Income from business or Income from short-term capital gains if few Equity shares are disclosed as investments?
Short Overview Where equity shares purchased by assessee were disclosed as investments and not as stock-in-trade , the AO was not justified in treating income arising from sale of the equity shares under the head Income from business as against the claim of assessee of Income from short-term capital gain .
Assessee-company was engaged in business of trading in shares as well as investment in shares. Since nature of activity of the assessee was trading in shares, AO treated income arising from sale of equity shares under the head Income from business as against the claim of the assessee of Income from short-term capital gain . Further, CIT(A) on the basis of audit report of CA upheld the views of the AO. Assessee submitted that in audited financial statement, the entire equity shares purchased by it were disclosed as investments , and not as stock-in-trade , therefore, the income from sale of equity shares should be treated as Income from short-term capital gain , and not as Income from business”.
It is held that On perusal of audited statement of account of assessee, it was evident that the assessee classified the equity shares purchased by it as investments , and not as stock-in-trade in the Balance Sheet. Therefore, the assessee was right in treating the gain resulting from the sale of its investment in equity shares under the head Income from short-term capital gain . Error committed by the CA in his audit report would not alter the intention of the assessee for holding the equity shares purchased by it as investment , which was evident from the statement of account/Balance Sheet of the assessee. Accordingly, the AO was directed to treat the income earned by the assessee during the relevant assessment year as Short-Term Capital Gain or Long-Term Capital Gain , as the case might be.
Decision: In assessee s favour.
IN THE ITAT, HYDERABAD BENCH
A. MOHAN ALANKAMONY, A.M.
Karpaga Vinayagar Enterprises (Pvt.) Ltd. v. ITO
ITA No. 400/Hyd/2016
8 July, 2020
Assessee by: P. Murali Mohana Rao
Revenue by: Solgy Jose T. Kottaram, DR
ORDER
A. Mohan Alankamony, AM.
This appeal is filed by the assessee against the order of the learned Commissioner (Appeals)-8, Hyderabad in Appeal No. 50/2008-09, dated 30-11-2015 passed under section 143(3) r.w.s 250(6) of the Act for the assessment year 2006-07.
2. The assessee has raised several grounds in its appeal however, the crux of the issue is that the learned Commissioner (Appeals) has erred in upholding the order of the learned assessing officer who had treated the income arising from sale of equity shares under the head Income from business as against the claim of the assessee of Income from short-term capital gain .
3. The brief facts of the case are that the assessee is a Private Limited Company engaged in the business of trading in shares as well as investment in shares filed its return of income for the relevant assessment year on 30-11-2006 admitting income of Rs. 12,84,952. Subsequently, the case was taken up for scrutiny and the assessment was completed under section 143(3) of the Act on 5-12-2008.
4. During the course of scrutiny assessment proceedings it was observed by the learned assessing officer that the assessee had disclosed income of 12,84,952 under the head STCG . However, the learned assessing officer opined that since the nature of business of the assessee is trading in shares the same has to be treated as income from business and not under the head Income from shorter-term capital gain . Accordingly, the learned assessing officer computed the net income of the assessee under the head Income from business at Rs. 12,49,567 (sic) Rs. 12,85,567 after disallowing proportionate expenses of Rs. 615 towards administration expenses, interest, and bank charges. On appeal, the learned Commissioner (Appeals) deleted the addition made for Rs. 615 as it was an ad-hoc disallowance made by the assessing officer on an improper basis. However, the learned Commissioner (Appeals) upheld the view of the learned assessing officer that the income earned by the assessee towards sale of shares has to be taxed under the head Income from business because the nature of activity of the assessee was trading in shares. The learned Commissioner (Appeals) arrived at such a conclusion based on the audit report of the Chartered Accountant filed in Form-3CA and 3CB as per Rule 6G of the IT Rules, 1963.
5. The learned AR argued before us by stating that the assessee had treated the shares purchased as its investment and not stock-in-trade . The learned AR further submitted that in the audited financial statement the entire equity shares purchased by the assessee was disclosed as investments and not as stock-in-trade . To evidence the same the learned AR referred to the paper book page No. 3 to 8 filed by the assessee. It was therefore pleaded that the gain earned by the assessee from the sale of its investment in equity shares may be treated as income from short term capital gain and not under the head income from business . The learned DR on the hand relied on the orders of the learned Revenue Authorities and prayed for confirming the same.
6. I have heard the rival submissions and carefully perused the materials on record. On perusing the audited statement of account of the assessee enclosed in paper book page No. 3 to 6 it is quite evident that the assessee has classified the equity shares purchased by it as investments and not as stock-in-trade as on 31-3-2006 and as on 31-3-2005 in the Balance Sheet. Therefore, the assessee is right in its rem to treat the gain resulting from the sale of its investment in equity shares under the head income from short term capital gains as per the provisions of the Act. Error committed by the Chartered Accountant in his audit report will not alter the intention of the assessee for holding the equity shares purchased by it as investment which is evident from the statement of accounts/Balance Sheet of the assessee. It is pertinent to mention that the Chartered Accountant of the assessee as well as the learned Revenue Authorities may have been confused on the issue because the assessee though have classified the purchase of equity shares as investment in its Balance Sheet, the same is disclosed in the P & L Account as trading activity. Considering the facts and circumstances of the case, I hereby direct the learned assessing officer to treat the income earned by the assessee during the relevant assessment year as Short-Term Capital Gain or Long-Term Capital Gain as the case may be. It is ordered accordingly.
7. Before parting, it is worthwhile to mention that this order is pronounced after 90 days of hearing the appeal, which is though against the usual norms, I find it appropriate, taking into consideration of the extra-ordinary situation in the light of the lock-down due to Covid-19 pandemic. While doing so, I have relied in the decision of Mumbai Bench of the Tribunal in the case of DCIT v. JSW Ltd. in ITA No. 6264/M/2018 and 6103/M/2018 for assessment year 2013-14, Order, dated 14-5-2020 : 2020 TaxPub(DT) 2142 (Mum-Trib).
8. In the result, appeal of the assessee is allowed.
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