2017 (2) TMI 847 - AT - Income Tax

Nature of income - share transaction - business income or capital gain - Held that - In principle ld.CIT(A) has accepted status of the assessee as investor also. It has also been explained that the assessee was maintaining two portfolios. There is no provision in the Income Tax Act which can authorize the authority to draw a line i.e. shares held less than 30 days would be treated as a business transaction. An assessee is either an investor or trader. His status cannot be changed on the basis of the transactions where shares were held below a particular number of days. There is no such provision in the Act. Thus the ld.CIT(A) has erred in creating an artificial line between transactions. The Revenue has not challenged the finding of the CIT(A) qua treating the assessee as an investor. Therefore we partly allow the appeal of the assessee and modify the order of the CIT(A). The transactions in respect of shares held by the assessee less than 30 days should also be treated as a transaction of investment. In other words short term capital gain shown by the assessee is to be accepted. Disallowance in respect of expenditure relevant to the activity of shares and securities - Alternatively it has been contended that the AO be directed to delete the disallowance or he may be directed to grant rebate under section 88E - Held that - A perusal of the record shows that an application under section 154 of the Act was filed before the ld.CIT(A). Since this issue has already been relegated to the AO for readjudication and there is no specific finding at the end of the AO on this issue. Moreover the order of the ld.CIT(A) based on an application under section 154 of the Act has not been challenged before the Tribunal it became final. In view of this development we are of the view that ends of justice would meet if we set aside this issue to the file of the AO for re-adjudication in accordance with law.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Classification of income from share transactions as business income or short-term capital gain.
3. Disallowance of expenditure related to the activity of shares and securities.

Issue-Wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:

The appeal was time-barred by 111 days. The assessee explained the delay was due to a misconception of law, believing a joint appeal could be filed against the final order of the CIT(A) and any order passed under section 154 of the Income Tax Act, 1961. The Tribunal considered the explanation and noted that the expression "sufficient cause" should be interpreted liberally to advance substantial justice. Citing Supreme Court rulings in Collector Land Acquisition Vs. Mst. Katiji & Others and N.Balakrishnan Vs. M. Krishnamurthy, the Tribunal emphasized that the judiciary should aim to remove injustice rather than legalize it on technical grounds. It concluded that the delay was due to a bona fide error and not a deliberate strategy, thus condoning the delay and proceeding to decide the appeal on merit.

2. Classification of Income from Share Transactions:

The primary grievance was the classification of ?56,52,395/- as business income instead of short-term capital gain. The assessee, a salaried employee, had made substantial investments in shares. The AO treated the income from these transactions as business income based on factors like frequency and volume of transactions, referencing CBDT Circular No.1827. However, the CIT(A) partly accepted the assessee as an investor, following the ITAT's decision in Sugamchand C. Shah (HUF) Vs. DCIT, and treated transactions where shares were held for less than 30 days as business transactions. The Tribunal found that the CIT(A) erred in creating an artificial distinction based on the holding period, as there is no such provision in the Income Tax Act. It held that the assessee should be treated consistently as an investor and accepted the short-term capital gain as declared by the assessee.

3. Disallowance of Expenditure Related to Shares and Securities:

The assessee contested the disallowance of ?4,14,273/- in expenses related to share transactions and alternatively sought a rebate under section 88E. The CIT(A) had already addressed this issue in an application under section 154, directing the AO to examine the claim for deductions under Chapter VI-A. The Tribunal noted that since this issue was already relegated to the AO and the order was not challenged, it became final. Therefore, the Tribunal set aside this issue to the AO for re-adjudication in accordance with the law.

Conclusion:

The appeal was partly allowed for statistical purposes, with the delay in filing condoned, the classification of income as short-term capital gain accepted, and the issue of disallowed expenditure sent back to the AO for re-adjudication.