2010 (12) TMI 93 - AT - Income Tax

Tribunal classifies capital gain as investment income, not business income, based on transaction analysis

The Tribunal allowed the appeal, treating the short-term capital gain of Rs.1,07,70,524/- as income from investment rather than business income. It ... Business income versus short term capital gain - trading in shares - AO rejected the claim of assessee and decided that in respect of these shares assessee was only a trader and therefore, the short term capital gain declared by the assessee, was treated as business income - Held that: - Assessee has carried out only 31 purchase transactions and 25 sale transactions which cannot be said to be a great volume of transactions. Further, assessee was holding shares worth Rs. 11.56 crores at the end of the year and market value of the same was about Rs.17.69 crores. If assessee was a trader, he would have definitely realised this huge profit of almost Rs. 6 crores immediately and not carried out the stock to the next year.In the assessment year 2004-05 the assessee sold 30 scrips and earned capital gains of Rs.1.05 crores, which was accepted by the AO as short term capital gains under section 143(3) of the Act. Similarly in the assessment year 2007-08 also the capital gains of Rs.0.08 crores on sale of 24 scrips was treated as short term capital gains by the AO in the assessment completed under section 143(3) of the Act. The conduct of the AO attracts the rule of consistency. - Decided in favor of assessee. Issues Involved:1. Whether the short-term capital gain of Rs.1,07,70,524/- should be treated as business income or investment income.Issue-wise Detailed Analysis:1. Nature of Income from Share Transactions:The primary issue in this appeal is whether the short-term capital gain of Rs.1,07,70,524/- declared by the assessee should be treated as business income or as income from investment. The Assessing Officer (AO) observed that the assessee had engaged in a high frequency of transactions, with 127 purchase transactions and 83 sale transactions, indicating a trading activity rather than investment. Furthermore, in some instances, shares were sold immediately without taking delivery, suggesting speculative trading.2. Frequency and Nature of Transactions:The AO noted that in 88% of the sales, the shares were purchased within the same year, implying a trading motive. The capital account showed a high turnover, with the initial capital being turned over multiple times to achieve significant sales and purchases. This pattern led the AO to conclude that the assessee was trading in shares, and thus, the short-term capital gain should be treated as business income.3. Assessee's Argument:The assessee contended that he was primarily engaged in the garment export business and had been investing in shares for a long time. He argued that most investments were held for more than a year, and the transactions were consistent with investment activity. The assessee further emphasized that he had not borrowed any funds for share investments and had not engaged in derivative transactions. He cited previous years where similar transactions were accepted as investments by the department.4. Tribunal's Observations:The Tribunal found merit in the assessee's arguments. It noted that the AO might have miscalculated the number of transactions due to the nature of electronic trading, where a single order could be split into multiple smaller transactions. The Tribunal observed that the assessee had only 31 purchase transactions and 25 sale transactions, which did not constitute a high volume of trading. Additionally, the assessee held shares worth Rs.11.56 crores at the end of the year, with a market value of Rs.17.69 crores, indicating an investment motive rather than trading.5. Consistency with Previous Decisions:The Tribunal referred to similar cases involving the assessee's family members, where the transactions were treated as investments. It cited the decision in the case of the assessee's sister, where the Tribunal held that the transactions were in the nature of investments. The Tribunal also relied on the principle of consistency, as established in the case of Gopal Purohit vs. JCIT, where similar transactions were treated as investments in previous years.6. Conclusion:The Tribunal concluded that the transactions disclosed by the assessee should be treated as investment transactions and not as business transactions. It emphasized that the assessee's primary business was garment exports, and the share transactions were carried out with surplus funds without any borrowings. The Tribunal also noted that the assessee had not engaged in speculative trading or derivative transactions, further supporting the investment nature of the transactions.7. Final Judgment:The appeal of the assessee was allowed, and the short-term capital gain of Rs.1,07,70,524/- was treated as income from investment rather than business income. The Tribunal's decision was based on a detailed analysis of the assessee's transaction patterns, consistency with previous decisions, and the overall nature of the assessee's business activities.