2017 (1) TMI 1046 - AT - Income Tax

Tribunal rules in favor of assessee, categorizing share sale gain as capital, allows R&D deduction

The Tribunal ruled in favor of the assessee, directing the AO to treat the gain on the sale of shares as short-term capital gain rather than business ... Gain from sale of shares - assessed as a business income or short term capital gain/long term capital gain - Held that:- In this case, transactions were more than 150 and in that case it was observed that if delivery based transactions are available, then, profit received from such transaction is to be treated as short term capital gain or long term capital gain. Thus, taking into consideration overall facts, we are of the view that the ld.Revenue authorities below are not justified in treating the assessee as trader in the shares, therefore, we allow the first fold of grievance and set aside assessment as a business income. We direct the AO to accept the claim of the assessee, and assess this amount as a short term capital gain. Weighted deduction under section 35(2AB) - Held that:- CIT(A) has failed to adhere to conditions contemplated in section 35(2AB) of the Income Tax Act and Rule 6(7A) of the Income Tax Rules. The finding of the ld.CIT(A) that the assessee was not maintaining separate accounts is factually incorrect. As duly pleaded before the ld.CIT(A) that it has been maintaining separate ledger accounts, which was duly certified. This was for the DSIR to consider before grant of approval. DSIR has not disputed it, and therefore, granted approval. Whether after satisfying itself for grant of approval, DSIR can grant approval for specific period on the strength of some policy formulated by it? - Held that:- The Act nowhere authorizes DSIR to grant approval for specific period. The job of DSIR was not find out whether R&D activity was carried out by the assessee or not, and the expenditure were incurred or not. Respectfully following the decision in the case of Claris Life Sciences Ltd [2008 (8) TMI 579 - Gujarat High Court ], we allow this ground of appeal and direct the ld.AO to grant weighted deduction under section 35(2AB) of the Income Tax Act, 1961. Issues Involved:1. Treatment of gain on sale of shares as business income vs. short-term capital gain.2. Disallowance of weighted deduction under section 35(2AB) of the Income Tax Act for Research and Development expenses.Issue-Wise Detailed Analysis:1. Treatment of Gain on Sale of Shares:The assessee, a private limited company engaged in manufacturing and selling biomass gasifiers, filed its return of income declaring a total income of Rs. 3,44,94,749/-. The dispute arose when the Assessing Officer (AO) treated the gain on the sale of shares amounting to Rs. 28,24,217/- as business income instead of short-term capital gain as claimed by the assessee. The AO's decision was based on the frequency and volume of transactions, suggesting the assessee was trading in shares rather than investing.The Tribunal considered various principles and judicial pronouncements, including the tests laid out by ITAT Lucknow Bench in Sarnath Infrastructure Pvt. Ltd. and the Gujarat High Court in Commissioner of Income Tax vs. Riva Sharkar A Kothari. These tests include the intention at the time of purchase, frequency of transactions, treatment in books of accounts, and whether the transactions were for realizing profit or for investment purposes.The assessee argued that:- It is primarily a manufacturing company, not engaged in trading shares.- Investments were made in blue-chip companies, indicating a long-term investment intent.- Transactions were delivery-based, and no borrowed funds were used for investments.- Investments were consistently valued at cost, and the same practice was followed in previous years without dispute from the department.The Tribunal concluded that the cumulative factors, including the nature of transactions, the method of accounting, and the primary business of the assessee, indicated that the assessee was an investor, not a trader. The Tribunal directed the AO to treat the gain of Rs. 28,24,217/- as short-term capital gain.2. Disallowance of Weighted Deduction under Section 35(2AB):The assessee claimed a weighted deduction of Rs. 13,48,732/- for Research and Development (R&D) expenses under section 35(2AB) of the Income Tax Act. The AO disallowed the claim on two grounds:- The Department of Science & Industrial Research (DSIR) approved the R&D facility from 1st April 2010, which the AO interpreted as applicable only from AY 2011-12.- The assessee did not maintain separate accounts for the approved R&D facility as required by Rule 6(7A)(c) of the Income Tax Rules.The Tribunal examined the submissions and noted that:- The assessee's R&D unit had been recognized by DSIR since 1990, with the latest renewal valid from 1st April 2009 to 31st March 2012.- The Gujarat High Court in CIT Vs. Claris Lifesciences Ltd. held that the Act does not provide for a specific cut-off date for weighted deduction eligibility. The approval by DSIR is sufficient to claim the deduction for the entire period.- The assessee maintained separate ledger accounts for R&D expenses, certified by Chartered Accountants, fulfilling the requirement of separate accounts.The Tribunal found that the AO's disallowance was not justified as the assessee met the conditions under section 35(2AB) and Rule 6(7A). The Tribunal directed the AO to allow the weighted deduction of Rs. 13,48,732/-.Conclusion:The Tribunal allowed the appeal of the assessee, directing the AO to treat the gain on the sale of shares as short-term capital gain and to grant the weighted deduction for R&D expenses under section 35(2AB). The decision emphasized the importance of considering the cumulative factors and judicial precedents in determining the nature of income and eligibility for deductions.