2018 (3) TMI 1169 - AT - Income Tax

Gain on sale of shares - capital gain or busniss income - Held that - Mere fact that dividend received is nominal, cannot be the deciding factor as to whether income from sale of investment is to be assessed as business income or capital gain, particularly when long term capital gain is accepted by the AO. In respect of sale of shares of LML Ltd and Oswal chemicals, it can been seen that sale is made on various dates as the sale order sometimes takes days to be fully executed. It is not the case that on some days sales are being purchased and sold. Just because assessee has purchased and sold number of shares does not by itself make it business income when the AO has accepted the scripts as investment in the balance sheet and books of account are accepted. In view of the above discussion, we are of the considered view that the CIT(A) has rightly treated the gain on sale of shares as short term capital gain. Accordingly, we find no infirmity in the order of the ld. CIT(A). Thus, the grounds raised by the Revenue in are dismissed.

Summary

Issues Involved:
1. Classification of income from the sale of shares as either capital gains or business income.
2. Allowability of payment of registration fees to SEBI under section 43B.
3. Deletion of addition made by invoking the provisions of section 14A.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue was whether the income from the sale of shares should be classified as capital gains or business income. The assessee, engaged in stock broking and investment in shares, declared short-term capital gains in its returns for AY 2005-06 and AY 2006-07. The Assessing Officer (AO) reclassified these gains as business income, but the CIT(A) reversed this decision, treating the gains as capital gains. The Tribunal initially upheld the CIT(A)'s decision, but the High Court remanded the case back to the Tribunal for a fresh examination based on specific tests and observations.

Upon remand, the Tribunal considered various arguments:
- The assessee maintained separate Demat accounts for investments and stock-in-trade.
- The assessee's Memorandum of Association (MOA) authorized investments in shares.
- The AO accepted long-term capital gains but contested short-term capital gains.
- The shares were held for varying periods, and sales were made on a delivery basis.
- Dividend income was not a decisive factor for investment classification.

The Tribunal concluded that the CIT(A) had rightly treated the gains as short-term capital gains, considering the consistent treatment of shares as investments in the balance sheet and the absence of borrowed funds for these investments. The Tribunal dismissed the Revenue's appeals, affirming the CIT(A)'s decision.

2. Allowability of Payment of Registration Fees to SEBI:
The second issue was whether the payment of ?27.30 lakhs as SEBI registration fees was allowable under section 43B. The AO disallowed this payment, but the CIT(A) directed the AO to allow it. The Tribunal did not specifically address this issue in detail in the provided judgment, focusing primarily on the classification of income from the sale of shares. However, the Tribunal's dismissal of the Revenue's appeal implicitly upheld the CIT(A)'s decision on this matter.

3. Deletion of Addition Made by Invoking Provisions of Section 14A:
The third issue was the deletion of an addition of ?1.95 lakhs made by the AO under section 14A. The AO made this addition, but the CIT(A) deleted it. Similar to the SEBI fees issue, the Tribunal's judgment did not elaborate on this specific point. Nonetheless, the dismissal of the Revenue's appeal indicates that the Tribunal agreed with the CIT(A)'s deletion of the addition.

Conclusion:
The Tribunal upheld the CIT(A)'s decisions on all issues, including the classification of income from the sale of shares as capital gains, the allowability of SEBI registration fees, and the deletion of the addition under section 14A. The appeals of the Revenue were dismissed for both assessment years 2005-06 and 2006-07.