Shares can be hold as both investment and stock-in-trade

Dipakbhai Harishchandra Shah Vs ITO (ITAT Ahmedabad)

ITAT Ahmedabad held that as per CBDT circular no.4/2007 dated 15.6.2007 and 6/2016 dated 29-2-2016, person can hold shares as both investment and stock-in-trade. Accordingly, income will be taxable based on the type in which share is hold.

Facts- During the assessment proceedings, AO noted that the assessee has shown LTCG on sale of shares amounting to Rs. 1,32,859/-. He further noted that the assessee had been reflecting share transaction both as business and as LTCG. Rejecting these two stands taken by the assessee, he brought long term capital returned by the assessee to tax as business income of the assessee.

CIT(A) rejected the contentions of the assessee stating that the assessee had not filed any bifurcation of shares held as stock-in-trade and as investment. Being aggrieved, the present appeal is filed.

Conclusion- CBDT vide circular No.4/2007 dated 15.6.2007 and Circular No.6/2016 dated 29-2-2016 had clarified that it was possible for one person to hold shares as investment and as stock-in-trade also; that certain guidelines has been brought with respect to the same which the assessee had followed.

Held that I find that the CIT(A) has substantially accepted the assessee’s contention that it is eligible to hold shares both as investor and as stock-in-trade, as per CBDT Circular/notification referred by it. In view of the same order of the ld.CIT(A) rejecting the assessee’s claim of long term capital gain amounting to R.s.1,32,834/- is set aside, and the AO is directed to allow the said claim to the assessee.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been filed by the assessee against order passed by the Commissioner of Income Tax(Appeals), Gandhinagar in short referred to as ld.CIT(A)) under section 250(6) of the Income Tax Act, 1961 (“the Act” for short), dated 7.3.2019 pertaining to Asst.Year 2015-1 6.

2. At the time of hearing none has appeared on behalf of the assessee, despite serving of notice through RPAD post. Even no adjournment application has been filed by the assessee. A perusal of the order sheets of the case demonstrates that the assessee has repeatedly remained unrepresented at the time of hearing. Assessee has been provided with as many as seven occasions starting from 25.11.2021 to 21.11.2022 for hearing of his appeal before the Tribunal, but in none of the occasions, the assessee came forward to prosecute his appeal. Therefore, I decide to dispose of the appeal of the assessee ex parte after hearing the ld.DR and considering the material available on record.

3. Ground No.1 raised by the assessee is as under:

1. The ld. CIT(A) erred in law and on facts in treating Long Term Capital gain on sale of shares as Business Income and made addition of Rs. 1,32,859/-“

4. Brief facts as emanating from the order of the AO relating to the issue are that during the assessment proceedings, the AO noted that the assessee has shown long term capital gain on sale of shares amounting to Rs. 1,32,859/-. He further noted that the assessee had been reflecting share transaction both as business and as long term capital gain. Rejecting these two stands taken by the assessee, he brought long term capital returned by the assessee to tax as business income of the assessee. Before the ld.CIT(A) the assessee contended that the long term capital gain was claimed by the assessee on shares held as investment acquired by the assessee prior to 1.4.1981; that trading in shares was commenced during the relevant year only, and he stated that the assessee had reflected share investment in his balance sheet also. He pointed out that CBDT vide circular No.4/2007 dated 15.6.2007 and Circular No.6/2016 dated 29-2-2016 had clarified that it was possible for one person to hold shares as investment and as stock-in-trade also; that certain guidelines has been brought with respect to the same which the assessee had followed. The reply of the assessee was forwarded to the AO for his comment who in his remand report stated that even as per the CBDT Circular referred to by the assessee, since the assessee had taken a view that share trading may be treated as business, there was no basis for the assessee now to claim profit as long term capital gain. The assessee filed rejoinder to the remand report reiterating his contentions made earlier. The ld.CIT(A) rejected the contentions of the assessee stating that the assessee had not filed any bifurcation of shares held as stock-in-trade and as investment. Relevant finding of the ld.CIT(A) in para 7.4 of his order is as under:

“7.4 I have considered the facts of the case, assessment order, submission made by the appellant remand report and rejoinder filed by the appellant. On this issue as held by the undersigned in para 5.3 of this order that the appellant has failed to provide any bifurcation of the share/ securities held as stock in trade / investment, therefore, the contentions of the appellant are devoid of any merit. Until and unless some independent evidence is produced to show that such & such securities are held as investment, how the benefit of claim of long term capital gain can be allowed to the appellant. The Board’s circulars in this regard are very much clear. Considering these facts, the AO was justified in denying the claim of long term capital gain and treating the entire share transactions as business activity. Thus the appeal on this ground also fails and the same is dismissed.”

5. Before me, the ld.DR relied on the order of the authorities

6. I have gone through orders of the authorities below and have carefully perused the contentions made by the assessee before the Revenue authorities. I find that the ld.CIT((A) has substantially accepted the assessee’s contention that it is eligible to hold shares both as investor and as stock-in-trade, as per CBDT Circular/notification referred by it. Thus, the basic point for the AO for rejecting the assessee’s claim of long term capital gain being that the assessee could not have held shares both as investment and stock-in-trade was clearly dismissed by the ld.CIT(A). But having held so, the ld.CIT(A) rejected the assessee’s claim on the ground that the assessee did not file any bifurcation of the shares held as investment and those held as stock-in-trade. I find that the assessee repeatedly asserted to the authorities below that it had treated shares held prior to 1.4.1981 as investment and reflected in its balance sheet also. The ld.CIT(A) has missed noting this fact, therefore I find that basis with the ld.CIT(A) for dismissing the assessee’s plea of claim of capital gain earned on share of shares as long term capital gain was non-existent, but on the contrary the assessee disclosed shares held as investment. In view of the same order of the ld.CIT(A) rejecting the assessee’s claim of long term capital gain amounting to R.s.1,32,834/- is set aside, and the AO is directed to allow the said claim to the assessee. The ground no.1 is allowed.

7. Ground No.2 and 4 relating to issue of disallowance of expenditure under section 14A of the Act read as under:

2. The ld. CIT(A) erred in law and on facts in applying provisions of of the IT Act, 1961 which were not applicable and made additionsection 1 of Rs.2, 08,055/-

3. The ld. CIT(A) erred in law and on facts in treating Dividend from companies Rs.2,63,064/- as taxable though the same was exempt u/s.10(34) of IT Act, 1961.

8. The facts as emerging from the order of the AO are that the during the assessment proceedings, the AO noted that the assessee had taken large amount of loan of Rs.20,29,568/- and had debited the interest payment of Rs.2,08,055/-. Noting that the assessee was a partner in a partnership firm, the profit & Loss earned from which was exempt from income-tax under section 10(2A) of the Act, the assessee was show caused as to why interest so claimed by the assessee be not disallowed, as having incurred for the purpose of earning exempt income by applying provisions of section 14A of the Act. The assessee replied that the interest claimed by him of Rs.2,08,055/- did not pertain to any loan, but on the contrary was pertaining to interest recovered from the partnership firm on the negative capital of the assessee in the said firm. The AO accepted this contention of the assessee, but noting that profit & loss from the firm was exempt from tax, he held that provision of section 14A would come into operation, and accordingly, he disallowed interest expenditure claimed by the assessee amounting to Rs.2,08,055/-.

9. Before the ld.CIT(A) the assessee reiterated his contention made before the AO that the interest expenditure was not relatable to the earning of exempt income, but on the contrary was recovery by the firm on account of negative capital of the assessee. He further contended that in the absence of any nexus established between amount on which interest was paid by the assessee and the earning of the profit from the said firm, in the absence of any finding to the fact that the profit earned by the assessee was related to the capital invested by the assessee, there could be no disallowance of interest on account of the same paid for the purpose of investment in the firm. In this respect, he relied on the decision of Mumbai Bench of the ITAT in the case of ACIT Vs. Novel Enterprises (202) 22 taxmann.com 116 (Mum). He further stated that in view of the above fact, his capital was negative in the firm from which he had earned exempt profit/loss, the provision of Rule 8D was also not workable. The reply of the assessee was also forwarded to the AO who in his remand report reiterated his order. The ld.CIT(A) after considering the contention of both the assessee and the AO upheld disallowance stating that in view of the fact that the assessee had earned exempt income from the firm, M/s.Shah Patel & Associates, the interest expense claimed by the assessee was disallowable as per section 14A of the Act.

The Ld.DR supported the order of the authorities below.

10. I have gone through the order of the AO/ Ld. CIT(A) and heard the Ld. DR. It is not disputed that the interest claimed by the assessee was recovery of interest by the firm from the assessee on account of his negative balance capital. Since there was no capital invested by the assessee in the firm, whatever was earned by the assessee from the said firm could not be stated to have any correlation i.e. capital invested because despite his capital being negative, he was entitled to earn any profit/loss. Now in this view of the fact alone, the interest paid by the assessee to the firm on account of negative capital balance could not be stated to have incurred for the purpose of earning any exempt income by way of Profit /Loss from the said firm. The decision of the Mumbai Tribunal in the case of Novel Enterprises (supra) relied upon by the ld.counsel for the assessee before the ld.CIT(A) clearly applies in the facts and circumstances of the present case, following which, I hold that no disallowance of interest u/s 14A of the Act was warranted in the present case. Even otherwise, I agree with the ld.counsel for the assessee that even machinery provision of computing the disallowance as per the Rule 8D of the Income Tax Rules, 1962 becomes unworkable since formula provided in the said rule for calculating the disallowance of interest is based on the investment made by the assessee for earning exempt income, which in the present is not there, and in fact negative investment. For this reason also even on applying Rule 8D in the facts and circumstances no disallowance of interest is warranted. The decision relied upon by the ld.CIT(A), I find only lays down the basic proposition that income earned by partners from firms in the form of profits, which are exempt under section 10(2A) of the Act, attract disallowance under section 14A of the Act. It is only basic proposition of law laid down in the said cases and does not help the case of the Revenue.

11. In view of the above facts, assessee’s claim of disallowance of interest amounting to Rs.2,08,055/- in the present case under section 14A is deleted. Ground no.2 and 4 are allowed.

12. Ground no.3 raised by the assessee reads as under:

3. The ld.CIT(A) erred in law and on facts in treating dividend from companies Rs.2,63,064/- as taxable though the same was exempt u/s. 10(34) of the iT Act.”

13. As transpires from the order of the authorities below, the assessee had earned dividend income amounting to Rs.2,63,064/- and claimed as exempt income under section 10(34) of the Act. The AO denied the exemption noting that it was earned on shares which were stock-in-trade of the assessee and which he held therefore qualified as business income which as per him was taxable and did not qualify for exemption under section 10(34) of the Act. He referred to CBDT Circular No.6 of 2016 and pointed out that it was directed by the CBDT in the said instruction that the assessee had the option to treat some shares as stock-in-trade and some as investments, and the shares so treated as stock-in-trade, income arising from transfer of shares would be treated as business income. The ld.AO interpreted the aforesaid circular to mean that the income from trading shares included dividend income earned on shares held as stock-in-trade and referring to the said CBDT Circular, he held that the dividend income earned by the assessee was taxable.

14. During appellate proceedings, the assessee pointed out that Hon’ble Allahabad High Court in the case of Sangam Investment Ltd. CIT, in Income Tax Appeal No.3 of 2003 had held that it was immaterial whether the shares were held by the assessee as stock­in-trade and dividend income earned in any case was exempt under section 10(34) of the Act. The ld. CIT(A) however upheld denial of exemption to the dividend income earned by the assessee finding that the AO had followed relevant instruction of the Board in this regard. The finding of the ld. CIT(A) at para 5.4 of the order are as under:

“5.4 I have considered the facts of the case, assessment order, submission made by the appellant remand report and rejoinder filed by the appellant. I find that the AO has followed the relevant instructions of the Board before resorting to the addition of dividend income. The appellant has also failed to specify the securities held as investment separately. The decision relied upon by the appellant is also of no help as there is no discussion of the provisions of section HA in the said decision. Considering these facts, the action of the AO is upheld and this ground of appeal is thus dismissed.”

15. Before me, the ld. DR relied on the order of the Revenue

16. I have gone through the orders of the authorities below and have also considered contentions raised by the assessee before the CIT(A). I find merit in the contentions of the assessee. The provisions of section 10(34) of the Act exempting the dividend income earned by the assessee nowhere restrict the dividend income as pertaining to that earned on shares held as investment only and precluding the benefit to dividend earned on shares held as stock-in­ trade. Section 10(34) as rightly pointed out by the ld. counsel for the assessee makes no distinction whatever between the dividend income earned on shares held as stock-on-hand and that held as investment. The Hon’ble Allahabad High Court in the case of Sangam Investment Ltd. (supra) has clearly interpreted section 10(34) as above. In view of the same, I hold that the assessee is entitled to claim exemption of dividend income of Rs.2,63,064/-.