2016 (8) TMI 997 - AT - Income Tax

Nature of income - Addition on account of treating short term capital gain as business profit - Held that - The distinction between the two types of transaction is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess is an enhancement of the value by realizing the security or a gain in an operation of profit making. The assessee might have invested capital in shares with an intention to resale these if in future their sale brings in a higher price. Such an investment though motivated by a possibility of enhancement value, did not necessarily render the investment a transaction in the nature of trade.It is also an admitted fact that in the preceding years, the share transactions have been considered under the head capital gains.

Issues Involved:
1. Treatment of short-term capital gain as business profit.
2. Treatment of profit from trading in shares held for more than 30 days as capital gains or business income.
3. Treatment of loan received from Mas Chemicals Industries Pvt. Ltd. as deemed dividend under Section 2(22)(e) of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Treatment of short-term capital gain as business profit:
The Revenue's sole grievance in ITA No. 3370/Ahd/2010 for A.Y. 2006-07 was that the CIT(A) erred in deleting the addition of ?1,02,71,681/- by treating short-term capital gain as business profit. The assessee, engaged in leasing and hiring, declared short-term capital gain of ?70,29,388/- and long-term capital gain of ?32,42,293/-. The Assessing Officer (A.O.) observed numerous transactions in shares/mutual funds and treated the gains as business income, arguing the transactions were systematic and profit-motivated. The CIT(A), however, found that the assessee had consistently treated shares as investments in past years and directed the A.O. to treat the gains as capital gains. The tribunal upheld CIT(A)'s decision, emphasizing the intention of the assessee at the time of purchase and noting the shares were shown as investments in the balance sheet.

2. Treatment of profit from trading in shares held for more than 30 days as capital gains or business income:
In ITA No. 383/Ahd/2013 for A.Y. 2008-09, the Revenue contended that the CIT(A) erred in treating profits from shares held for more than 30 days as capital gains, despite significant trading activity and loans availed for share purchases. The tribunal, referencing its decision in ITA No. 3370/Ahd/2010, upheld CIT(A)'s decision, reiterating that the intention of the assessee at the time of purchase is paramount and gains from investments should be treated as capital gains.

3. Treatment of loan received from Mas Chemicals Industries Pvt. Ltd. as deemed dividend under Section 2(22)(e):
The second issue in ITA No. 383/Ahd/2013 was whether the loan received by the assessee from Mas Chemicals Industries Pvt. Ltd. should be treated as deemed dividend under Section 2(22)(e) of the Income Tax Act. The A.O. argued that since Samurai Holdings, which holds significant voting power in both the payer and payee companies, the provisions of Section 2(22)(e) apply. However, the tribunal, relying on the decisions of the Hon'ble High Courts and the Special Bench of the Tribunal, held that deemed dividend cannot be taxed in the hands of persons other than shareholders of the lender company. Since the assessee was not a shareholder of Mas Chemicals Industries Pvt. Ltd., the tribunal upheld CIT(A)'s decision not to treat the loan as deemed dividend.

Conclusion:
The appeals filed by the Revenue were dismissed, with the tribunal upholding the CIT(A)'s decisions in both cases. The tribunal emphasized the importance of the assessee's intention at the time of purchase and the consistent treatment of shares as investments in determining the nature of income from share transactions. Additionally, it was held that deemed dividend provisions under Section 2(22)(e) apply only to shareholders of the lending company.

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