2013 (9) TMI 227 - AT - Income Tax

Short term capital loss or speculation loss - whether CIT(A) erred in treating the transactions made by the assessee as short term capital loss and not speculation loss - Intention of assessee - Held that - It is a well settled position that the assessee may acquire shares as stock in trade of its business or may acquire shares as investment or the very same assessee may acquire certain shares as stock in trade and other shares as an investor also. In our considered opinion, whether the shares in question was stock in trade of the assessee or capital investment depends upon the intention with which the shares were acquired by the assessee. If the intention of the assessee at the time of acquiring of the shares was to earn profit by selling the same again then the same constitutes stock in trade in the hands of the assessee giving rise to business income or business loss or when the shares were acquired with the intention to enjoy the fruits of such acquisition then the same constitutes capital asset in the hands of the assessee giving rise to capital gain or capital loss. The real intention of the assessee is to be gathered by taking complete fact and circumstances into consideration. There may be several factors like the manner of presentation of the same in the books of account, volume of transactions, period of holding, frequency of transactions, employment of borrowed funds for acquiring shares, nature of shares acquired etc. which taken together show the intention of the assessee for acquiring the shares. It is also an established position that the presence or absence of a single factor is not conclusive to determine the actual nature of the acquisition and a proper evaluation of all the factors taken together only show the actual intention of the assessee - assessee could not acquire sufficient number of shares and therefore the assessee sold the shares in question. However, no material was produced before us or before any lower authorities to support the above contention - CIT(A) has also brought no material on record to show what was the actual intention of the assessee in acquiring the shares in question whether the same was acquired as stock in trade or the same was acquired as capital asset to enjoy the fruits of the same - it shall be fair and in the interest of justice to restore this issue to the file of the AO for adjudication afresh after proper verification in the light of the discussions made herein above after allowing reasonable opportunity of hearing to the assessee - Decided in favour of Revenue.

Summary

Issues Involved:
1. Whether the transactions made by the assessee should be treated as short-term capital loss or speculation loss.

Detailed Analysis:

1. Treatment of Transactions as Short-Term Capital Loss or Speculation Loss:
The sole issue in this appeal is whether the transactions made by the assessee should be treated as short-term capital loss or speculation loss. The assessee earned a profit of Rs. 32,65,980/- on the sale of investments in unquoted shares and incurred a loss of Rs. 33,10,000/- on the purchase and sale of other unquoted shares. The AO treated this loss as a business loss, considering it as speculation loss under Explanation to Sec. 73 of the I.T. Act, and did not allow it to be set off against other income. The assessee contended that the loss should be treated as short-term capital loss, arguing that the shares were part of an investment and not trading activity.

2. Arguments and Findings of the AO:
The AO observed that the loss of Rs. 33,10,000/- was reflected in the Profit and Loss account as share trading, indicating it was a business transaction. The AO issued a show-cause notice, and the assessee explained that the shares were part of an investment. However, the AO did not accept this explanation, holding that the transactions were shown as business transactions in the return of income and computation of income, thus treating the loss as speculation loss under Explanation to Sec. 73 of the Act.

3. Submissions and Findings of the CIT(A):
The assessee appealed to the CIT(A), arguing that the loss was from investment and not trading. The CIT(A) accepted the assessee's claim, stating that the treatment of the transaction in the return of income should not solely determine its nature. The CIT(A) noted that the assessee had sufficient funds and did not engage in regular trading activities, thus concluding that the transactions were in the nature of investment, treating the loss as short-term capital loss.

4. Arguments Before the ITAT:
The Revenue argued that the transactions were shown as business transactions in the Profit and Loss account, supporting the AO's view. The assessee contended that the shares were held as investment and sold due to insufficient acquisition, supporting the CIT(A)'s order.

5. ITAT's Evaluation and Decision:
The ITAT noted that the issue was whether the shares were stock-in-trade or capital investment. The intention of the assessee at the time of acquiring the shares is crucial. The ITAT observed that the lower authorities did not properly verify the facts and circumstances to ascertain the true intention of the assessee. The ITAT concluded that a proper evaluation of all factors is necessary to determine the actual nature of the acquisition. Therefore, the ITAT restored the issue to the file of the AO for fresh adjudication after proper verification, allowing the Revenue's appeal for statistical purposes.

Conclusion:
The appeal was allowed for statistical purposes, with the issue remanded to the AO for fresh adjudication to ascertain the true intention of the assessee in acquiring the shares and determine whether the loss should be treated as short-term capital loss or speculation loss.