2016 (9) TMI 902 - AT - Income Tax

Profit arising out of sale & purchase of shares - business income OR short term capital gain - Held that - We find that the assessee has maintained the investment portfolio and all the sales and purchase of shares are routed through the same portfolio as noted above. The assessee has kept the entire investment of shares as an investment and not in the trading account. The assessee is not in the business of share trading rather he is partner in firm and doing share transactions as part time. We find that the AO considering the volume and frequency and considering that the assessee has applied for borrowed funds for making investment in shares, treated the activity of purchase and sale of shares as business activity and assessed the profits arising there from as business income as against declared by the assessee as Short Term Capital Gain. We find that the allegation of Revenue that the assessee is indulging into high frequency transactions but this itself could not mean that the trading activity has been carried out by the assessee because the assessee has kept the entire investment in shares in investment portfolio and his intention is clear that he has to earn capital appreciation on the same. The assessee acted accordingly. The assessee has also kept these shares in DEMAT after taking delivery of the same. Even otherwise in earlier years and future years the assesses transaction of sale and purchase of shares was treated by Revenue as investment and profit or loss arising out of the same was assessed as capital gain i.e; either Long Term Capital Gain or Short Term Capital Gain as the case may be. In view of the precedent cited by Ld. Counsel in the case of Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT we allow the claim of the assessee holding that the income / profit arising out of sale purchase of shares is capital gains and not business income. - Decided in favour of assessee Disallowance of interest expenditure - Held that - We have gone through the documents and noticed that assessee has earned interest income on the FDR s, which were made out of loan taken from Deepika Dharia. There is a direct nexus between the loan taken and amount invested in FDR s and it has not gone into interest free advances. Once it is a case, the disallowance made by AO cannot be sustained. Accordingly, we are of the view that the assessee has explained the nexus of interest bearing loans invested in income earning instruments and not in the interest free advances. In view of this fact, we delete the disallowance and allow this issue of assessee s appeal.

Summary

Issues:
1. Treatment of profit from sale and purchase of shares as business income.
2. Disallowance of interest expenditure.

Issue 1: Treatment of profit from sale and purchase of shares as business income:

The appeal pertains to the dispute over the treatment of profit from the sale and purchase of shares by the assessee. The Assessing Officer treated the profit as income from business, contrary to the assessee's claim of short-term capital gain. The key contention was whether the assessee's activities constituted trading or investment. The assessee argued that the transactions were investment-oriented, evidenced by the holding period, portfolio management, and transactions through a DEMAT account. The Revenue alleged high-frequency trading due to the volume of transactions and borrowing for investments. The Tribunal analyzed the nature of the transactions, distinguishing between investment and business activities based on a precedent (CIT Vs. Gopal Purohit). The Tribunal found that the assessee maintained a separate investment portfolio, held shares for appreciation, and treated them as capital assets. Consequently, the Tribunal allowed the assessee's claim, holding that the income from share transactions should be treated as capital gains, not business income.

Issue 2: Disallowance of interest expenditure:

The second issue revolved around the disallowance of interest expenditure amounting to ?2,93,652 by the Assessing Officer. The disallowance was based on the AO's observation that the assessee had given interest-free loans to family members after taking interest-bearing loans. The AO disallowed the interest expenditure related to loans from the wife and another individual. The assessee contended that the loans were invested in income-generating instruments, such as fixed deposits, and provided evidence of the direct nexus between the loans and investments. The Tribunal examined the documents presented by the assessee, which demonstrated that the loans were indeed invested in instruments generating interest income. As a result, the Tribunal concluded that there was a clear connection between the interest-bearing loans and income-earning investments, refuting the disallowance made by the AO. Consequently, the Tribunal allowed this issue in favor of the assessee, deleting the disallowance of interest expenditure.

In conclusion, the Appellate Tribunal ITAT Mumbai ruled in favor of the assessee on both issues. The Tribunal held that the profit from the sale and purchase of shares should be treated as capital gains, not business income, based on the nature of the transactions and precedent. Additionally, the disallowance of interest expenditure was overturned as the loans were shown to be invested in income-generating instruments. The judgment highlighted the importance of distinguishing between investment and business activities in determining the tax treatment of income generated from such transactions.