Whether a single transaction can be construed as business transaction when motive behind such a transaction was to make Investment - NO: ITAT

THE issues before the Bench are - Whether a single transaction can be considered as business transaction when the motive behind such a transaction was to make Investment; Whether the amount received on sale of shares can be considered as LTCG when the period of holding of shares was more than two years and the valuation of such shares was at the cost price in the respective balance-sheets from the date of purchase and Whether disallowance u/s 14A is attracted even when the securities fetching exempt income are held as stock in trade. And the verdict partly goes in favour of Revenue.

Facts of the case

The assessee wrote off a sum of Rs.15 lakh in its Profit and loss account. The AO observed that the assessee was earlier engaged in the trading of suiting & shirting and thereafter, it started trading in shares and securities. According to the AO, the assessee was not engaged in the business of purchase and sale of land. The AO held that the said amount of Rs.15 lakh was not bad debt as the same was not incidental to the assessee's business. No relief was allowed in the first appeal.

On Appeal before the Tribunal the DR submitted that the amount was not a bad debt. The assessee never earned any income on account of transaction of making advance to M/s. ZEPL. The AR submitted that the amount should be considered as 'Business loss’ deductible u/s.28 of the Act. It was further submitted that mere the fact that the assessee kept on claiming before the authorities below that it was a case of bad debt, would not preclude it from the contending that the amount should be considered as “business loss” and hence deductible, if it is actually so.

Having heard the parties, the Tribunal held that,

++ a single business transaction can be considered as “adventure in the nature of trade”. However, it is of utmost importance that the facts must prove that such an isolated transaction was, in fact, entered into with the object of doing “business”. The assessee miserably failed to prove that the present transaction was in the nature of a 'business transaction’. It is so for the reason that the amount of Rs.37.50 lakh given as advance was never given with the intention of doing any business in “real estate”. This solitary transaction of paying Rs.37.50 lakh to M/s.ZEPL was with the object or making an “Investment” and the non-receipt of refund of Rs.15 lakh out of such transaction cannot be characterized as anything but a loss of capital nature;

++ on the issue of treatment of Rs.9,22,445/- as LTCG instead of 'Business profit’, it is a settled legal position that nomenclature of a transaction is not relevant. It is the real character of the transaction which is looked into. The period of holding was more than two years and the valuation of such shares were at cost price in the earlier balance-sheet. These shares were in fact held as “Investment”. Once the shares are held as 'Investment, any profit or loss from their transfer has to be considered under the head 'Capital gains’ and not as 'Business income’;

++ on the issue of deletion of addition of Rs.15,000/- made by the AO u/s 14A , we find no force in the contention urged on behalf of the assessee that no disallowance of expenses u/s 14A can be made when the shares are held as stock in trade. As we are dealing with the AY 2006-07 the disallowance is required to be made u/s. 14A on some reasonable basis.