2018 (2) TMI 181 - AT - Income Tax

Income from sale of shares - capital gain or busniss income - as submitted that shares were not held as stock-in-trade and the shares were not reshuffled for long period - Held that - In the instant case, the shares are fairly held for a period of 4 months upwards before being disposed of by the assessee on which short term capital gain was earned and very few shares were sold within a period of one month from the date of purchase. The shares on which long term capital gains were earned were held for period of 1 year 3 months. The assessee has not borrowed interest bearing funds for making investments on which STCG/LTCG was earned as no interest has been debited vis-a-vis investments portfolio of the assessee. The Revenue has accepted in preceding years gains arising from the dealing in the share as capital gains wherein the assessee was held to be an investor and principle of consistency has to be followed. Income earned by the assessee from dealing in shares is to be assessed as income from capital gains and we have no hesitation in confirming the well reasoned appellate order passed by learned CIT(A). This ground raised by the Revenue is dismissed. Loss arising from the Future and Option ( F& O) segment - Held that - The copy of reply received from NSE was duly handed over to the assessee by the AO but the assessee could not rebut the same as no evidences are brought on record by the assessee to prove that F & O transactions were genuine. Even before us no additional evidences are filed to contend that F & O losses were genuine. Thus the loss in F & O segment claimed to have been incurred were bogus/sham loss which was being allegedly incurred only with a view to set off the same against the income from short term capital gains on sale of shares/securities in order to reduce the tax liability. Thus, we disallow this loss by holding the same to be sham and the appeal of the assessee on this ground stood dismissed and we have no hesitation in confirming the well reasoned appellate order of learned CIT(A).

Issues Involved:
1. Classification of income from share transactions as business income or capital gains.
2. Disallowance of loss from trading in Futures and Options (F&O).

Detailed Analysis:

1. Classification of Income from Share Transactions:
The Revenue contended that the assessee's income from share transactions should be treated as business income, arguing that the assessee invested in shares to make quick profits rather than investments. The Revenue highlighted the volume, frequency, and nature of transactions, suggesting trading activity rather than investment. The assessee, on the other hand, argued that the shares were held as investments, shown under "Investments" in the books, and that the intention was to hold shares for earning dividends and capital appreciation.

The Assessing Officer (AO) observed that the assessee traded in shares in large volumes, often holding shares for very short periods. The AO classified the income from share transactions as business income, citing the magnitude of transactions and the intention to make quick profits.

The Commissioner of Income Tax (Appeals) [CIT(A)] disagreed with the AO, noting that the assessee held shares for more than a year, earned substantial dividends, and maintained two portfolios (investment and trading). The CIT(A) referenced the CBDT Circular No. 4 of 2007, which allows taxpayers to hold two portfolios. The CIT(A) also cited Supreme Court judgments emphasizing the need to consider the intention and conduct of the assessee. The CIT(A) concluded that the income from shares should be treated as capital gains, not business income.

The Tribunal upheld the CIT(A)'s decision, noting that the assessee's shares were held for significant periods, no interest-bearing funds were borrowed for investments, and the principle of consistency should be followed as the Revenue had accepted similar treatment in previous years.

2. Disallowance of Loss from F&O Trading:
The assessee claimed a loss of ?7,38,18,591 from F&O trading, which was set off against short-term capital gains. The AO disallowed this loss, observing that the transactions with the broker NKB Securities were not settled within the usual market period (T+2), and the broker allowed the assessee to accumulate losses without recovering dues. Notices sent to NKB Securities returned unserved, and the National Stock Exchange (NSE) confirmed that no such transactions took place during the relevant period.

The CIT(A) upheld the AO's disallowance, noting the lack of credible evidence from the assessee and the NSE's confirmation of no such transactions. The CIT(A) concluded that the F&O transactions were sham and non-genuine.

The Tribunal agreed with the CIT(A), emphasizing the unusual conduct of business with NKB Securities and the lack of evidence to support the genuineness of the transactions. The Tribunal held that the F&O losses were bogus and intended to reduce tax liability by setting off against short-term capital gains.

Conclusion:
Both the assessee's and the Revenue's appeals were dismissed. The Tribunal upheld the CIT(A)'s decisions, treating the income from share transactions as capital gains and disallowing the F&O losses as sham transactions. The well-reasoned orders of the CIT(A) were confirmed, and the principle of consistency was emphasized in the treatment of the assessee's income from share transactions.

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