2016 (8) TMI 958 - HC - Income Tax

Transaction of shares - business income or capital gain - Held that - Both the CIT (A) and the ITAT have concurrently concluded on facts that the Assessee has in its books of account been treating separately the shares held as investment and those held as stock-in-trade. The ITAT noted that merely because the Assessee was engaged in trading of stocks, derivatives and features, it did not mean that the Assessee was precluded from maintaining investment portfolio. The ITAT referred to CBDT Circular No. 4 of 2007 which recognised that an Assessee having two portfolios may have income under both heads i.e. capital gains as well as business income. The ITAT further referred the decisions of the High Court and the Supreme Court and examined whether the scrips were bought from the borrowed funds, the period for which the shares were held and the frequency of the trading etc. The specific finding of the ITAT is that where the Assessee from the beginning held the shares under investment portfolio the same is treated as investments in the books of account and where the shares are held for trading purposes the profit arising there on is offered to taxed under the business head. Having heard the submissions of Mr. Manchanda, the Court is not persuaded to re-examine the above concurrent finding on facts by both the CIT (A) and the ITAT. No case has been made out by the Revenue that the above factual findings are perverse warranting interference by the Court. As regards the Explanation to Section 73 of the Act is concerned, apart from the fact that this point does not appear to have been urged by the Revenue before the ITAT and, therefore, not dealt with by it, the Court is not satisfied that the said provision has any application in the facts of the present case. - Decided against revenue

Summary

Issues:
- Appeal against the common judgment of the ITAT for AYs 2006-07 and 2007-08
- Treatment of profit from share transactions as business income
- Disproportionate income from shares held as investment and stock-in-trade
- Allegations of manipulating books of accounts
- Interpretation of Section 73 of the Income Tax Act 1961

Analysis:
1. The appeals by the Revenue challenged the ITAT's decision affirming the CIT(A)'s order regarding the treatment of profit from share transactions as business income for AYs 2006-07 and 2007-08. The CIT(A) had split the profits between business income and capital gains for both years. The ITAT agreed with the CIT(A) and also addressed the splitting of interest expenditure related to capital gains and business income.

2. The Revenue contended that the Assessee's disproportionate income from shares held as investment compared to stock-in-trade indicated manipulation of books of accounts to show trading shares as investments. The Revenue relied on the Explanation to Section 73 of the Income Tax Act 1961 to support its argument.

3. However, the Court, after reviewing the orders of the ITAT, AO, and CIT(A), disagreed with the Revenue's submission. Both the CIT(A) and the ITAT found that the Assessee maintained separate treatment for shares held as investment and stock-in-trade in its books. The ITAT highlighted that engaging in stock trading did not prevent an Assessee from maintaining an investment portfolio. The ITAT considered factors like the source of funds for buying shares, holding period, and trading frequency. The specific finding was that shares held as investments were treated as such in the books, while trading shares' profits were taxed as business income.

4. The Court found no reason to question the factual findings of the CIT(A) and ITAT. There was no evidence of perversity in the findings to warrant court interference. Additionally, the Court determined that the Explanation to Section 73 was not applicable to the case, as it was not raised before the ITAT and did not seem relevant to the circumstances.

5. Ultimately, the Court concluded that no substantial legal question arose for consideration, and thus, the appeals were dismissed.