By Ajay R. Singh Advocate
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New Claim – Without filing revised return before AO – No Bar to entertain such claim by Appellate authority – Borrowing funds for its business of sale and purchase of shares held allowable:
The assessee in his return of income had claimed carry forward short term loss of Rs.1,17,70,414/-, in respect of sale and purchase of shares. During the course of assessment proceedings the assessee vide letter dated 17/10/2011 claimed that the activity of the assessee regarding sale and purchase of shares should be considered to be in the nature of business activity. It was pleaded that loss arising out of sale and purchase of shares should be allowed as loss arising out of business of sale and purchase of shares. A loss of Rs.5,40,98,454/- was computed by the assessee in respect of sale and purchase of shares . It was submitted that the activity of sale and purchase of shares should be considered to be business activity as all the necessary ingredients which are required to hold an activity as business activity have been fulfilled viz. (i) there is a high frequency of purchase and sale of shares; (ii) the transactions are substantial ; (iii) there is a voluminous trade as the total purchase are to the tune of Rs.51.24 crores and sales are of Rs.49.00 crores; (iv) the holding period of shares is very low; (v) the assessee has utilized borrowed funds for purchasing and holding the shares.
The AO did not accept such contentions of the assessee The AO also rejected the claim of the assessee regarding interest on loans which was claimed to the tune of Rs.71,18,278/- as according to AO only a portion of the said interest could be considered for the purpose of purchase and sale of shares. AO held that 40% of such interest is disallowable. Accordingly, he made disallowance of Rs.28,47,311/- .
Before the CIT (A) the assessee raised the same contentions . The Ld.CIT(A) did not accept the submission of the assessee on the ground that the assessee himself, in the return of income, has disclosed the income arising out of share transactions under the head capital gain; in the balance sheet, the stock had been shown under the head investment. He held that the claim made by the assessee during the course of assessment proceedings was an after thought the assessee could not be allowed to change the stand just to take advantage of some provisions of the Act; the assessee was not a trader of shares and purchase and sale of shares by him was only a part time activity because the assessee was getting regular salary income from the company; mere frequency of transactions could not be a proof of trading activity. Therefore, he held that AO was right in treating such income under the head “capital gain” and in this manner CIT(A) confirmed the action of the AO. The CIT(A) also confirmed the disallowance made by the AO in respect of interest.
The ITAT held that activity of sale and purchase entered into by the assessee was in the nature of business, as it had not been disputed by the revenue that borrowed funds on which interest had been paid by the assessee were utilized for the purpose of purchase of shares, the same was allowable out of income earned by the assessee from the activity of sale and purchase of shares. Thus appeal filed by the assessee was allowed .
The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the Tribunal has followed the decision of this Court in CIT vs. Pruthvi Brokers and Shareholders Pvt. Ltd. 349 ITR 336. Thus, the assessee’s contention was accepted that the gain on account of purchase and sale of shares was in the nature of business income. Consequently the interest paid by the assessee for borrowing funds for its business had necessarily to be allowed. In the above view, Appeal was dismissed.
