2012 (4) TMI 660 - AT - Income Tax

Tribunal rules capital gains, not business income, disallows STT deduction

M/s. Smaa Enterprises Pvt. Ltd. Versus Asstt. Commr. of Income-tax

The Tribunal directed the AO to treat short-term and long-term capital gains as capital gains, not business income, reversing the CIT(A)'s decision. The ... Income from sale of shares - capital gain or business income - STT - Held that:- The assessee has purchased shares which are delivery based and made the payment and vice versa is not under dispute. Whereas the trader normally makes the purchase and sale during the day without taking delivery and settling the transactions ultimately as at the end of the day without delivery, which is not the case of the assessee. The assessee has been declaring the shares as investment since assessment year 2001-02 is a matter of record and the department has not brought on record any different facts and in the absence of any material change justifying the department to take different view from that taken in earlier proceedings. The department cannot change the stand in the subsequent year. In the facts and circumstances of the present case and decisions of various courts of law relied upon by both the parties, we are of the view that the assessee is a investor and cannot be termed as a trader in shares. Therefore, the AO is directed to accept the claim of the assessee. Issues Involved:1. Treatment of short-term capital gains as business income.2. Treatment of long-term capital gains as business income.3. Deduction of Securities Transaction Tax.4. Disallowance of proportionate expenditure on earning exempt income.5. Disallowance of penalties as business expenditure.Issue-wise Detailed Analysis:1. Treatment of Short-term Capital Gains as Business Income:The assessee argued that the CIT(A) erred in treating short-term capital gains of Rs. 1,80,75,100/- as business income instead of capital gains. The AO treated the shares as stock-in-trade based on the substantial nature of transactions, the manner of maintaining books, and the magnitude of purchases and sales. The AO referenced the decision of the Authority of Advance Ruling and principles from various judgments, concluding that the shares were held for trading purposes. The CIT(A) upheld this view. However, the assessee contended that the shares were held as investments, valued at cost, and not for trading purposes. The assessee had consistently shown shares as investments in previous years, and the principle of consistency should apply. The Tribunal agreed with the assessee, noting that the shares were declared as investments, held for appreciation, and no borrowings were involved. The Tribunal directed the AO to accept the assessee's claim, reversing the CIT(A)'s order.2. Treatment of Long-term Capital Gains as Business Income:Similar to the short-term capital gains, the assessee contested the treatment of long-term capital gains of Rs. 17,03,733/- as business income. The AO and CIT(A) treated these gains as business income based on the same rationale used for short-term capital gains. The assessee argued that the gains should be treated as capital gains since the shares were held as investments. The Tribunal, considering the same facts and principles as in the short-term capital gains issue, directed the AO to treat the long-term capital gains as such, reversing the CIT(A)'s order.3. Deduction of Securities Transaction Tax:The assessee claimed a deduction of Rs. 2,27,736/- on account of Securities Transaction Tax. The AO disallowed the deduction under section 40(a)(ib) of the Income-tax Act, and the CIT(A) confirmed this action. The Tribunal, in view of its decision on the treatment of capital gains, concurred with the CIT(A) that the deduction does not qualify, dismissing the assessee's ground.4. Disallowance of Proportionate Expenditure on Earning Exempt Income:The assessee did not press this ground, and therefore, it was dismissed as not pressed.5. Disallowance of Penalties as Business Expenditure:Similarly, the assessee did not press this ground, and it was dismissed as not pressed.General Ground:The general ground raised by the assessee did not require any adjudication.Conclusion:The Tribunal partly allowed the appeal, directing the AO to treat the short-term and long-term capital gains as such and not as business income, while upholding the disallowance of the Securities Transaction Tax deduction. The other grounds were dismissed as not pressed.