2017 (11) TMI 1417 - AT - Income Tax

Treatment to profit arising out of purchase and sale of shares - long term capital gain/ short term capital gains OR business income - Held that - The assessee is an old person and is regularly making investment in the shares and the number of scrips dealt is also not high. We do not find any differential fact for the year under consideration as compared to the immediate preceding assessment year for which similar activity has been held to be assessable under the head capital gain. There is also no substantial difference in the activities carried out by the assessee in individual capacity vis- -vis in the capacity of HUF. The assessee did not utilize the borrowed funds for making investment as the entire investment is made out of own capital of the assessee. Thus Tribunal has decided exactly on identical facts in assessee s own case for AY 2008-09 treated the profit arising out of sale and purchase of shares as capital gains. - Decided against revenue Disallowance of interest expenditure - disallowance as the share transaction is treated as business activity - Held that - We remand this matter back to the file of the AO to examine whether the assessee has earned FDR income which has nexus with the expenditure of interest and also consider the order of Tribunal of Agra Bench in the case of Raj Kumari Agarwal (2014 (7) TMI 867 - ITAT AGRA). Accordingly, this issue of Revenue s appeal is allowed for statistical purposes by set aside the orders of lower authorities and remanding the matter back to the file of the Assessing Officer.

Summary

Issues:
1. Treatment of profit from purchase and sale of shares as capital gains or business income.
2. Disallowance of interest expenditure claimed against profit from share transactions.

Issue 1: Treatment of profit from purchase and sale of shares
The appeal by the Revenue challenges the order of the CIT(A) directing the AO to treat the profit from shares as long-term or short-term capital gains instead of business income. The Revenue argued that the assessee's high volume of share dealings and motive to book profits indicate a business activity. However, the CIT(A) found that the assessee, a senior citizen and ex-employee, invested retirement proceeds and savings in shares. The CIT(A) highlighted that the shares were valued as investments in the balance sheet, and no rebate under section 88E was claimed. Relying on the precedent for AY 2008-09, the CIT(A) concluded that the income should be treated as capital gains, not business income. The Tribunal upheld the CIT(A)'s decision based on consistency with prior rulings and lack of factual differences between the years. The Tribunal dismissed the Revenue's appeal on this issue.

Issue 2: Disallowance of interest expenditure
The Revenue contested the CIT(A)'s deletion of the disallowance of interest expenditure against profit from share transactions, arguing that such claims are invalid if shares are treated as a business activity. The CIT(A) did not provide detailed reasoning but allowed the claim against income from other sources. The Tribunal noted the lack of clarity in the CIT(A)'s decision and remanded the issue back for fresh adjudication. The assessee argued that the interest expenditure was on FDRs, with borrowed funds utilized for investments. Citing a precedent from the Agra Bench, the assessee claimed that if FDR income exceeds interest expenditure, it should be allowed as an expense. The Tribunal remanded the matter to the AO to assess the nexus between FDR income and interest expenditure, considering the Agra Bench's decision. The Tribunal partly allowed the Revenue's appeal on this issue for statistical purposes.

In summary, the ITAT Mumbai dealt with the issues of treating profits from share transactions as capital gains or business income and the disallowance of interest expenditure. The Tribunal upheld the CIT(A)'s decision on the treatment of share profits as capital gains, emphasizing the nature of the assessee's investments. The Tribunal remanded the interest expenditure issue back to the AO for further examination based on the nexus between FDR income and interest expenditure.