2013 (9) TMI 11 - AT - Income Tax

Business income or Capital gain - Profit from sale of shares - AO treated the entire profit from sale of shares as Business income chargeable to tax at normal rates. - Held that - The fact that shares were held for such a long period amply demonstrates that the intention of the assessee was to keep such shares as Investment . The further fact that the assessee consistently showed such shares as Investment in his balance sheets of the earlier years clearly brings out his intention of retaining the shares as Investments and not as Stock in trade . If such shares had been held as stock in trade, naturally these would have been valued at Cost or market price, whichever is less and not at Cost price . These facts indicate that insofar as profit from transfer of shares held for such a long period is concerned, it cannot be classified as Business income but has to be held as long term capital gain. Another salient feature, which is relevant but not decisive, is that the assessee had purchased the shares with his own capital and there is no outstanding loan in his balance sheet. These facts amply show that the profit from sale of such shares cannot be considered as Business income as has been held by the authorities below - Decided in favour of assessee. Sale of shares - repeated transaction in the case of shares of Steel Authority of India Limited - Held that - The facts indicate that the profit of Rs.5.61 lakh resulting from the transfer of these shares is in the nature of Business income and not short term capital gain as claimed by the assessee. In view of the foregoing discussion - Held as business income - Decided against the assessee. Disallowance of bad debt - Held that - The interest income so shown by the assessee was duly accepted as business income. That is how in all the earlier years the stand point of the assessee that the interest was earned from money lending business came to be accepted by the Assessing Officer through various orders passed for several years in scrutiny assessment. In such a situation the non-recovery of Rs.15 lakh out of the loan advanced in earlier years, interest from which was shown as business income, cannot be considered as anything other than bad debts of the money lending business. Sub-section (2) of section 36 clearly provides that in making any deduction for bad debt or part thereof, no deduction shall be allowed unless the debt or part thereof inter alia represents money lent in the ordinary course of business of money lending which is carried on by the assessee. Since the assessee is admittedly engaged in the money lending business and a sum of Rs.15 lakh turned out to be irrecoverable from such business, there is no justification in denying the deduction u/s 36(1)(vii) read with section 36(2) - Decided in favour of assessee.

Issues Involved:
1. Classification of income from the sale of shares as long-term capital gain vs. business income.
2. Classification of income from the sale of shares as short-term capital gain vs. business income.
3. Disallowance of the claim of bad debts.
4. Classification of interest income as business income vs. income from other sources.

Detailed Analysis:

1. Classification of Income from Sale of Shares as Long-Term Capital Gain vs. Business Income (Assessment Year 2005-2006):
The primary issue was whether the profit from the sale of shares should be treated as long-term capital gain or business income. The assessee sold shares worth Rs.95.14 lakh, claiming Rs.26.76 lakh as long-term capital gain and Rs.5.61 lakh as short-term capital gain. The Assessing Officer (AO) treated the entire profit as business income based on the assessee's previous treatment of such income. However, the Tribunal noted that the shares were consistently shown as "Investment" in the balance sheets and valued at cost, indicating a long-term investment intent. The Tribunal emphasized the introduction of Securities Transaction Taxes (STT) and the consequential exemption of long-term capital gains under section 10(38). Given the substantial holding period of the shares (ranging from 400 to 5063 days) and the consistent treatment of shares as investments, the Tribunal concluded that the profit from the sale of these shares should be classified as long-term capital gain.

2. Classification of Income from Sale of Shares as Short-Term Capital Gain vs. Business Income (Assessment Year 2005-2006):
The second aspect of the first ground concerned the treatment of Rs.5.61 lakh as short-term capital gain. The Tribunal observed that the shares resulting in short-term capital gain were frequently traded, with repeated entries and exits into the same scrips. This indicated a business motive rather than an investment intent. The Tribunal also noted that in subsequent years, the assessee consistently showed profit from shares held for less than one year as short-term capital gain. Consequently, the Tribunal upheld the CIT(A)'s decision to treat Rs.5.61 lakh as business income.

3. Disallowance of the Claim of Bad Debts (Assessment Year 2005-2006):
The assessee claimed a bad debt deduction of Rs.15 lakh, which was disallowed by the AO on the grounds that money lending was not the assessee's business. The Tribunal reviewed the assessee's history of lending money and earning interest, which had been consistently shown and accepted as business income in previous years. The Tribunal noted that the assessee had advanced Rs.40 lakh to M/s. Aircommand Limited, recovering only Rs.25 lakh after litigation, resulting in a loss of Rs.15 lakh. Given the consistent treatment of interest income from money lending as business income, the Tribunal concluded that the loss should be considered a bad debt under section 36(1)(vii) read with section 36(2). Therefore, the Tribunal overturned the impugned order and allowed the deduction.

4. Classification of Interest Income as Business Income vs. Income from Other Sources (Assessment Year 2005-2006):
The AO treated the interest income of Rs.17,391 as "Income from other sources" based on the disallowance of the bad debt claim. The Tribunal, consistent with its finding that the assessee was engaged in the money lending business, held that the interest income should be classified as business income. Thus, this ground was allowed.

5. Classification of Income from Sale of Shares as Long-Term Capital Gain vs. Business Income (Assessment Year 2006-2007):
The Revenue's appeal for the assessment year 2006-2007 challenged the CIT(A)'s decision to treat the profit from the sale of shares held for more than one year as long-term capital gain. The Tribunal found the facts for this year similar to those for the assessment year 2005-2006. The Tribunal upheld the CIT(A)'s decision, treating the long-term capital gain of Rs.53.86 lakh as such, rather than business income, consistent with its earlier detailed discussion.

Conclusion:
The assessee's appeal for the assessment year 2005-2006 was partly allowed, with the Tribunal ruling in favor of the assessee on the classification of long-term capital gains and bad debts but upholding the AO's decision on short-term capital gains. The Revenue's appeal for the assessment year 2006-2007 was dismissed, with the Tribunal affirming the CIT(A)'s treatment of long-term capital gains.

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