2018 (3) TMI 1030 - AT - Income Tax

Income from sale of shares - Treatment of Short Term Capital Gains as Business Income - assessee had maintained dual portfolio in its books of accounts i.e both investment and trading portfolio - Held that - AO had already accepted the assessee s stand of being an investor for Asst Years 2007-08 and 2008-09 by accepting the long term capital gains reported by the assessee. The dispute was only with acceptance of short term capital gains and for that limited purpose alone, the revenue was trying to treat the assessee as trader in shares and not investor in shares. This divergent stand of the lower authorities is not appreciated. The assessee had purchased the shares that the assessee had invested in the aforesaid scrips with an intention to earn dividend and for holding for quite a long period of time and earn capital appreciation thereon. These are also supported by the Board Resolution passed by the assessee company to treat the purchase of certain scrips in each year as investments, much prior to the introduction of concessional rate of tax in the statute pursuant to levy of STT. We also find from the perusal of the audited financial statements, the assessee has got sufficient own funds at its disposal which were used for making investments and no part of the borrowed funds were used for making investments. The trading transactions disclosed by the assessee comprised of 96 scrips (trading in shares) and 269 scrips (trading in derivatives) for the Asst Year 2006-07. The profit derived from these trading transactions were duly offered to tax by the assessee as business income and accepted by the revenue. The assessee had after conversion of stock into investment as on 1.4.2005 had held those shares for a reasonable period of time and the weighted average period of holding of those shares was 82 days. This shows the intention of the assessee to hold those shares as investments to earn dividend and reap the benefits of capital appreciation and at the same time, exit at a profitable moment depending upon the market conditions The treatment given by the assessee in respect of share transactions by separately offering business income and short term capital gains / long term capital gains does not warrant any disturbance and deserves to be accepted. Disallowance of Consultancy charges - Held that - The only way is to understand the veracity of the transactions is by cross verifying the other side who had submitted those reports. He fairly agreed that let this matter be examined by the ld AO. We find that this request of the ld AR deserves to be considered in as much as the disallowance has been made only by way of suspicion by the ld AO. Accordingly, in the interest of justice and fair play, we deem it fit and appropriate to remand this issue to the file of the ld AO to decide the same by making necessary cross verifications from M/s Batliwala & Karani Securities India Pvt Ltd in the legal process known to law.

Issues Involved:
1. Treatment of Short Term Capital Gains as Business Income
2. Disallowance of Foreign Travel Expenses
3. Disallowance of Consultancy Charges

Issue-wise Detailed Analysis:

1. Treatment of Short Term Capital Gains as Business Income:

The core issue was whether the profits from the sale of shares should be treated as short-term capital gains or business income. The assessee maintained dual portfolios, one for trading and another for investments, and treated the gains from the sale of shares held as investments as short-term capital gains. The Assessing Officer (AO) treated these gains as business income, citing reasons such as numerous transactions, high frequency, and volume of transactions, utilization of sale proceeds for acquiring more shares, and the accountant's draft trial balance showing all gains as trading profits. The assessee argued that the shares were purchased with the intention to hold as investments, supported by board resolutions and consistent treatment in books of accounts.

The tribunal noted that the assessee maintained dual portfolios and consistently treated certain shares as investments. It also observed that the AO had accepted the assessee's treatment of long-term capital gains in subsequent years. The tribunal emphasized that the intention of the assessee, supported by board resolutions and consistent treatment in books, should be the guiding factor. It also referred to various judicial precedents and CBDT Circular No. 6/2016, which supports maintaining dual portfolios.

The tribunal concluded that the treatment given by the assessee regarding share transactions, offering business income and short-term/long-term capital gains separately, does not warrant any disturbance. Hence, the grounds raised by the assessee for all assessment years were allowed.

2. Disallowance of Foreign Travel Expenses:

The assessee claimed foreign travel expenses, which were disallowed by the AO and the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) erroneously noted that the assessee did not press this ground. The tribunal found that the assessee had indeed filed detailed written submissions regarding these expenses. Therefore, the tribunal restored the issue to the file of the CIT(A) for fresh adjudication on merits, directing the assessee to appear before the CIT(A) and the CIT(A) to dispose of the issue by a specified date.

3. Disallowance of Consultancy Charges:

The AO disallowed consultancy charges paid to M/s Batliwala & Karani Securities India Pvt Ltd, doubting the genuineness of the expenditure as the assessee could not produce research reports. The assessee argued that the consultancy charges were genuine, subjected to service tax, and tax was deducted at source. The tribunal noted that the AO did not verify the genuineness of the transaction from the other party. Therefore, the tribunal remanded the issue to the AO for cross-verification from M/s Batliwala & Karani Securities India Pvt Ltd.

Conclusion:

- The tribunal allowed the grounds related to the treatment of short-term capital gains as business income for all assessment years.
- The issue of foreign travel expenses was remanded to the CIT(A) for fresh adjudication.
- The issue of consultancy charges was remanded to the AO for cross-verification.

The appeals for the assessment years 2005-06 and 2006-07 were partly allowed for statistical purposes, while the appeals for the assessment years 2007-08 and 2008-09 were allowed.

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