2017 (11) TMI 372 - AT - Income Tax

Income from sale of shares - capital gain or business income - use of IPO funding availed by the assessee - Held that - An undisputed fact is that the assessee has applied in the shares, acquired through IPO of the company from borrowed capital. Merely because the shares were purchased through borrowed capital cannot be the ground for capital gain, to be assessed as business income. The fact that the assessee paid interest on borrowings cannot be held against him, treating it business income, when there are other predominating natures which give clear impression that the assessee intended only to invest on shares and not to hold them as stock-in-trade. Therefore, we are of the view that assessee has worked as an Investor and not Trader. The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. There were no repetitive purchase and sale of the same script in the assessee s case under consideration, which means that there was no churning of shares. Besides, the assessee has accumulated past losses, that is, short term/long term capital losses, and as per the assessment done by the Department in past years, he is entitled to set-off these losses form short term/long term capital gain in subsequent years, if the Department is changing its stand and treat the assessee as a trader in shares then assessee would not be able to set off these losses and this would be an harassment to the assessee, which is not acceptable. We note that the Department has been consistently accepting the assessee as an Investor in scrutiny proceedings, therefore, we do not uphold the order of the ld. CIT(A) following the Rule of consistency. See RadhasoamiSatsang vs. CIT (1991 (11) TMI 2 - SUPREME Court ). Thus no reason to treat the assessee as a trader. Direct the AO to treat the short-term capital gain / long-term capital gain as income under the head capital gain and treat the assessee as an Investor. - Decided in favour of assessee Disallowance of interest as cost of acquisition in computing the short-term capital gain - Held that - We are of the view that the assessee under consideration is an investor and the interest paid on loan by the assessee was accepted by the AO as cost of investment and revenue expenditure in the assessment for the A.Y. 2010-11. The interest paid by the assessee, on the money borrowed for acquiring the shares, which is the cost for acquisition of shares. We, therefore, hold that the interest paid by the assessee on the money borrowed for purchase of shares should be treated as cost of acquisition in computing the short-term capital gain / long-term capital gain as the case may be. See case of Smt. Sunita A. Damani 2011 (11) TMI 788 - ITAT MUMBAI - Decided in favour of assessee

Summary

Issues Involved:
1. Classification of income from the sale of shares as either "Short-term Capital Gains" or "Business Income."
2. Disallowance of interest as a cost of acquisition of shares.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:

The core issue revolves around whether the income of ?1,95,94,294/- from the sale of shares should be classified as "Short-term Capital Gains" or "Business Income." The assessee, a partnership firm engaged in investment in shares and securities, declared this amount as short-term capital gains. However, the Assessing Officer (AO) treated it as business income, arguing that the shares were acquired using borrowed funds with an intention to earn short-term profits. The AO's reasoning was based on the fact that the shares were purchased through an Initial Public Offer (IPO) with financing arrangements, indicating a business-like activity rather than an investment.

The assessee contended that its activities were consistent with those of an investor, citing past assessments where similar transactions were treated as capital gains. The assessee emphasized that the shares were classified as investments in the balance sheet, substantial dividends were earned, and the investments were mainly made from own funds. The assessee also highlighted that the shares were not acquired regularly or systematically, which would indicate a trading activity.

The CIT(A) upheld the AO's decision, noting that the shares were bought with borrowed funds at high-interest rates and sold within a short period, indicating an intention to earn short-term profits. However, the Tribunal found that the Department had consistently accepted the assessee as an investor in previous years, and there was no significant change in the assessee's activities. The Tribunal emphasized the principle of consistency and ruled in favor of the assessee, directing the AO to treat the income as short-term capital gains.

2. Disallowance of Interest as Cost of Acquisition:

The second issue pertains to the disallowance of interest amounting to ?24,87,354/- paid by the assessee as a cost of acquisition for shares of DQ Entertainment (International) Ltd. The AO disallowed this interest, treating it as a prior period expense. The CIT(A) upheld this disallowance, arguing that the interest accrued in the previous year and should not be considered in the current year.

The assessee argued that the interest paid on borrowed funds should be capitalized as part of the cost of acquisition of the shares. The assessee emphasized that the interest was directly attributable to the acquisition of shares and should be allowed as a deduction. The Tribunal agreed with the assessee, noting that the interest paid on borrowed funds used for acquiring shares should be treated as part of the cost of acquisition. The Tribunal relied on the precedent set by the ITAT Mumbai in the case of Smt. Sunita A. Damani, where interest on borrowed funds for IPO applications was allowed as part of the cost of acquisition.

Conclusion:

The Tribunal ruled in favor of the assessee on both issues. It directed the AO to treat the income from the sale of shares as short-term capital gains and allowed the interest paid on borrowed funds as part of the cost of acquisition of shares. The appeals filed by the assessee were allowed, ensuring consistency in the treatment of similar transactions and recognizing the interest expense as a legitimate cost in the acquisition of shares.