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2017 (3) TMI 382 - AT - Income TaxIncome from sale of the scrips - LTCG and STCG or business income - Period of holding - Held that - We as, independent of the concession allowed by the aforesaid CBDT Circular No. 6/2016 (supra), which as observed by us at length hereinabove would not be available to the assessee as regards the profit/gain on sale of scrips which were held by the assessee for a period of less than 12 months, are however of the considered view that the conduct of the assessee company, nature of purchase/sale transactions of the shares as can be deciphered from the records, holding period of the shares, volume of transactions, treatment of the scrips by the assessee in its books of account, nature of business of the assessee company, source of purchase of shares and last but not the least, the very fact that the A.O. while framing regular assessment under Sec. 143(3) in the hands of the assessee for the immediately preceding year, viz. A.Y. 2006-07, had accepted that the shares as claimed by the assessee were in the nature of Investments , and had assessed the loss on the sale of shares under the head Capital gain by making a specific mention in the body of the assessment order that the Short term capital loss of ₹ 8,35,225/- shown by the assessee on sale of shares shall be C/forward to the succeeding years. We thus in the totality of the aforesaid facts, are thus of the considered view that the conduct of the assessee duly goes to fortify and substantiate its claim , and as such the profit/gain on sale of the shares had rightly been reflected by the assessee company in its return of income under the head Capital gain . The profits/gains arising in the hands of the assessee company from the sale of the scrips had rightly been reflected in the return of income under the head Capital gain , viz. LTCG and STCG and the view of the A.O. which thereafter had been sustained by the CIT(A) that the assessee had been carrying out systematic purchase and sale transactions in shares, and thus was liable to be assessed as business activity cannot be sustained and is thus vacated. We in the backdrop of our aforesaid observations are of the considered view that the assessee had rightly reflected the income arising in its hands from sale of shares under the head Capital gain . Disallowance u/s 14A - Held that - We are of the considered view that the CIT(A) had rightly relied on the judgment of the Hon ble Bombay High Court in the case of Godrej Boyce Company Ltd., Vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT), and as such had correctly sustained the disallowance of ₹ 78,848/- u/s 14A in the hands of the assessee company. We find no infirmity in the order of the CIT(A)
Issues Involved:
1. Classification of income from sale of shares as either business income or capital gains. 2. Disallowance under Section 14A of the Income Tax Act. Issue-wise Detailed Analysis: 1. Classification of Income from Sale of Shares: The primary issue in this case was whether the income from the sale of shares should be treated as business income or capital gains. The assessee argued that the gains should be classified as short-term and long-term capital gains, as the shares were held as investments. The Assessing Officer (A.O.) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the gains as business income due to the volume, frequency, and nature of the transactions. Arguments by the Assessee: - The Memorandum of Association did not authorize the business of purchase and sale of shares. - The investments were made from surplus funds and were intended to be held as investments, not as stock-in-trade. - The transactions were delivery-based, and no intraday trading was conducted. - The shares were held for the purpose of earning dividend income. - The shares were consistently shown as investments in the audited balance sheets. - In the previous assessment year, similar gains were accepted as capital gains by the department. Arguments by the Revenue: - The volume and frequency of transactions indicated a business activity. - The classification by the assessee in its accounts was not decisive. - The nature of the transactions, including the short holding periods, suggested an intention to earn profits systematically. - The Memorandum of Association's provisions were not conclusive in determining the nature of the transactions. Tribunal’s Analysis and Decision: - The Tribunal emphasized the importance of the assessee’s intention at the time of acquiring the shares. - The Tribunal noted that the shares were purchased from the assessee’s own funds and were shown as investments in the books of accounts. - The Tribunal highlighted that the assessee had not revalued the shares to market value, which would have been done if the shares were held as stock-in-trade. - The Tribunal referred to CBDT Circular No. 6/2016, which provides guidelines for determining whether income from the sale of shares should be treated as capital gains or business income. - The Tribunal observed that in the previous assessment year, the department had accepted the assessee’s claim of capital gains, and there was no change in facts or circumstances in the current year. - The Tribunal concluded that the income from the sale of shares should be treated as capital gains, not business income. 2. Disallowance under Section 14A: The second issue was the disallowance of ?78,848 under Section 14A of the Income Tax Act, which pertains to expenses incurred in relation to earning exempt income. Arguments by the Assessee: - The assessee did not specifically address this issue in the appeal. Arguments by the Revenue: - The A.O. made a disallowance under Section 14A, which was upheld by the CIT(A). Tribunal’s Analysis and Decision: - The Tribunal upheld the CIT(A)’s decision, relying on the judgment of the Hon’ble Bombay High Court in the case of Godrej Boyce Company Ltd. Vs. DCIT, which supports the disallowance under Section 14A. - The Tribunal found no infirmity in the CIT(A)’s order regarding the disallowance and upheld it. Conclusion: The Tribunal allowed the appeal in part. The income from the sale of shares was to be treated as capital gains, not business income, aligning with the assessee’s claim. However, the disallowance under Section 14A was upheld. The appeal was thus partly allowed.
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