2018 (2) TMI 2127 - AT - Income Tax

Surplus on sale of land as capital gains as against the same held as profits and gains from business by the AO - whether the land is a fixed asset as claimed by the assessee or is it stock-in-trade as held by the AO - HELD THAT - From all the facts, the finding of the AO that the assessee has held the land for a short period of seven months is not acceptable. Even if it is held that the land is held for 19 months, the gain is still short term capital gains only. The fact that the assessee has held it as a capital asset in its books and has paid the wealth tax over it, clearly prove that it was not held as stock-in-trade but was held as a capital asset and the gain therefore is Short Term Capital Gain as offered by the assessee. We do not see any reason to interfere with the orders of CIT (A) on this issue in both the cases. The grounds of appeal on this issue are therefore, rejected. Set off of STCL against short term capital gain - as per loss on sale of shares is a speculation loss and can be allowed only against speculation income in terms of the explanation to section 73 - HELD THAT - We find that section 73 deals with the loss in speculative business and explanation thereto provides that where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads Interest on Securities , Income from House Property , Capital Gains and Income from other sources ) or a Company (the principal business of which is the business of banking) or the granting of Loans Advances consists in the purchase and sale of shares of other companies, such company shall, for the purpose of section 73, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares . Admittedly, the gross total income of the assessee consists mainly of short term capital gain and does not consist of income from purchase and sale of shares. Therefore, the explanation to section 73 is not applicable and the capital loss on sale of shares cannot be considered as speculative loss and is to be set off from the short term capital gain. Addition u/s 68 - increase in share capital of the assessee and has received the premium - assessees are the conduits for the investment of share capital in RCL and JPPL, and the number of share and the premium paid by the CPIPL to the assessees and by the assessees to RCL and JPPL is also the same. Thus, it is clear that the assessee s have not earned or retained any income to treat it as their income u/s 68 of the IT Act. We also find that the amendment to Sec. 56(viib) of the IT Act has come into the statute w.e.f 1.04.2013 and prior to such an amendment, there was no provision to tax the share premium as the income of the assessee. For this reason also, the share premium cannot be brought to tax in the hands of the assessee. We also find that in its recent decision in the case of M/s Apeak InfoTech, Nagpur and others 2017 (9) TMI 1590 - BOMBAY HIGH COURT has held that the share premium is a capital receipt like share capital and therefore is not taxable. In the case before us also, the share premium has been brought to tax as the income of the assessee. Respectfully following the decision of the Hon ble Bombay High Court in the above case (cited supra), we hold that the share premium, even it is in excess of the value of the net worth of the assessee, can only be treated as capital receipt and cannot be brought to tax. Though, we do not agree with the findings of the CIT(A), that it is the income of the individual Shri N. Prasad, and has to be brought to tax in his hands, for the reasons given above, we hold that the share premium cannot be brought to tax in the hands of the assessees before us. Thus, the grounds of the appeal of the revenue on this issue are rejected.

Summary

Issues Involved:

1. Classification of income from the sale of land as either business income or short-term capital gains.
2. Set-off of short-term capital loss on the sale of shares against short-term capital gains from the sale of land.
3. Taxability of share premium received by the assessee under Section 68 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Land:

The primary issue was whether the profit from the sale of land should be classified as business income or short-term capital gains. The Assessing Officer (AO) treated the profit as business income, arguing that the assessee, being in the real estate business, sold the land within seven months of purchase, indicating a business transaction. However, the assessee contended that the land was a capital asset, held with the intention of long-term investment, and was shown as a fixed asset in the balance sheet. The CIT (A) accepted the assessee's claim, noting that the land was held for 19 months and was shown as a capital asset. The Tribunal upheld the CIT (A)'s decision, concluding that the land was a capital asset, and the profit from its sale should be treated as short-term capital gains.

2. Set-off of Short-term Capital Loss on Sale of Shares:

The second issue was whether the short-term capital loss on the sale of shares could be set off against the short-term capital gains from the sale of land. The AO denied the set-off, treating the loss as speculative under the explanation to Section 73 of the Income Tax Act. The Tribunal found that the assessee's gross total income mainly consisted of short-term capital gains and not income from the purchase and sale of shares. Therefore, the explanation to Section 73 was not applicable, and the capital loss on the sale of shares could be set off against the short-term capital gain. The Tribunal dismissed the Revenue's appeal on this issue.

3. Taxability of Share Premium under Section 68:

The third issue concerned the taxability of share premium received by the assessee from M/s. Corner Stone Properties & Investments Pvt. Ltd. The AO, following directions from the Addl. CIT under Section 144A, treated the share premium as income under Section 68, arguing that the premium was excessive and lacked justification. The CIT (A) disagreed, holding that the premium was a capital receipt and not taxable. The Tribunal supported the CIT (A)'s view, noting that prior to the amendment of Section 56(viib) effective from 1.04.2013, there was no provision to tax share premium as income. Citing the Bombay High Court's decision in M/s Apeak InfoTech, the Tribunal held that share premium is a capital receipt and cannot be taxed. Consequently, the Tribunal rejected the Revenue's appeal on this issue as well.

Conclusion:

The Tribunal dismissed the appeals filed by the Revenue, upholding the CIT (A)'s decisions on all issues. The classification of income from the sale of land as short-term capital gains, the set-off of short-term capital loss, and the non-taxability of share premium as income were affirmed.