2020 (4) TMI 264 - AT - Income Tax

Tribunal directs reexamination of capital gain treatment, dismisses expenditure disallowance, appellant to argue on issue.

The Tribunal partially allowed the appeal, directing the AO to reexamine the treatment of short term capital gain as business income due to discrepancies ... Treatment of short term capital gains as business income - distinction between investment and stock-in-trade - classification of securities transactions and motive/test of trading vs investment - treatment of expenditure on increase of share capital - application of Raja Bahadur Visheshwara Singh principleTreatment of expenditure on increase of share capital - Validity of disallowance of fees paid to ROC for increase in authorised share capital - HELD THAT: - The assessee did not press or argue this ground before the Tribunal. The AO had disallowed the ROC filing fees claimed as revenue expenditure and the CIT(A) sustained that disallowance. In view of the absence of any argument or defence by the assessee at the hearing before the Tribunal, the ground challenging the disallowance is not entertained and is dismissed. [Paras 7]Ground dismissed; disallowance upheld for purposes of the appeal.Treatment of short term capital gains as business income - distinction between investment and stock-in-trade - classification of securities transactions and motive/test of trading vs investment - application of Raja Bahadur Visheshwara Singh principle - Whether profit treated by the assessee as short term capital gains is taxable as business income or as capital gains - HELD THAT: - The AO treated profits shown as short term capital gains as business income, a view upheld by the CIT(A) relying on the Raja Bahadur Visheshwara Singh test and on findings that the assessee maintained a common accounting system for trading and investment, that the impugned scrips were not opening or closing investments but intra-year transactions, and that the assessee has regularly traded in shares. The assessee contested these findings by asserting separate books for investments and stock-in-trade, a substantial holding period, payment of STT and prior/subsequent years' acceptance of capital gains. Because material facts and conflicting contentions remain unresolved, the Tribunal declined to decide the issue on merits and directed that the matter be restored to the AO for fresh adjudication on facts and law after giving the assessee an opportunity of hearing; the AO is also directed to examine the treatment in preceding and subsequent years on similar transactions. [Paras 12]Issue remanded to the AO for fresh adjudication in the light of submissions of the assessee; directions to examine preceding and subsequent years and to decide afresh after hearing the assessee.Final Conclusion: Appeal partly allowed: the challenge to the disallowance of ROC fees is dismissed, and the question whether the contested receipts are short term capital gains or business income is remitted to the AO for fresh decision after hearing the assessee. Issues:1. Treatment of short term capital gain as business income.2. Disallowance of expenditure on account of fees paid for increase in capital.Issue 1: Treatment of short term capital gain as business incomeThe appellant, a company engaged in financial services, filed an appeal against the order of the CIT(A) confirming the AO's treatment of short term capital gain as business income for A.Y. 2011-12. The AO noted that the appellant categorized some shares as investments and others as stock in trade, maintaining a common accounting system for both. The AO observed that the shares in question were not part of the opening or closing stock, indicating intra-year stock transactions. The CIT(A) upheld the AO's decision. The appellant argued that the shares were held for capital appreciation, not trading, citing the average holding period, separate books for investments, and payment of security transaction tax on purchases. The Tribunal found discrepancies in the lower authorities' findings and directed the AO to reexamine the issue, considering the appellant's submissions and past treatment of similar transactions. The Tribunal allowed the appeal for statistical purposes, restoring the issue to the AO for fresh adjudication.Issue 2: Disallowance of expenditure on account of fees paid for increase in capitalThe AO disallowed an expenditure of &8377; 2,67,847 claimed by the appellant as revenue expenditure on filing fees paid to the ROC for increasing the share capital. The CIT(A) upheld this disallowance. During the appeal before the Tribunal, the appellant did not argue on this issue. Consequently, the Tribunal dismissed the ground raised by the appellant regarding this disallowance.In conclusion, the Tribunal partially allowed the appeal filed by the appellant, directing the AO to reconsider the treatment of short term capital gain as business income while dismissing the ground related to the disallowance of expenditure on account of fees paid for an increase in capital.