2013 (11) TMI 1330 - AT - Income Tax

Classification of head of income - Capital gain or Income from Business and Profession on purchase and sale of shares The holding period for the shares is less than 365 days - Character of the shareholding by the assessee, i.e., whether as investment or as trading stock , for resale at a profit, as soon as a profit opportunity arises on the horizon Held that;- The long term capital gain , i.e., the profit on shares held for more than 365 days is, at Rs.6.66 lacs only, as against Rs. 50 lacs declared as short term capital gain . Though not conclusive, this is again a strong indicator as to the shares being not intended to be held by way of investments - What is the appropriate time for the sale of shares, and which, thus, determines its holding period, would be a business decision, guided, apart from the prevailing market price, an assessment of the risk and return factors attending their holding or exposure therein, including anticipated price movement of the relevant scrip. The holding period would not, thus, carry any additional significance under such circumstances - Profit returned as short term capital gain by the assessee-company for the year stands rightly assessed by the Revenue as business income Decided against the Assessee.

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act.
2. Characterization of income from the purchase and sale of shares as either short-term capital gains or business income.
3. Disallowance under Section 40(a)(ia) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Expenditure under Section 14A:
The assessee challenged the disallowance of Rs. 5,74,703/- made by applying Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules, arguing no direct nexus between the expenditure and the exempt income. The assessee requested the matter be remitted back to the Assessing Officer (A.O.) for reconsideration in light of the jurisdictional high court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT. The Revenue opposed this, stating that the CIT(A) had already examined the matter based on the high court's decision, and the assessee failed to demonstrate any infirmity in the CIT(A)'s reasoning.

The tribunal noted that while Rule 8D was not retrospectively applicable, the CIT(A) had justified the disallowance based on the reasonableness standard set by the high court. However, the tribunal observed that the assessee's activity of purchasing and selling shares constituted a separate business, necessitating a fresh examination of the expenses related to this business. The tribunal directed the A.O. to re-adjudicate the disallowance under Section 14A, considering the business nature of the activity and allowing the assessee to present its case. Grounds 1 and 2 of the assessee's appeal were allowed for statistical purposes.

2. Characterization of Income from Shares:
The principal issue was whether the income from the purchase and sale of shares should be treated as short-term capital gains or business income. The assessee argued that the Revenue had not provided definite findings for the current year and relied solely on the previous year's findings, which had been influenced by a Board resolution authorizing trading in shares. The assessee contended that the transactions were few (89 in total) and primarily involved shares held for over three months, thus qualifying as short-term capital gains.

The Revenue countered that the transactions for the current year were similar to the previous year, where the tribunal had classified them as a trading activity. The tribunal emphasized that determining the nature of shareholding (investment or trading stock) involves examining the intent behind the transactions. The tribunal noted that the assessee, being a company, could be presumed to engage in business activities, either as an investor or trader. The tribunal found that the shares held as stock-in-trade in the previous year continued to be so, and the profits from their sale constituted business income.

The tribunal rejected the assessee's arguments, stating that the number of transactions and holding period were not conclusive factors. It observed that the Board resolution authorizing trading in shares reflected the company's intent and that the transactions were carried out systematically with a profit motive. The tribunal upheld the Revenue's classification of the profits as business income, consistent with the previous year's findings. The tribunal limited its decision to the disputed gain of Rs. 43,69,929/-, subject to the A.O.'s consideration of securities transaction tax paid on a portion of the profits.

3. Disallowance under Section 40(a)(ia):
The assessee did not press the ground regarding the disallowance of Rs. 8,81,800/- under Section 40(a)(ia) during the hearing. Consequently, the tribunal dismissed this ground as not pressed.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, with the matter of disallowance under Section 14A remanded to the A.O. for fresh adjudication. The tribunal upheld the Revenue's classification of the income from share transactions as business income and dismissed the ground regarding Section 40(a)(ia) disallowance. The order was pronounced on 22.3.2013.

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