1993 (8) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Whether the assessees engaged in an adventure in the nature of trade by purchasing and selling Gold Bonds and converted Gold.
2. Whether the CIT(A) should have held that the ITO was debarred from making an assessment on the beneficiaries in respect of their shares from the trust.
3. Whether the income from the Gold Bonds should be taxed in the hands of the trustees or the beneficiaries.
4. Whether the profit arising from the sale of Gold Bonds should be taxed under the head "Business" or as capital gains.
5. Whether the levy of interest under sections 139(8) and 215 was illegal.

Detailed Analysis:

1. Adventure in the Nature of Trade:
The main issue was whether the assessees embarked on an adventure in the nature of trade by purchasing and selling Gold Bonds and converted Gold. The Tribunal noted that the assessees borrowed substantial funds from the trust and banks at market rates, engaged in transactions through brokers, and sold the bonds within a short time, indicating a speculative tendency. The Tribunal concluded that the assessees' actions were speculative and constituted an adventure in the nature of trade, affirming the lower authorities' decision to tax the profits as business income.

2. Assessment of Beneficiaries:
The assessees argued that the CIT(A) should have held that the ITO, having exercised the option to assess the trust, was debarred from making an assessment on the beneficiaries. The Tribunal found that the ITO had allocated the income of the trust among the beneficiaries and did not charge the trust to any tax. Therefore, the ground based on the assumption that the ITO had exercised the option to assess the trust failed, and the income was rightly assessed in the hands of the beneficiaries.

3. Taxation of Income from Gold Bonds:
The assessees contended that the income from the Gold Bonds, purchased with funds from the trust, should be taxed in the hands of the trustees. The Tribunal held that the beneficiaries borrowed funds from the trust on payment of interest, and any profit from the borrowed funds was assessable in their hands only. The Tribunal rejected the argument that the income should be taxed in the hands of the trustees.

4. Taxation under "Business" or Capital Gains:
The assessees argued that the profits from the sale of Gold Bonds should be taxed as capital gains, not business income. They cited Supreme Court and Bombay High Court decisions to support their claim. However, the Tribunal found that the facts of the case indicated a speculative intent and a short-term profit motive, distinguishing it from the cited cases. The Tribunal concluded that the transactions were speculative and affirmed the taxation of the profits as business income. The Tribunal also rejected the alternative plea to treat the profit from the sale of redeemed gold as capital gains, as the Gold Bonds were not considered capital assets.

5. Levy of Interest:
The assessees contended that the levy of interest under sections 139(8) and 215 was illegal, but no reasons were provided, and the point was not pressed during the hearing. The Tribunal rejected this ground.

Conclusion:
The Tribunal dismissed all four appeals filed by the assessees, affirming the lower authorities' decisions on all issues. The transactions were deemed speculative and taxable as business income, and the income was rightly assessed in the hands of the beneficiaries. The levy of interest was upheld.