2013 (10) TMI 470 - AT - Income Tax

Classification of head of Income on sale of shares Chargeable under head Capital gain or Business income Held that - There are conflicting decisions of the Tribunal on this issue. Each case is, therefore, to be based on its own factual situation - Assessee has shown shares as investment right from the date of purchase and that was shown as such in the balance sheet of the assessee which was filed before the AO - Shares have to be treated as an investment and therefore any profit earned on the sale thereof is to be treated as capital gain Decided in favor of Assessee.

Summary

Issues:
1. Treatment of capital gains from shares as business income.
2. Addition of Rs. 2,23,900/- u/s. 14A of the Act.
3. Non-adjudication of an addition of Rs. 7,59,921/- as income from Future & Options by the Ld. CIT(A).

Issue 1: Treatment of Capital Gains from Shares as Business Income:
The appellant, a Private Limited company, filed an appeal against the order of the Ld. CIT(A)-20, Mumbai for A.Y. 2007-08, regarding the treatment of capital gains from shares as business income. The Assessing Officer (AO) raised concerns about the nature of the income due to the volume and frequency of transactions, along with borrowed funds. Despite the appellant's claim of being an investor, both the AO and Ld. CIT(A) treated the gains as business income. The appellant argued that the shares were investments, supported by separate accounting entries and CBDT Circular No. 4/2007. The Tribunal analyzed the factual situation and legal precedents, emphasizing the distinction between investment and trading portfolios. It noted the Supreme Court's stance on the assessee's ability to differentiate between stock-in-trade and investment shares. The Tribunal concluded that the shares were investments, directing the AO to treat the profits as capital gains, thereby allowing Ground No. 1 & 2.

Issue 2: Addition of Rs. 2,23,900/- u/s. 14A of the Act:
The AO invoked Section 14A concerning the exemption claimed on dividend income, leading to a disallowance of Rs. 2,23,900/- under Rule 8D. The appellant contended that Rule 8D was not applicable for the year under consideration based on a High Court ruling. The Ld. CIT(A) agreed on the inapplicability of Rule 8D but upheld the disallowance. The Tribunal, acknowledging the settled applicability of Rule 8D from A.Y. 2008-09, disagreed with the Ld. CIT(A) and remanded the issue to the AO for re-computation without Rule 8D, allowing Ground No. 3 for statistical purposes.

Issue 3: Non-adjudication of an addition of Rs. 7,59,921/- as income from Future & Options:
The Ld. CIT(A) did not address the appellant's ground regarding an addition of Rs. 7,59,921/- as income from Future & Options. Consequently, the Tribunal remanded this issue back to the Ld. CIT(A) for proper consideration, allowing the ground for statistical purposes.

In conclusion, the Tribunal partially allowed the appeal, reversing the treatment of capital gains from shares as business income, remanding the Section 14A disallowance issue, and directing the Ld. CIT(A) to address the unadjudicated addition related to income from Future & Options.