2011 (4) TMI 3 - AT - Income Tax

Share sale profits taxed as capital gains, not business income, where shares shown as investments and own funds used

ITAT Mumbai held that profits arising from purchase and sale of shares in the case of the assessee are taxable as capital gains and not as business ... Nature of income - profit arising out of purchase and sale of shares is assessable to tax - Capital gain or business income - The case of the Revenue is that even shares held for more than 30 days should be treated as ‘stock-in-trade’; whereas, the case of the assessee is that even shares sold within a span of 30 days from the date of purchase should be brought to tax under the head ‘short term capital gains’, since the pre-dominant intention of the assessee was to hold the shares as investment. - HELD THAT:- No dispute that the assessee was holding the shares in its books as an investor - Merely because assessee transacted in 158 shares that should not be taken as a sole criterion to come to the conclusion that assessee is a trader in shares. It is not in dispute that in the books of accounts assessee has declared the shares as an investment and the finding of the learned CIT(A) that only own funds were utilised for purchase of shares was not contradicted by the learned DR. It was also highlighted by the learned CIT(A) that assessee had not indulged in any squaring-up of the transactions on the same day. On a conspectus of the matter, we are of the view that the transactions of purchase and sale of shares, in the instant case, deserves to be considered as investment and profit thereon has to be assessed to tax under the head ‘capital gains’. We direct the Assessing Officer accordingly. In the result, appeal filed by the assessee is allowed and appeal filed by the Revenue is dismissed. Issues:Assessment of income from sale of shares as business income or capital gains.Analysis:The case involved cross-appeals against the Order of the CIT(A)-XXXII, Mumbai for the assessment year 2006-2007. The Assessing Officer observed that the assessee frequently transacted in shares, indicating a trading activity. The assessee, however, claimed the transactions were investments, not trading. The Assessing Officer concluded that the income from short-term sale of shares was business income. The assessee contended that the income should be treated as capital gains, as done in the previous assessment year. The CIT(A) partially accepted the assessee's contention, distinguishing between shares held for more than 30 days and those held for less. The CIT(A) recognized the assessee as both an investor and trader, directing the treatment of income accordingly.The main issue before the Tribunal was whether the profit from the sale of shares should be assessed as capital gains or business income. The Tribunal noted that the assessee maintained the shares as investments, without an office or administrative setup, and used own funds for acquisitions. The Tribunal also considered the Assessing Officer's acceptance of the nature of transactions as investments in subsequent years. Emphasizing that trading in 158 shares should not solely determine the assessee's status as a trader, the Tribunal held that the transactions were investments. Consequently, the profit was to be assessed as capital gains, not business income.In conclusion, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal, directing the Assessing Officer to assess the profit from the sale of shares as capital gains.