2024 (3) TMI 300 - AT - Income Tax

Share transaction income treated as capital gains despite high volumes when consistently shown as investments

Sh. Amrit Lal Batra Versus Addl. Commissioner of Income Tax, Range-3, Jammu, Deputy Commissioner of Income Tax-3, Srinagar

The ITAT Amritsar held that income from share transactions should be treated as capital gains rather than business income, despite high transaction ... Correct head of income - treatment of income from sale and purchase of shares - business income or income from capital gains - HELD THAT:- In the present case, mere high volume of transactions and frequently investment in shares could not alter assessee's consistent treatment of shares purchased on delivery basis as investment duly accounted for in its books of account and shown in its Balance Sheet as investment, which was even accepted by revenue for proceeding years and subsequent years. Thus we are of the considered view that the appellant assessee has purchased the shares with the intention of investment. Respectfully, following the Later judgment of the Hon'ble Gujarat High Court in the case of “Pr. CIT v. Bhanuprasad D Trivedi, HUF” [2017 (9) TMI 840 - GUJARAT HIGH COURT] we hold that the assessee had purchased shares with clear intention of being an investor and held shares by way of investment, and gain arising out of transfer of shares would be treated as capital gains and not business income. Accordingly, the AO is directed to treat the income of the assessee arising out of transfer of shares as capital gains. Nature of expenses - Disallowance of legal expenses - HELD THAT:- In the Present case of the Assessee, the facts are similar to that of “CIT vs. Delhi Safe Deposit Co. Ltd [1982 (1) TMI 2 - SUPREME COURT] Appellant being holding the Chairmanship in M/s AB Hotels nothing but a profit earning asset of the Assesses. Thus, the expenditure incurred by the Assessee in order to protect the same would be an allowable expenditure. Respectfully, following the Hon’ble Apex Court in the case of “CIT vs. Delhi Safe Deposit Co. Ltd.”, (supra) we hold that in the present case, the legal expenses claimed by the assessee are allowable expenses u/s 37 of the Act. Issues Involved:1. Treatment of income from the sale and purchase of shares as business income or capital gains.2. Disallowance of legal expenses.Summary:Issue 1: Treatment of Income from Sale and Purchase of SharesThe Hon'ble High Court of Jammu and Kashmir remitted the matter back to the Tribunal to reconsider the nature of the transaction concerning the sale and purchase of shares, whether it should be treated as business income or capital gains. The High Court emphasized the need to examine the volume, frequency, continuity, and regularity of transactions, as outlined in the decisions of the Delhi High Court and Gujarat High Court. The Tribunal had earlier referred to these decisions but did not fully apply the tests to the facts of the present case.The Tribunal, upon reconsideration, acknowledged the various tests laid down by the Gujarat High Court in the case of 'Commissioner of Income Tax vs. Rewashanker A. Kothari,' including the intention behind the initial acquisition, the purpose of subsequent sales, and how the shares were treated in the books of accounts. The Tribunal noted that the assessee consistently treated the shares as investments, reflected in the balance sheet, and earned substantial dividend income, indicating an investment intention. The Tribunal also considered precedents where high volume and frequency of transactions did not alter the treatment of shares as investments.In view of the factual matrix and judicial precedents, the Tribunal concluded that the assessee purchased shares with the intention of investment. Therefore, gains arising from the transfer of shares should be treated as capital gains and not business income. The AO was directed to treat the income from the transfer of shares as capital gains.Issue 2: Disallowance of Legal ExpensesThe High Court also set aside the Tribunal's finding on legal expenses, requiring fresh consideration. The assessee argued that the legal expenses were incurred to protect his interest as Chairman of M/s AB Hotels Ltd., where he held a significant shareholding. The expenses were related to a dispute before the Company Law Board, which, if unresolved, could adversely affect his other business interests and reputation.The Tribunal referred to the Supreme Court's decision in 'CIT vs. Delhi Safe Deposit Co. Ltd.,' which held that expenses incurred to protect a profit-earning apparatus are deductible. The Tribunal also cited the Mumbai Tribunal's decision in 'DCIT vs. Anil Dhirajlal Ambai,' where settlement charges paid to SEBI were considered business expenses.Given the similarities with the cited cases, the Tribunal held that the legal expenses incurred by the assessee to protect his position in M/s AB Hotels Ltd. were allowable under Section 37 of the Act.Other Matters:The appeal for the Assessment Year 2010-11 was dismissed as infructuous upon the appellant's request.Conclusion:The appeals were disposed of in favor of the appellant, treating the income from the transfer of shares as capital gains and allowing the legal expenses as deductible. The order was pronounced in the open court on 06.10.2023.