1996 (7) TMI 166 - AT - Income Tax

Summary

Issues Involved:
1. Classification of profits/losses from the sale of shares as capital gains/losses or business gains/losses.
2. Eligibility for depreciation on buildings not fully owned by the assessee.
3. Computation of profit under the provisions of section 115J of the Income-tax Act.
4. Levy of interest under section 234B.

Detailed Analysis:

1. Classification of Profits/Losses from the Sale of Shares:
The primary issue was whether the profits/losses arising from the sale of shares should be classified as capital gains/losses or business gains/losses. The assessee, a government undertaking formed by the Government of Karnataka, claimed that the shares were held under the investment portfolio, and thus, the resulting profits/losses should be treated as capital gains/losses. The Assessing Officer and the CIT(A) disagreed, treating the transactions as business activities, thus classifying the profits/losses as business gains/losses.

The Tribunal examined several precedents, including the Supreme Court judgments in Raja Bahadur Visheshwara Singh v. CIT and Dalhousie Investment Trust Co. v. CIT, which clarified that mere realization of investments does not equate to business activity unless it is part of regular business operations. The Tribunal noted that the assessee did not engage in regular trading of shares in the secondary market but invested in shares as a promoter under government directives. The shares were held for long periods and were treated as investments in the balance sheet. The Tribunal concluded that the primary objective of the assessee was to develop industries in the state, not to earn profits, and thus, the profits/losses from the sale of shares should be classified as capital gains/losses.

2. Eligibility for Depreciation on Buildings:
The second issue involved the eligibility for depreciation on buildings that the assessee possessed but did not fully own, as there were no registered conveyance deeds. The Tribunal upheld the decisions of the lower authorities, referencing the Karnataka High Court decisions in Ramkumar Mills (P.) Ltd. v. CIT and CIT v. Bharath Gold Mines Ltd., which stipulated that without registered conveyance deeds, the assessee could not be considered the owner of the properties. Consequently, the claim for depreciation was disallowed.

3. Computation of Profit under Section 115J:
The third issue was related to the computation of profit under section 115J of the Income-tax Act. The CIT(A) had initially dismissed this claim, noting that after excluding the accrued interest, the book profits under section 115J would be less than the business profits computed under normal provisions. However, with the Tribunal's direction to treat the profits from the sale of shares as capital gains, the computation under section 115J required reassessment. The Tribunal directed the CIT(A) to re-evaluate and pass an appropriate order after recomputing the income.

4. Levy of Interest under Section 234B:
Lastly, the issue of interest levy under section 234B was raised. The assessee's counsel admitted that the relief sought was consequential. The Tribunal noted that consequential relief would be granted automatically, thus dismissing this ground without further consideration.

Conclusion:
The Tribunal partially allowed the appeal, reversing the lower authorities' decisions on the classification of profits/losses from the sale of shares, directing that they be treated as capital gains/losses. It upheld the disallowance of depreciation on buildings not fully owned by the assessee. The Tribunal also directed the CIT(A) to recompute the income under section 115J in light of the revised classification of profits. The ground concerning interest under section 234B was dismissed as it was deemed consequential.