2012 (5) TMI 96 - AT - Income Tax

Treating short term capital gains in shares as Business income applying maximum marginal rate instead of concessional rate of tax of 10% as per Sec. 111A Held that - Where the period of holding is more than six months, the transaction will be in the nature of capital gains and where it is less than six months,it will be in the nature of business - CIT (A) treated the short term capital gains in relation to shares held by the assessee more than six months and the shares held for less than six months have been treated as business income treated not in accordance with the provisions of law - merely because the shares are sold within the short span of one to two months would not change the character of capital gains to the business income - in favour of assessee Assessing short term capital loss on transactions in commodities as Business loss on the basis of nature, volume scale and frequency of transaction Held that - AO has not brought any material on record to show that the shares were not held by the assessee as investment - ground in respect of delivery based share transactions, investment and capital loss in respect of commodity transactions on delivery basis both are to be held on account of short term capital gain income and short term capital loss respectively in favour of assessee. Verify whether the interest paid amounting is compensatory or penal in nature which is not in accordance with the provisions of Section 25(1) Held that - Since income to be capital in nature, the direction of ld. CIT(Appeals) about verifying the payment of interest to Indiabulls Financial Services Ltd. becomes infructuous - against revenue.

Summary

Issues Involved:
1. Classification of short-term capital gains from share transactions as business income.
2. Classification of short-term capital loss from commodity transactions as business loss.
3. Verification of the nature of interest paid to Indiabulls Financial Services Ltd.

Detailed Analysis:

1. Classification of Short-Term Capital Gains from Share Transactions as Business Income:
The assessee filed an appeal against the CIT(A)'s decision to classify short-term capital gains from share transactions amounting to Rs. 7,61,56,446 as business income, thereby applying the maximum marginal rate instead of the concessional rate of 10% under Section 111A of the Income Tax Act, 1961. The assessee maintained regular books of accounts and accounted for delivery-based transactions as investments. The assessee contended that delivery-based transactions were investments, supported by CBDT Circular No. 4/2007 and various judicial precedents. The AO, however, treated these transactions as business income, citing frequent transactions and the use of borrowed funds. The CIT(A) partly upheld the AO's view, emphasizing the volume and frequency of transactions, and the use of borrowed funds indicated a business activity. The Tribunal, however, concluded that the assessee maintained two distinct portfolios for investment and trading, supported by the CBDT Circular and judicial precedents, and thus, delivery-based transactions should be treated as capital gains.

2. Classification of Short-Term Capital Loss from Commodity Transactions as Business Loss:
The assessee also appealed against the CIT(A)'s decision to classify short-term capital loss from commodity transactions amounting to Rs. 2,95,16,035 as business loss. The assessee argued that these were delivery-based transactions accounted for as investments. The AO and CIT(A) treated these transactions as business activities due to the nature and frequency of transactions. The Tribunal, however, held that similar to share transactions, delivery-based commodity transactions should also be treated as investments, resulting in short-term capital loss.

3. Verification of the Nature of Interest Paid to Indiabulls Financial Services Ltd.:
The Revenue appealed against the CIT(A)'s direction to the AO to verify whether the interest paid amounting to Rs. 1,42,37,378 to Indiabulls Financial Services Ltd. was compensatory or penal in nature. The CIT(A) had restored the matter to the AO for verification. The Tribunal, however, found this issue to be infructuous as it determined the income from share and commodity transactions to be capital in nature, making the verification of interest nature irrelevant.

Conclusion:
The Tribunal allowed the assessee's appeal, holding that the income from delivery-based share and commodity transactions should be treated as short-term capital gains and losses, respectively. Consequently, the Revenue's appeal regarding the verification of the interest nature was dismissed as infructuous. The Tribunal's decision emphasized the distinction between investment and trading portfolios, supported by the CBDT Circular and judicial precedents.