2015 (5) TMI 1082 - AT - Income Tax

Tribunal rules in favor of assessee on share transactions, confirms addition under section 94(7) and disallows deduction under section 35D.

The tribunal partly allowed the assessee's appeal, ruling in favor of the assessee on the treatment of income from share transactions as short term ... Treatment of share transactions as investment versus trading - short term capital gains - principle of consistency in classification of activities - dividend stripping under section 94(7) - deduction of preliminary expenses under section 35DTreatment of share transactions as investment versus trading - short term capital gains - principle of consistency in classification of activities - Whether income from purchase and sale of shares is to be treated as business income or as short term capital gain - HELD THAT: - The Assessing Officer treated the assessee as a trader in respect of short term gains because of the volume and frequency of transactions, while the assessee consistently treated and was accepted as an investor since 1997 and declared long term capital gains and dividend income in earlier years. The Tribunal held that Revenue cannot adopt a double yardstick-treating the assessee as an investor for long term gains and as a trader for short term gains-since that would render the short term capital gains concept redundant. Having regard to the Memorandum and Articles of Association, absence of borrowed funds for share transactions, existence of long term capital gains and dividend income, and consistent prior treatment, the Tribunal applied the rule of consistency and overall facts and circumstances to conclude the assessee was an investor and the income should be treated as short term capital gain. [Paras 7]Income from purchase and sale of shares held to be short term capital gains in favour of the assessee.Dividend stripping under section 94(7) - Whether the loss on purchase and sale of shares should be reduced to the extent of dividend under section 94(7) - HELD THAT: - The Assessing Officer reduced the loss claimed by the assessee to the extent of dividend earned under the dividend stripping provision and added that amount to assessable income; the Commissioner (Appeals) upheld that view. The Tribunal found no infirmity in the impugned order and confirmed the addition on the dividend stripping issue. [Paras 10]Addition on account of dividend stripping under section 94(7) confirmed.Deduction of preliminary expenses under section 35D - Whether deduction of preliminary expenses debited to Profit & Loss account is allowable beyond the statutory limit - HELD THAT: - The assessee debited preliminary expenses to Profit & Loss account; the Assessing Officer allowed deduction only to the extent permissible having regard to capital employed and disallowed the balance. No arguments were advanced before the Tribunal challenging the learned Commissioner (Appeals)'s upholding of that disallowance. The Tribunal found no infirmity in the order of the Commissioner (Appeals) and dismissed the ground. [Paras 13]Disallowance of preliminary expenses beyond the allowable amount under section 35D upheld.Final Conclusion: Appeal partly allowed: classification of share-sale income as short term capital gains upheld in favour of the assessee; additions on dividend stripping and disallowance of excess preliminary expenses confirmed. Issues involved:1. Treatment of income from sale and purchase of shares - short term capital gains or business income.2. Dividend stripping activity under section 94(7).3. Disallowance of deduction under section 35D.Issue 1 - Treatment of income from sale and purchase of shares:The case involves a dispute regarding whether income earned from the sale and purchase of shares should be treated as short term capital gains, as claimed by the assessee, or as business income, as assessed by the Assessing Officer. The Assessing Officer and the learned CIT(A) held that the assessee was systematically engaged in share transactions with a profit motive, hence treated the income as business income. However, the assessee argued that it had always been treated as an investor, consistently investing surplus profits in shares since 1997. The assessee's intention was to invest in shares, not trade, supported by the absence of borrowed funds for share transactions and substantial income from long term capital gains and dividends. The tribunal, applying the rule of consistency, ruled in favor of the assessee, concluding that the income from share transactions should be treated as short term capital gains, considering the overall facts and circumstances of the case.Issue 2 - Dividend stripping activity under section 94(7):The Assessing Officer observed that the assessee had engaged in prohibited share transactions under section 94(7), resulting in a loss. Consequently, the Assessing Officer reduced the loss by the dividend earned and added it back to the assessee's income. The learned CIT(A) upheld this addition, and the tribunal found no fault in the decision, confirming the addition as per the impugned order.Issue 3 - Disallowance of deduction under section 35D:Regarding the disallowance of deduction under section 35D, the assessee had debited preliminary expenses of &8377; 3,204 to the Profit & Loss account, but the Assessing Officer disallowed &8377; 2,704 as the capital employed was &8377; 2,00,000, allowing deduction only to the extent of &8377; 500. The learned A.R. did not present any arguments on this issue, and the tribunal found no fault in the learned CIT(A)'s decision to uphold the disallowance, resulting in the dismissal of the ground raised by the assessee.In conclusion, the tribunal partly allowed the assessee's appeal, ruling in favor of the assessee on the treatment of income from share transactions but confirming the addition related to dividend stripping activity and the disallowance of deduction under section 35D.