2015 (8) TMI 701 - AT - Income Tax

Tax Tribunal: Share gains as business income, not capital gains. Verify stock inclusion, tax write-back.

The ITAT Mumbai upheld the decision to classify gains from share transactions as business income rather than capital gains, citing the appellant's ... Gains arising from sale of shares - chargeable under the head 'Profit and gains of business or profession' instead of 'Capital gains' - Held that:- Once the assessee himself had returned the loss in share transactions as business loss so that he may seek set off against the income from share transactions in future assessment years, he at this stage cannot be allowed to claim himself as an investor, only because the benefits to him for treated like that. The decision of the Hon’ble Bombay High Court in the case of “Gopal Purohit” [2010 (1) TMI 7 - BOMBAY HIGH COURT] is applicable in the case in hand. We do not find any infirmity in the order of the lower authorities in treating the assessee as a trader in share transactions. So far as the contention that the gains arising from sale of bonus shares and split shares be charged under the head “Capital gains”, we are unable to subscribe to the said contention also. Once the assessee has been treated as a trader, then the income arising from bonus shares, split shares etc. is also to be treated as business income only - Decided against the assessee. The assessee has agitated that by mistake and oversight an amount of ₹ 25,11,982/- is included in the closing stock as on 31.03.08. This plea requires factual verification by the AO. The AO is directed to verify the said claim and if the contention of the assessee is found correct, to allow the claim accordingly. Addition towards write back of unsecured loan - Held that:- The assessee has claimed that the unsecured loans written back by the assessee of ₹ 4,05,000/- had not been claimed as deduction in the year in which the loan was taken and therefore the write back of unsecured loans could not be considered as part of taxable income under section 41(1) of the Act. The Ld. CIT(A), however, held that any liability of the earlier years which has been written off must be shown as income in the year in which it is written off. We do not find any infirmity in the order of the Ld. CIT(A) in this respect. Accordingly, the said ground is also decided against the assessee. Issues involved:1. Treatment of gains from sale of shares as business income or capital gains.2. Inclusion of amount in closing stock by mistake.3. Addition towards write back of unsecured loan under section 41(1) of the Income Tax Act.Issue 1: Treatment of gains from sale of sharesThe appellant contested the decision of the Commissioner of Income Tax (Appeals) (CIT(A)) in treating gains from the sale of shares as business income instead of capital gains. The appellant argued that the gains should be treated as capital gains as they were an investor in shares. However, the Assessing Officer (AO) and CIT(A) noted that in the previous assessment year, the appellant had treated share transactions as business activity. The AO found no substantial change in the appellant's share transaction activity to justify a shift from business income to capital gains. The AO relied on the principle of uniformity and consistency in income treatment. The ITAT Mumbai upheld the lower authorities' decision, emphasizing that the appellant's extensive share dealings indicated a trading pattern, supporting the classification of income as business income. The ITAT rejected the appellant's plea to treat gains from bonus and split shares as capital gains, maintaining the business income classification.Issue 2: Inclusion of amount in closing stock by mistakeThe appellant raised a claim that an amount of Rs. 25,11,982 was erroneously included in the closing stock as of 31.03.08 due to a mistake and oversight. The ITAT directed the AO to verify this claim for factual accuracy. If the claim is substantiated, the AO is instructed to allow the correction accordingly, indicating a need for factual verification before making a decision on this issue.Issue 3: Addition towards write back of unsecured loanThe appellant contested the addition of Rs. 4,05,000 towards the write back of an unsecured loan under section 41(1) of the Income Tax Act. The appellant argued that since the unsecured loans were not claimed as deductions when taken, the write back should not be considered taxable income. However, the CIT(A) upheld the addition, stating that any written-off liability from previous years must be treated as income in the year of write-off. The ITAT affirmed the CIT(A)'s decision, finding no error in treating the write back of unsecured loans as part of taxable income under section 41(1) of the Act.In conclusion, the ITAT Mumbai partially allowed the appeal for statistical purposes, upholding the classification of gains from share transactions as business income, directing factual verification for the inclusion in closing stock, and confirming the addition towards the write back of unsecured loan as taxable income.