15 days, the CIT(A) held that the use of borrowed funds for purchasing shares further supported the classification as business income.

2. Enhancement of Assessment by CIT(A) without complying with Section 251(2):
The Assessee argued that the CIT(A) erred in enhancing the assessment without following the requirements of Section 251(2). The Tribunal agreed that the CIT(A) could not enhance the assessment beyond the specific issues addressed in the order u/s 263. The CIT(A)'s decision to reclassify the STCG as business income was beyond the scope of the original order, which only directed disallowance of interest and application of Section 14A.

3. Allowance of Interest Claimed in Computing Short Term Capital Gain:
The Assessee had claimed interest expenditure of ?7,09,614/- as expenses incurred in connection with the transfer of shares. The CIT, in his order u/s 263, directed the AO to disallow this interest expenditure, stating that there was no provision in the IT Act for such a deduction from capital gains. The Tribunal upheld the AO's recomputation of STCG at ?1,16,05,085/-, disallowing the interest claimed by the Assessee.

4. Scope of Assessment Proceedings Pursuant to Order u/s 263:
The Tribunal noted that the CIT's order u/s 263 was limited to disallowance of interest and application of Section 14A. The AO, therefore, could not extend the scope of reassessment to reclassify the STCG as business income. The Tribunal cited several judgments supporting the principle that the AO's powers in reassessment are confined to the issues specified in the order u/s 263.

5. Consistency in Treating Income from Sale of Shares:
The Tribunal emphasized the principle of consistency, noting that in previous and subsequent assessment years, the Assessee's classification of income from sale of shares as capital gains was accepted by the revenue. The Tribunal found no justification for a different treatment in the current assessment year (2005-06), given the identical facts and circumstances. Therefore, the Tribunal held that the gain on sale of shares should be assessed as capital gain, not business income.

Conclusion:
The Tribunal partly allowed the Assessee's appeal, ruling that:
- The reclassification of STCG as business income by the CIT(A) was beyond the scope of the order u/s 263.
- The interest claimed by the Assessee in computing STCG was correctly disallowed by the AO.
- The gain on sale of shares held as investments should be treated as capital gain, maintaining consistency with previous and subsequent years.

Order:
The appeal of the Assessee is partly allowed. Order pronounced in the Court on 11.05.2016.

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