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2014 (7) TMI 961 - AT - Income TaxBusiness income treated as STCG and LTCG Share transactions Held that - The assessee is maintaining two separate port folios, one in respect of trading and other in respect of investments - the assessee has paid STT but in respect to short term capital gain STT was not paid - investment in shares and mutual funds is out of assessee s own capital - The assessee is maintaining separate port folios for investment in shares and trading in shares - Following the decision in CIT Vs. Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT - assessee is engaged in two different types of transactions namely, investment in shares and dealing in shares for the purposes of business and held that the delivery based transactions are to be treated as investment transactions and the profit received therefrom is to be treated as short term or long term capital gain depending on the period of holding of shares and that there ought to be uniformity in treatment and consistency in various years the order of the CIT(A) is upheld Decided against Revenue. Bad debts written off as business loss Held that - Loss which was incurred by assessee is a business loss or bad debt - The provision of section 28 read with section 4 of the Act imposes a charge on profit and gains of any business or profession carried on by the assessee - The business profit is to be computed in accordance with the provisions of section 30 to 43(c) and this section deals with deduction and allowances - The scheme of this provision is that profits and gains should be computed subject to certain express deduction and allowances and to certain express provisions of deductions - The list of allowances incurred in this section is not exhaustive or all allowances which can be made in ascertaining the profit of the business taxable u/s. 28 of the Act and an item of loss or expenditure incidental to business may be deducted in computing profits and gains of business or profession, even if it is not falling under any of these sections. Relying upon Badrinath Daga Vs. CIT 1958 (4) TMI 2 - SUPREME Court - the assessee who was in the business of trading and investment in shares, had advanced a sum to a share broker with whom the assessee has regular dealings in earlier years and the advance made were during the course of assessee s business against which assessee had given shares, which are more than the value of the advance given as on that date - due to scam in the market there was a loss to the assessee which was directly connected to the assessee s business - it should have been allowed as business loss by the AO Decided against Revenue.
Issues Involved:
1. Classification of income from share transactions as Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) versus business income. 2. Allowability of bad debts written off as business loss. Detailed Analysis: 1. Classification of Income from Share Transactions: The first issue revolves around whether the income declared by the assessee from share transactions should be treated as Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) or as business income. The revenue challenged the order of CIT(A), which directed the AO to treat the income as LTCG and STCG. Facts: - The assessee maintained two portfolios: one for investment and another for stock in trade. - The AO observed that the major part of the assessee's earnings came from frequent and large-scale share transactions, leading to the classification of the income as business income. - The CIT(A) noted that the assessee had been consistently maintaining two separate portfolios and that the investments were made from own funds, not borrowed ones. - The CIT(A) also observed that the department had accepted this treatment in previous and subsequent scrutiny assessments. CIT(A) Observations: - Investments were made wholly out of own funds, and there were no borrowed funds employed. - The investment in shares and mutual funds was substantial and the holding period for most transactions was several months. - The transactions did not indicate frequent churning of investments. - The assessee had substantial dividend income, which supported the claim that the transactions were not in the nature of business. - The CIT(A) relied on the decision in CIT vs. Gopal Purohit, where the Supreme Court dismissed the revenue's special leave petition. Tribunal's Findings: - The assessee maintained separate portfolios for trading and investment. - The investment in shares and mutual funds was out of the assessee's own capital. - The AO's general observations were insufficient to reclassify the capital gains as business income. - The Tribunal confirmed the CIT(A)'s order, following the principle laid down in CIT vs. Gopal Purohit, and dismissed the revenue's appeal. 2. Allowability of Bad Debts Written Off as Business Loss: The second issue concerns the CIT(A)'s decision to allow the assessee's claim of bad debts written off as a business loss. Facts: - The assessee was engaged in share trading and investment, maintaining two portfolios. - The assessee advanced Rs. 35 lakhs to a share broker, Harish Chandra Biyani, who later became involved in a scam and absconded. - The assessee attempted to recover the amount but failed and eventually wrote off Rs. 22,11,812 as bad debt. - The AO disallowed the claim, stating it did not meet the conditions under section 36(1)(vii) read with section 36(2) of the Income-tax Act. CIT(A) Observations: - The loan did not qualify as a bad debt under section 36(1)(vii) as it did not relate to any receipts taken into account in computing income of any earlier year. - The loan was considered an isolated transaction and not part of banking or money lending business. - The CIT(A) agreed with the AO but allowed the claim as a business loss, noting that the loss was incidental to the assessee's business activities. - The loan was advanced in the regular course of business and not as a personal loan or pure investment. Tribunal's Findings: - The Tribunal agreed that the loss was incidental to the business and had a direct and proximate nexus with the business operations. - The Tribunal cited Supreme Court decisions in Badrinath Daga and Ramchandran Shivnarayaan, which support the allowance of losses incidental to business. - The Tribunal confirmed the CIT(A)'s order, allowing the claim as a business loss, and dismissed the revenue's appeal. Cross Objection by the Assessee: - The assessee filed a cross objection, which was barred by limitation by 15 days. - The assessee's counsel requested withdrawal of the cross objection, which was not objected to by the revenue. - The Tribunal permitted the withdrawal and dismissed the cross objection as withdrawn. Conclusion: - The appeal of the revenue and the cross objection of the assessee were both dismissed. - The order was pronounced in the open court on 17.07.2014.
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