2013 (10) TMI 1388 - AT - Income Tax

Tribunal rules in favor of assessee, treating share transactions as capital gains, emphasizing consistency in securities treatment.

Jt. Commissioner of Income Tax, Range-1, Jalgaon Versus Shri Chhatarmal Gokulchand Chhajer and vice-versa

The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objections, directing the AO to treat all share transactions as capital ... Capital gain or business income - nature of income - Held that:- Sale of shares held for more than one month would be charged capital gain and surplus of shares held for less than one month will be treated as profit from business. CIT(A) was not justified to make above classification. This classification is not reasonable. Taking all facts and circumstances as discussed above, we hold that all the share transactions undertaken by assessee will be charged to capital gain irrespective of their holding period. Assessing Officer is directed to compute capital gain accordingly. This take care of issue raised in cross objection by assessee as well. Issues Involved:1. Classification of income from the purchase and sale of shares as either 'Short Term Capital Gain' (STCG) or 'Business Income.'2. Consistency in the treatment of securities transactions in line with previous assessment years.3. Impact of the volume of transactions, period of holding, and use of borrowed funds on the nature of income.Issue-wise Detailed Analysis:1. Classification of Income from Shares:The primary issue revolves around whether the income from the purchase and sale of shares should be classified as 'Short Term Capital Gain' (STCG) or 'Business Income.' The Assessing Officer (AO) treated the STCG as business income, citing factors such as the volume of transactions, the period of holding, and the use of borrowed funds. However, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to treat the profits/gains earned on the transaction of purchase and sale of shares held for more than one month as STCG, as claimed by the assessee. The Tribunal upheld the CIT(A)'s decision, emphasizing that all share transactions undertaken by the assessee will be charged to capital gain irrespective of their holding period.2. Consistency in Treatment of Securities Transactions:The assessee argued that the AO failed to consider the decision of the CIT(A) for A.Y. 2006-07, where under identical facts, the gains were treated as capital gains. The principle of consistency, as upheld in the case of CIT vs. Gopal Purohit, was cited, which states that the revenue should maintain uniformity in treatment and consistency when the facts and circumstances are identical. The Tribunal noted that the assessee had consistently shown securities as investments in the balance sheet and had followed the same practice for many years. The Tribunal found that the AO was not justified in treating the securities as stock-in-trade during the year under appeal.3. Impact of Volume of Transactions, Period of Holding, and Use of Borrowed Funds:The AO's decision to classify the income as business income was based on the high volume of transactions, short period of holding, and the use of borrowed funds. The Tribunal, however, observed that the assessee had its own funds amounting to Rs. 43,58,618/- and a closing balance of Rs. 2,97,97,747/-, including a profit of Rs. 2,63,08,425/-. The Tribunal also noted that the assessee had not raised any unsecured loans during the year and had repaid substantial loans. The Tribunal concluded that the volume of transactions and the use of borrowed funds were not sufficient grounds to classify the income as business income, especially when the assessee had shown the shares as investments in the balance sheet.Conclusion:The Tribunal dismissed the appeal filed by the Revenue and allowed the cross-objections filed by the assessee. It directed the AO to compute the capital gain accordingly, treating all share transactions as capital gains irrespective of their holding period. The judgment emphasized the importance of consistency in the treatment of securities transactions and found that the volume of transactions and the use of borrowed funds were not sufficient to classify the income as business income.