2017 (3) TMI 41 - HC - Income Tax

Surplus earned from sale of shares - business income OR short term capital gain - Held that - Considering the fact the major amount of capital gain is in respect of script in the name of Lok Housing and Construction Ltd. of which the assessee has sold 4,37,000 shares and has earned a capital gain of ₹ 2,03,86,894/- and that the assessee applied for acquiring fully convertible warrants of the said Company on 26/02/2006 and paid 10% i.e. ₹ 4.60 per warrant for 95,000 warrants at the time of application and thereafter on 10/05/2006 warrants were allotted to the assessee for an amount of ₹ 4,37,000/-, which duly appeared in the balance sheet as on 31.03.2007 under the investment in shares head and thereafter in the beginning of Financial Year 2007-08 assessee in order to get warrants converted into equity shares paid the balance amount i.e. 90% i.e. ₹ 39.33 lakhs and acquired the equity shares of the company and got it in demat form and all the aforesaid shares came to be sold in between 01/08/2007 and 05/02/2008, the learned tribunal noticed that the assessee paid the interest on borrowed funds for paying ₹ 39.33 lakhs towards balance amount of allotment money for converting warrants into shares and paid interest of ₹ 8,48,296/- to his relatives from whom fund was borrowed, however, did not claim the said interest expenditure against business income. Considering above it cannot be said that the learned tribunal has committed any error in confirming the order passed by the learned CIT(A) deleting the addition made by the Assessing Officer of ₹ 2,04,87,755/-, which was made treating the same as income from business. We are in complete agreement with the view taken by the learned tribunal.

Summary

Issues:
Whether surplus earned from sale of shares should be considered as business income or short term capital gain?

Analysis:
The appellant challenged the order passed by the Assessing Officer disallowing the claim for short term capital gain and treating it as business income. The respondent, an individual dealing in shares, had shown short term capital gain in the return of income for the Assessment Year 2008-09. The Assessing Officer disallowed the claim, assessing the income as business income. The CIT(A) deleted the addition, treating the profit from sale of shares as short term capital gain. The tribunal upheld the CIT(A)'s decision.

The Assessing Officer relied on the audit report mentioning the business of trading in shares and securities. However, the CIT(A) noted that the appellant had claimed short term capital gain for a small number of transactions, indicating investment rather than trading. Referring to CBDT Circular No.4/2007, the CIT(A) observed that shares declared as investments in the balance sheet should be taxed as capital gain. The tribunal concurred, emphasizing the delivery-based nature of transactions.

The tribunal specifically analyzed the major capital gain from shares of a particular company, highlighting the process of acquiring warrants and converting them into equity shares. The appellant's payment of interest on borrowed funds and not claiming it against business income supported the capital gain treatment. The tribunal found no error in the CIT(A)'s decision and dismissed the appeal, concluding that no substantial question of law arose.

In conclusion, the court upheld the tribunal's decision, dismissing the appeal. The detailed analysis considered the nature of transactions, treatment of shares as investments, and specific circumstances of the case. The judgment emphasized the distinction between business income and capital gain, ultimately supporting the treatment of the surplus from share sale as short term capital gain.