Tax Insights
from India Tax & Regulatory Services
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Delhi bench of Tribunal holds that acquisition of shares in a scheme of arrangement and merely showing it as stock-in-trade, does not
constitute business of dealing in shares
March 31, 2020
In brief
Recently,1 the Delhi bench of the Income-tax Appellate Tribunal (Tribunal) held that merely classifying the shares of a company, into which the taxpayer’s main business was demerged, as stock-in-trade, does not amount to the taxpayer being engaged in the business of purchase and sale of securities.
Accordingly, the Tribunal disallows the expense claimed by the taxpayer. However, the Tribunal upheld that since the issue itself is debatable, it cannot result in penalty.
In detail
Facts
• The taxpayer is a company engaged in the business of providing passive
infrastructure and automated teller machine sites (ATMs) to the telecom and banking industry.
• Pursuant to a scheme of demerger, the taxpayer demerged its passive telecom infrastructure business into a company and held 49% stake therein (resulting company).
• The taxpayer disclosed the shares held in the resulting company as stock-in-trade and claimed that it is in the business of share trading.
1
ITA No. 2191 & 2006/Del/2017
The taxpayer claimed the professional charges paid for investment advisory services and interest expense as business expense. The taxpayer offered the income from renting of ATMs and interest income on fixed deposits as business income.
• The tax officer (TO) assessed the income from renting ATMs under the head “income from house property”, and interest income on fixed deposits under the head “income from other sources.”
Further, the TO disallowed the professional charges and interest expense, as the taxpayer did not carry on
any business. This was further upheld by the Commissioner of Income- tax (Appeals).
Issues before the Tribunal
• Did the taxpayer carry on the business of purchase and sale of securities?
• Was the deduction for interest and professional fees allowable under the Income-tax Act, 1961 (the Act) while computing the income under the head
“profit & gains of business or profession”?
• In case the above expenses are disallowed, can penalty under section 271(1)(c) of the Act be levied?
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Taxpayer’s contentions
• The shares in the resulting company are classified as
“current assets” and the fact that the taxpayer entered into multiple share purchase agreements to acquire shares of the resulting company demonstrated that the taxpayer was engaged in the business of buying of shares.
• When the shares in the resulting company were sold during the subsequent assessment year (AY) and the income on such sale was offered as business income, the Revenue accepted the same.
• Central Board of Direct Taxes (CBDT) Circular No. 6/ 2016 dated 29 February 2016, states that where the taxpayer opts to treat the shares and securities as stock-in-trade, the income arising from the transfer of shares and securities would be treated as its business income.
• The taxpayer’s claim about carrying on business cannot be denied based on the
information furnished.
However, even if it is denied, it cannot result in penalty. Mere making of the claim, which is disallowed, could not be a ground to levy penalty.
Tribunal’s ruling
• The disclosure of the shares of the resulting company as stock-in-trade does not help the case of the taxpayer to show that it is engaged in the business of sale and purchase of securities, as the transaction of purchase of shares of the resulting company was for the acquisition of a company. The main intention of the whole transaction was to acquire a stake in the resulting company. It is not a regular transaction of purchase of securities nor is it with the
intention to earn profit thereon.
• This is the only transaction of purchase of shares during the year and the subsequent sale of those shares to the shareholders of the taxpayer cannot by any stretch of imagination be considered as the fact that the taxpayer is carrying on any business of purchase and sale of securities.
• As per the notes to accounts of the taxpayer, it is clear that the main business of the taxpayer, including all its assets and liabilities, are demerged into the resulting company as a going concern and this itself proves that the taxpayer does not have any business now.
• The acquisition of the shares of the resulting company is merely a strategic
arrangement of business reorganisation and it is not a transaction of purchase and sale of securities that can result in carrying on the activities of purchase and sale of securities as a business.
• Other objects in the
Memorandum of Association of the taxpayer, allowing it to carry on the business as share and stock broker, and to buy, sell and deal in shares and stocks is merely part of the other objects, whereas the main objects to be pursued by the taxpayer on its
incorporation do not contain any such activity. Therefore, with respect to any object mentioned in the other objects without any reference in the main objects, it cannot be said that the taxpayer is carrying on the business of that activity.
• Even otherwise, if a company wants to carry on business mentioned in other objects, as per the provisions of the Companies Act, 1956, it can do so only after the members
approve the proposal by a special resolution, which is not the case in the present
scenario.
• Reliance placed on the CBDT Circular No. 6/ 2016 dated 29 February 2016 does not help, as it was with respect to the dispute that continued to exist wherein it was difficult to prove the intention of the taxpayer in acquiring the shares and securities and whether they should be taxed as business income or capital gains.
• In view of the aforesaid, it is held that the taxpayer is not carrying on any business.
Therefore, the lower Revenue authorities have rightly disallowed the professional charges and interest expense.
• The taxpayer tried to
substantiate the claim, about carrying on business of sale and purchase of securities, with the annual audited accounts. It furnished all the particulars related to its claim, none of which was found to be incorrect. Careful perusal of the assessment order for AY 2011–12revealed that the TO had not disturbed income on sale of shares under the head business income, as shown by the taxpayer. Therefore, it is apparent that the claim of the taxpayer, although ultimately not accepted by the concurrent authorities, is debatable.
When the issue itself is debatable, it cannot result in penalty.
The takeaways
Based on the facts of the case, the Tribunal has held that mere classification of securities acquired as a strategic investment, as stock-in-trade, would not entitle the taxpayer to claim the expenses incurred in relation to such acquisition as business expense.
Tax Insights
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