2013 (8) TMI 412 - AT - Income Tax

Intention of the assessee, whether an assessee has made investment in shares or it was an adventure in the nature of trade - To discern the intention of the assessee, whether it has made investment or just on account of change of law, it is trying to convert its stock-in-trade as investment Held that - In the light of tests laid down in the case of Sarnath Infra- structure Pvt. Ltd. vs. ACIT reported in 2007 (12) TMI 261 - ITAT LUCKNOW-B , facts of the present case was examined and it was revealed that assessee has not converted its stock-in-trade into investment, just after the announcement of change in the tax rate on short term capital gain. It has been independently making purchases, which are shown as investment in the investment registered. It has took the delivery of shares, this aspect was specifically pleaded before the CIT (A) and it has been accepted. It has not used borrowed funds for making investment. The AO has not pointed out this aspect in the assessment order also. The shares have been valued at cost at the end of the year, while closing the accounts. The Board had passed the resolution for investment in the month of January, some of the shares were old shares on which short term capital gain has been declared, they were appearing in the opening stock as investment. Thus cumulative setting of all these factors suggest that assessee had made investment in the shares Decided in against the Revenue. Allowance of security transaction tax Held that - Deduction of security transaction tax is not admissible to the assessee, once its claim of short term capital gain is accepted Decided against the Revenue. Disallowability of deduction under section 14A of the Income Tax Act Held that - If it is not possible for the AO to pin point any specific expenditure from the accounts relatable to earning of exempt income then he would look into surrounding circumstances AO is directed to re-adjudicate this issue, keeping in view the judgment of Hon ble Delhi High court in the case of Maxopp Investment Ltd. Vs. CIT 347 ITR page 272 .

Issues Involved:
1. Classification of income from the sale of shares as short-term capital gain versus business income.
2. Allowance of payment of security transaction tax.
3. Disallowance under Section 14A of the Income Tax Act.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue revolves around whether the income of Rs. 68,06,698/- from the sale of shares should be treated as short-term capital gain or business income. The assessee, a registered sub-broker with SEBI, declared this income as short-term capital gain, supported by the classification of shares as investments in its books. The Assessing Officer (AO) contested this, arguing that the transactions were in the nature of trading, thus should be treated as business income. The AO emphasized the high frequency and volume of transactions, and the pattern of investments over three years, which he believed indicated trading activity.

The CIT (A) sided with the assessee, noting that the company maintained separate portfolios for investment and trading, as recognized by CBDT Circular No. 4/2007. The CIT (A) highlighted that the assessee's books of accounts consistently reflected this separation, with investments shown in the balance sheet and trading stock listed under current assets. The investments were not funded by loans, and the shares were valued at cost, supporting the claim of investment. The CIT (A) also referenced multiple judicial precedents supporting the assessee's stance.

Upon appeal, the Tribunal upheld the CIT (A)'s decision, affirming that the assessee's intention and treatment of shares as investments were genuine. The Tribunal noted the consistent classification in the books, the absence of borrowed funds for investments, and the resolutions passed by the Board of Directors authorizing such investments. The Tribunal applied various tests from judicial precedents to ascertain the nature of transactions, concluding that the assessee's activities aligned with investment rather than trading.

2. Allowance of Payment of Security Transaction Tax:
The revenue contended that the CIT (A) erred in allowing the payment of security transaction tax amounting to Rs. 75,346/-. However, it was found that the assessee did not press this issue before the CIT (A), and thus, the CIT (A) did not delete this addition. The Tribunal clarified that the deduction of security transaction tax is not admissible once the claim of short-term capital gain is accepted. Consequently, this ground was rejected.

3. Disallowance under Section 14A:
The assessee challenged the disallowance of Rs. 4,85,543/- made under Section 14A, arguing that the AO computed this disallowance using Rule 8D of the Income Tax Rules, which is applicable prospectively from AY 2008-09, as held by the Delhi High Court in Maxopp Investment Ltd. v. CIT. The Tribunal agreed that Rule 8D could not be applied for the assessment year in question (2006-07) and directed the AO to re-adjudicate the issue based on reasonableness and the principles laid out in the Maxopp case, examining the accounts to identify any specific expenditure related to earning exempt income.

Conclusion:
The Tribunal dismissed the revenue's appeal and partly allowed the assessee's cross-objection for statistical purposes, directing a re-examination of the disallowance under Section 14A. The order was pronounced in the open Court on 8/08/2013.

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