2010 (1) TMI 962 - AT - Income Tax

Tribunal rules in favor of taxpayers on share transactions classification emphasizing intent & holding periods

The Tribunal overturned the Commissioner of Income-tax (Appeals) decision, ruling in favor of the assessees in a case concerning the classification of ... Nature of income - Income from sale of shares - treatment of income - long-term capital gain or business income'' - assessees are trading in shares and also making investments for which separate accounts have been maintained - assessees claimed as long-term capital gain but AO, treated same as business income. HELD THAT:- The volume and number of transactions is not decisive in understanding the true nature of the transactions. The volume and number will depend upon the quantum of investments being made. If funds invested are huge, obviously the number of transactions and volumes will become high. In case a large number of transactions are confined within the same year, i.e., both the purchases and sales are within the same year, this definitely will give the indication that the assessee is trading in shares but in case the number of transactions is large but sales made during the year is in respect of purchases made long ago, then it could not be said that the assessee is trading in shares merely because volume is heavy and manner of transactions is large. There is no bar on the assessee keeping a separate portfolio for trading and investments which has been accepted even by the Board in the Circular No. 4 of 2007 dated June 15, 2007. Moreover the shares sold in this year have been acquired in the earlier years in which these have already been accepted as investment. Therefore the nature of the investment cannot be changed in the year of sale. Considering the entirety of facts and circumstances mentioned above we see no reason for treating the long-term capital gain declared from sale of shares as business income - Appeals of the assessees are allowed. Issues:Nature of income from share transactions - Long-term capital gain vs. Business income classification.Analysis:The case involved a dispute over the treatment of income from the sale of shares by a husband and wife duo for the assessment year 2004-05. The Assessing Officer contended that the assessees, engaged in numerous share transactions with heavy volumes, were conducting a full-time share dealing business. He argued that the volume and frequency of transactions indicated a business activity rather than mere investments, leading to the classification of long-term capital gains as business income.In response, the assessees maintained that they segregated trading and investment activities in separate accounts, with past investments being accepted as such by the tax authorities. They highlighted the absence of borrowed funds for investments, emphasizing the intent to hold shares for extended periods. The assessees' representative referenced previous years' assessments and the Central Board of Direct Taxes' Circular to support the claim that separate portfolios for investments and trading were permissible.Upon review, the Tribunal noted that the assessees had consistently maintained separate accounts for trading and investments, which were accepted in prior assessments. The Tribunal emphasized that the volume and frequency of transactions alone were not determinative of the nature of activities, especially when sales were not immediately following purchases. It was highlighted that the assessees' use of own funds for investments, coupled with the extended holding periods of shares acquired years earlier, supported the characterization of gains as long-term capital gains rather than business income.Consequently, the Tribunal overturned the Commissioner of Income-tax (Appeals) decision, ruling in favor of the assessees and allowing their appeals. The Tribunal's judgment, delivered on January 6, 2010, upheld the assessees' position, emphasizing the permissible coexistence of separate investment and trading portfolios and the significance of intent and holding periods in determining the nature of income from share transactions.