2018 (3) TMI 1303 - AT - Income Tax

Assessee wins case on share sale income classification, entitled to deduction

Smt. Prem Jain Versus ITO, Ward- 29 (1), New Delhi

The Tribunal ruled in favor of the assessee, determining that the income from the sale of shares should be classified as business income and not ... Income from sale of shares - busniss income or capital gain - period of holding - Benefit of deduction u/s 35 denied - Held that:- Hon’ble Delhi High Court in the case of D & M Components Ltd. (2014 (4) TMI 866 - DELHI HIGH COURT) while deciding a somewhat identical issue has held that where there was short duration of holding of shares and lack of clarity in account books, sale and purchase of shares would lead to business income and not short term capital gains. The various other decisions relied by the assessee also supports his case that the profits in the instant case of purchase and sale of shares would amount to business income and not short term capital gain as held by the Assessing Officer. We set-aside the order of the ld. CIT(A) and direct the Assessing Officer to allow the claim of business income on account of profit on sale of such shares. Since the assessee succeeds on this issue, the claim of the assessee regarding the deduction u/s 35 of the I.T. Act is also allowed subject to verification of other conditions if any by the Assessing Officer. - Decided in favour of assessee. Issues Involved:1. Deduction under Section 35 of the Income Tax Act.2. Restriction of deduction to Rs. 31,00,000.3. Determination of whether the assessee was carrying on any business activity.4. Entitlement to deduction under Section 35 in the absence of business income.5. Classification of income from the sale of shares as business income or short-term capital gain.Detailed Analysis:1. Deduction under Section 35 of the Income Tax Act:The assessee claimed a deduction under Section 35 amounting to Rs. 54,75,000 on account of a donation made towards scientific research to M/s Himalaya Trust Dehradun. The Assessing Officer (AO) disallowed this claim, arguing that the assessee had not declared any business income in the past and there was no opening or closing stock of shares. The AO treated the income from the sale of shares as 'short-term capital gain' rather than business income, thereby disallowing the deduction under Section 35.2. Restriction of Deduction to Rs. 31,00,000:The CIT(A) upheld the AO's decision to treat the income from the sale of shares as short-term capital gain but allowed an alternate deduction under Section 80GGA amounting to Rs. 31,00,000. The assessee contested this restriction, arguing that the full deduction under Section 35 should have been allowed.3. Determination of Whether the Assessee was Carrying on Any Business Activity:The AO and CIT(A) both concluded that the assessee was not carrying on any business activity. This was based on the absence of business income declarations in previous years and the lack of opening or closing stock of shares. The assessee argued that the transaction of purchasing and selling shares should be considered an adventure in the nature of trade, thereby constituting business activity.4. Entitlement to Deduction under Section 35 in the Absence of Business Income:The AO disallowed the deduction under Section 35, citing the absence of business income. The CIT(A) upheld this view but allowed an alternate deduction under Section 80GGA. The assessee argued that the deduction under Section 35 should be allowed if the transaction is considered an adventure in the nature of trade.5. Classification of Income from the Sale of Shares as Business Income or Short-Term Capital Gain:The core issue was whether the profit from the sale of shares should be classified as business income or short-term capital gain. The assessee contended that the transaction was an adventure in the nature of trade, citing various Supreme Court and High Court decisions. The AO treated the profit as short-term capital gain, arguing that the transaction was manipulated to claim the deduction under Section 35.Judgment:The Tribunal considered the arguments and various judicial precedents. It noted that the AO did not doubt the genuineness of the transactions but questioned the classification of income. The Tribunal found merit in the assessee's argument that a single transaction of purchase and sale outside the assessee's line of business could constitute an adventure in the nature of trade. Citing decisions from the Hon'ble Supreme Court and Delhi High Court, the Tribunal concluded that the profit from the sale of shares should be treated as business income.The Tribunal set aside the CIT(A)'s order and directed the AO to classify the income as business income and allow the deduction under Section 35, subject to verification of other conditions. The appeal filed by the assessee was allowed.Conclusion:The Tribunal ruled in favor of the assessee, determining that the income from the sale of shares should be classified as business income and not short-term capital gain. Consequently, the assessee was entitled to the deduction under Section 35, subject to verification of other conditions by the AO. The appeal was allowed, and the order was pronounced on March 22, 2018.