2017 (1) TMI 1088 - AT - Income Tax

Sale of shares - short term capital gain OR income from business - Held that - As the issue under consideration is materially identical to that of AY 2008-09, respectfully following the same, we direct the AO to assess the profit on sale of the shares as short term capital gains and not as income from business. Accordingly, this issue is decided in favour of the assessee. Disallowance for loss on equity stock option - AO disallowed the same by observing that the assessee company had debited to P&L A/c a provision for loss on equity stock option/index option, the assessee ought to have added back the same to the income returned which the assessee failed to do so - Held that - As per the accounting policy, which is followed consistently over the years and accepted by the department, the assessee is recognizing the mark to market loss, which is the actual loss on carrying amount of investment. As per prudent norms, it is recognized as loss. Since, assessee is following the accounting method, it amounts to actual loss and cannot be termed as provision . The term Provision is something which cannot be ascertained as per the information available at the year end. But in this case, assessee has proper information and ascertained the loss at the year end, which is different from provision . As per the facts of the case, assessee is eligible to claim the loss on stock options and accordingly, ground raised by the assessee is allowed.

Summary

Issues:
1. Treatment of short term capital gain as business income.
2. Disallowance of provision for loss on equity stock option.

Issue 1: Treatment of Short Term Capital Gain as Business Income

The assessee, a company deriving income from providing finance against securities and dealing in shares, filed its return for AY 2009-10 admitting total income of &8377; 1,34,97,1340/-. The AO assessed the total income at &8377; 2,19,96,480/-, making disallowances including short term capital gain treated as business income. The AO reasoned that since the company's primary business was providing finance against securities and dealing in shares, the intention was to trade in shares for quick profits, not investment. The CIT(A) upheld the AO's decision, emphasizing that the transactions were organized for quick profits, indicating a business nature. The assessee contended that a similar issue in AY 2008-09 was decided in their favor by the ITAT Hyderabad, where it was held that the transactions were part of investment activities, not trading. Following the precedent, the ITAT directed the AO to treat the profit on sale of shares as short term capital gains, not business income.

Issue 2: Disallowance of Provision for Loss on Equity Stock Option

The AO disallowed the provision for loss on equity stock option amounting to &8377; 84,95,856/-, stating that the assessee should have added it back to the income returned. The CIT(A) confirmed the disallowance, noting the lack of documentary evidence substantiating the claim and ambiguity regarding ownership of the stock options. The assessee argued that the loss was accounted for as per their accounting policy, valuing closing stock at cost or market value, and the loss was carried forward to the next year. The ITAT observed that the assessee submitted additional evidence, which the AO did not object to, indicating acceptance. Considering the consistent application of the Accounting Standard and the recognized mark to market loss as actual loss, the ITAT allowed the appeal, stating that the loss on stock options was legitimate and not a mere provision.

In conclusion, the ITAT allowed the appeal of the assessee, directing the AO to treat the profit on sale of shares as short term capital gains and accepting the loss on equity stock option as a legitimate loss, not a provision.