By TIOL News Service

NEW DELHI, MAR 26, 2018: THE issue - Whether if the assessee, a housewife, makes short-term investments in shares and makes huge profits, such income is to be treated as business income and not STCG as the assessee maintains no books for such adventure. YES is the answer.

Facts of the case

The assessee, an individual deriving income from capital gain and other sources, filed returns for the relevant AY, declaring her total income. On assessment, the AO observed that the assessee had sold some shares for an amount. Against such sale, the assessee had declared an amount of net profit after deducting purchase cost of such shares. The AO also noted that the assessee had claimed deduction u/s 35 on an amount donated to a trust. Also, the amount of deduction claimed was higher than that the amount donated. The assessee had also claimed deduction u/s 80GGA. Later the AO recorded the assessee's statements u/s 131, wherein the assessee claimed to have conducted such transactions at the behest of her spouse. Summons were also issued to the two persons to whom the assessee sold the shares. Thereafter, the AO treated the income declared as business income, to be income arising from short term capital gain. The AO also disallowed the deduction claimed u/s 35. On appeal, the CIT(A) upheld the findings of the AO. However, the CIT(A) allowed the deduction claimed u/s 80GGA. Hence the assessee's appeal.

On hearing the matter, the Tribunal held that,

++ it is an undisputed fact that the AO has not disbelieved the purchase and sale of shares on thes basis of the various documents filed before him since ultimately he has treated the profit from sale of shares as short term capital gain. His grievance is that the assessee has manipulated the so-called shares and so-called transaction of shares of one private company is just to claim the deduction u/s 35 of the I.T. Act on the donation of Rs.31,00,000/-. The donation has also not been disbelieved. Under these circumstances, it has to be considered as to whether the profit on sale of such shares will constitute an adventure in nature of trade as claimed by the assessee or STCG as treated by the AO and upheld by the CIT(A). Considered relevant findings of the Apex Court in CIT vs. Sutlej Cotton Mills Supply Agency Ltd. and in G. Venkataswami Naidu & Co. vs. CIT .

++ the Delhi High Court in the case of CIT vs. D & M Components Ltd. while deciding a somewhat identical issue has held that where there was short duration of holding of shares and lack of clarity in account books, sale and purchase of shares would lead to business income and not STCG. The various other decisions relied by the counsel for the assessee also supports his case that the profits in the instant case of purchase and sale of shares would amount to business income and not STCG as held by the AO. In this view of the matter, the order of the CIT(A) is set-aside and direct the AO to allow the claim of business income on account of profit on sale of such shares. Since the assessee succeeds on this issue, the claim of the assessee regarding the deduction u/s 35 of the I.T. Act is also allowed subject to verification of other conditions if any by the AO.

(See 2018-TIOL-444-ITAT-DEL)