2018 (2) TMI 882 - HC - Income Tax

High Court affirms ITAT decision on capital gains treatment, upholds real income principle for interest.

PRINCIPAL COMMISSIONER OF INCOME TAX-7 Versus PAVITRA COMMERCIAL LTD.

The High Court upheld the decision of the ITAT regarding the assessee's claim of capital gains, affirming the separate treatment of shares as investments ... Income from sale of shares - busniss income or capital gain - Held that:- The decisions of the Court have emphasized five broad tests whether the income bears the character of business income or capital gain – firstly, whether the company or concern is authorized in its Memorandum of constituting documents to deal with shares; (2) whether the entity had shown the shares under the head “Investment”; (3) whether the assessee/entity utilized its own funds and had not borrowed funds for the purpose of acquiring shares; (4) whether the nature of infrastructure – whether it is small, represents investment activity rather than the trading activity that would require larger infrastcuture; and lastly, whether the behaviour of the assessee is such as to disclose income/earning has objective i.e. “obtaining dividend” rather than trading. This Court notes that all the tests and the relevant rulings were noticed by both the authorities below, who had applied their mind and held that the AO’s approach in singular fixing scrutiny to the shifting and regulations of some shares to treat as business income, was erroneous. Reporting of mercantile interest of doubtful debts - Held that:- The question is covered by the decision of this Court in Commissioner of Income Tax Vs. Vasisth Chay Vyapar Ltd. (2010 (11) TMI 88 - Delhi High Court). The Court had applied “real income” principle to uphold the assessee’s contention. Those observations are squarely applicable in the present case. Issues:1) Whether the decision of the ITAT affirming the Appellate Commissioner’s view on the assessee’s claim of capital gain is justifiedRs.2) Whether the ITAT was justified in holding that interest income accrued on the basis of the assessee’s contention that recovery as well as interest on such deposits is doubtfulRs.Analysis:Issue 1:The High Court analyzed the case where the Assessing Officer (AO) rejected the assessee’s claim of capital gains, treating the profits as business income. The assessee maintained a distinct portfolio for stock in trade and investment. The CIT(A) held that the AO's view was incorrect, noting the separate treatment of shares under investments and stock in trade. The ITAT concurred, emphasizing the distinct portfolios and reconciliation of shares. The Court upheld the lower authorities' findings, applying established tests to determine the character of income as business income or capital gain. The Court found no error of law and dismissed the appeal.Issue 2:Regarding the reporting of mercantile interest on doubtful debts, the Court referred to a previous decision applying the 'real income' principle. The Court upheld the assessee’s contention based on this principle. The judgment in Commissioner of Income Tax Vs. Vasisth Chay Vyapar Ltd. was cited to support this position. Consequently, the Court dismissed the appeals and disposed of all pending applications.