2014 (2) TMI 256 - AT - Income Tax

Dealing in shares - Business income or income from capital gains - Held that - The intention of the assessee at the time of acquisition should be considered while deciding the nature of income from dealing in shares - No single factor alone can be conclusive guidance for ascertaining the intention of the assessee - Merely because the period of holding was short, it cannot be concluded that the assessee acquired the units and shares with an intention of dealing in those units and shares - There were only 3 or 4 transactions of purchase and sale of units and shares during the entire year, investment in shares and units were made from own funds and not out of borrowed funds, the assessee was engaged in the business of dealing in futures and auctions - The assessee can be said to be investor in shares and the dealer - Decided in favour of assessee. Taxability of interest - Accrual basis or cash basis - Held that - The assessee was accounting for interest income on cash basis regularly and consistently - Merely because the assessee claimed credit for TDS of interest income which is not assessable as income of the assessee of the year on the basis of consistent and regular system followed by the assessee does not empower the Assessing Officer to change the consistent system of accounting and bring to tax interest income on mercantile basis - As per provisions of section 145 of the Act - The interest income is assessable on the basis of consistent and regular system of accounting either cash or mercantile as regularly followed by the assessee - The order of CIT(A) upheld - Decided against Revenue.

Issues Involved:
1. Classification of income from sale of shares and units as business income or short-term capital gains.
2. Addition of interest income on an accrual basis versus cash basis and the corresponding credit for TDS.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares and Units as Business Income or Short-Term Capital Gains:

The primary issue in the appeals for Assessment Years 2006-07 and 2007-08 was whether the income from the sale of shares and units should be classified as business income or short-term capital gains. The Assessing Officer (AO) treated the gains as business income, arguing that the short holding period and frequent transactions indicated a trading activity. The CIT(A) upheld this view, relying on a precedent set by the Ahmedabad Bench of the Tribunal in the case of Shri Sugamchandra C. Shah, which held that shares held for less than a month should be treated as business income.

The assessee, however, argued that the transactions were investments, citing decisions from the Hon'ble Gujarat High Court in CIT Vs. Bankim Jayantilal Shah and CIT Vs. Vaibhav J. Shah (HUF), which suggested that short holding periods alone do not necessarily indicate trading activity. The assessee also pointed out that the investments were made from own funds and not borrowed funds, and the number of transactions was limited.

Upon review, the Tribunal found that the intention at the time of acquisition is crucial in determining whether the transactions were for investment or trading. Factors such as the way transactions are recorded in financial statements, volume and frequency of transactions, use of borrowed funds, and the period of holding were considered. The Tribunal concluded that merely because the holding period was short, it could not be concluded that the transactions were for trading purposes. Given that the assessee had only a few transactions and used own funds, the Tribunal directed that the profits be treated as capital gains.

2. Addition of Interest Income on an Accrual Basis Versus Cash Basis and the Corresponding Credit for TDS:

The second issue involved the addition of interest income on an accrual basis for Assessment Years 2006-07, 2007-08, 2008-09, and 2009-10. The AO added the difference between the interest income as per TDS certificates and the interest income reported by the assessee, arguing that since the assessee claimed TDS credit, the interest should be assessed on an accrual basis.

On appeal, the CIT(A) deleted the additions, noting that the assessee consistently followed the cash method of accounting for interest income. The CIT(A) also directed that TDS credit should be given in the year the corresponding income is offered to tax.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's consistent method of accounting should not be altered merely because TDS credit was claimed. The Tribunal agreed that interest income should be assessed on a cash basis, as consistently followed by the assessee, and TDS credit should be given accordingly.

Conclusion:

The Tribunal concluded that the income from the sale of shares and units should be treated as capital gains and not business income. It also upheld the CIT(A)'s decision to assess interest income on a cash basis and directed that TDS credit be given in the year the income is offered to tax. The appeals of the assessee were partly allowed for Assessment Year 2006-07 and fully allowed for Assessment Year 2007-08, while the appeals of the Revenue for all four years were dismissed.

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