2022 (6) TMI 639 - AT - Income Tax

Disallowance of set-off u/s 70 of share trading business loss against income from profession - distinction between shares held as stock-in-trade and shares held as investment - HELD THAT - From the assessee's conduct, it is evident that the shares were not purchased for purpose of holding them as investment and the fact that most of the shares were sold by the assessee during the first itself indicates that the assessee intended to purchase and sell shares as business activity and not to hold shares on long-term basis for earning capital gains or earning dividend income - CBDT has also issued guidelines for assessing officers on tests for distinction between shares held as stock-in-trade and shares held as investment vide office memorandum, dated 13.12.2005 F. No. 149/287/2005-TPL and one of the criteria mentioned therein is whether, the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or for earning dividends and interest and also the typical holding period for securities bought and sold. We see that in instant facts, almost all the shares which the assessee purchased during the year were sold by him. As noted above, out of 34 stocks purchased during the year, the assessee sold 32 of those scripts, which is a clear indicator that the intention at the time of purchase of scripts was to sell them at a profit. On the issue that the assessee has employed his own capital or reflected shares as investment, we note that in the case of CIT v Naishad I. Parikh 2013 (10) TMI 292 - GUJARAT HIGH COURT the Gujarat High Court held that where assessee claimed share trading and future options losses and further, assessee had substantiated entire transactions by furnishing valid and statutorily accepted documents, merely debiting directly these items in capital account instead of in profit and loss account and, not routing share trading account through audited account under section 44AB, could not be a ground to disregard legally acceptable claim of assessee. Therefore, the assessee has been able to substantiate that the shares were purchased for the purpose of trading and earning profit and not for purpose of holding them as investment to earn capital gains/dividend income. This is this is evident from the fact that during the first year itself, almost all of the scripts purchased by the assessee were sold by him - we hold that the CIT(A) has erred in facts and law in holding that the loss from sale of shares was short-term capital losses and hence not eligible for set of against income from profession of the assessee. - Assessee appeal allowed.

Summary

Issues:
1. Disallowance of setoff under section 70 of the Income Tax Act, 1961 of share trading business loss against income from profession.
2. Treatment of share trading business loss as Short Term Capital Loss.

Analysis:

Issue 1: Disallowance of setoff under section 70 of the Income Tax Act, 1961:
The appellant, an advocate by profession, incurred a loss of ?12,96,828 in share trading, which was set off against income from the profession. However, the Assessing Officer treated the loss as short-term capital loss, disallowing the set-off against professional income. The appellant argued that Circular no. 4/2007 by CBDT directed to consider the sale of shares held for less than one year as business income. The CIT (Appeals) rejected the appeal, stating that the conditions set by the Circular were not met, as the appellant did not earn a profit from share transactions and did not engage in large-scale share trading activities. The CIT (Appeals) held that the loss on sale of shares should be treated as short-term capital loss, disallowing the set-off against professional income.

Issue 2: Treatment of share trading business loss as Short Term Capital Loss:
The appellant contended that the shares were not purchased for investment purposes, as evidenced by the short holding period and frequent transactions. The appellant pointed out that most shares were sold during the year, indicating a business activity rather than long-term investment. The Tribunal noted the appellant's trading summary, observing that the intent was to sell shares for profit. Referring to a Gujarat High Court decision, the Tribunal held that the appellant substantiated the purpose of trading shares for profit, not for investment. Therefore, the Tribunal concluded that the loss from share trading should not be treated as short-term capital loss, allowing the set-off against professional income.

In conclusion, the Tribunal allowed the appeal, holding that the loss from share trading should be treated as a business loss eligible for set-off against income from the appellant's profession.