2012 (10) TMI 15 - AT - Income Tax

Loss on Forfeiture of Shares is assessed under Capital Gain or PGBP - Partial payment made for allotment of shares was disclosed under the head investment held in stock in trade Held that - As concluding from the fact the balance sheet assessee has disclosed the investment for allotment of shares being partly paid up under the head investment in equity shares . Assessee did not produce any other materials to establish that these partly paid equity shares were held as stock in trade. There are no other materials before us to look beyond the statement of affairs. Therefore, nature of investment of the assessee and income or loss arising out of purchase and sale of the same has to be taxed under the head capital gains. Decides in favour of revenue Profit & Loss on sale of shares, is a business income or capital gain Investments of shares were disclosed under the head investment - Held that - As concluded from paper book filed by the appellant it appears that the share are held as stock in trade. Thus it is very clear that the objective of the assessee company in purchasing the shares was to trade in these shares and not for holding the same as investments. Therefore losses on sale of shares treat as business loss. Appeal decides in favour of assessee Transaction in F&O treat as business income or capital gain Assessee s ground that loss on sale of shares is assessable under the head capital gains, then profit and gains from the purchase/sales of the derivatives (F&O) of the shares must also be assessed under the head capital gains Held that - The intention of the assessee for procuring the asset has to be examined to determine whether the asset is to be treated as investment or stock- in- trade. It is very essential to understand the nature of transactions in dealing with derivative. Derivative itself is merely a contract between two or more parties for purchase/sale of securities by taking delivery or by settlement on certain pre-determined terms. Therefore, derivative by itself cannot be termed as an investment or stock in trade. The entire transactions of purchase/sale of securities/shares through derivatives and later on dealing with those shares/securities will determine whether an investment is made or stock-in-trade is procured. It entirely differ from case to case. - Decided against the assessee.

Summary

Issues:
1. Treatment of "Loss on Forfeiture of Shares" as Business loss or Capital Loss.
2. Treatment of "Loss on Sale of Shares" as Business loss or Capital Loss.
3. Taxation of profits and gains from the purchases/sales of derivatives under the head 'capital gains'.

Issue 1: Treatment of "Loss on Forfeiture of Shares"

The appellant contested the addition of Rs. 7,00,000 as disallowance of "Loss on Forfeiture of Shares" treated as Capital Loss by CIT(A). The appellant argued that the shares were part of stock in trade and should be considered as trading loss, not capital loss. However, the disclosure of the investment in the balance sheet under the head "investment in equity shares" indicated the shares were held for investment, not trading. The Tribunal examined the balance sheet and affirmed that the shares were intended for investment, thus ruling the loss to be taxed under capital gains.

Issue 2: Treatment of "Loss on Sale of Shares"

The appellant challenged the addition of Rs. 33,08,337 as disallowance of "Loss on Sale of Shares" treated as Capital Loss by CIT(A). The appellant argued that these shares were held as stock in trade, not as investments. The Tribunal reviewed the balance sheet and observed that the shares were classified as stock in trade, not investments, as per Section 2(14) of the Act. Consequently, the Tribunal held that the loss on purchase and sale of these shares should be treated as trading loss.

Issue 3: Taxation of Derivatives

The appellant sought to treat profits and losses from derivatives under the head 'capital gains' if the shares' losses were assessed as capital gains. The appellant argued that both shares and derivatives were part of the same activity and should be treated similarly. The Tribunal emphasized that the nature of transactions determines their tax treatment. While derivatives are considered securities, their treatment as investments or stock in trade depends on the intention behind the transactions. As detailed explanations on derivatives were not provided, the Tribunal dismissed this alternate ground raised by the appellant.

In conclusion, the Tribunal partly allowed the appeal, ruling in favor of the appellant regarding the treatment of losses on shares as trading losses rather than capital losses. However, the request to tax profits and losses from derivatives under 'capital gains' was dismissed due to insufficient evidence on the nature of those transactions.