2011 (4) TMI 42 - AT - Income Tax

Share sale gains treated as short-term capital gains, not business income, following consistency principle from earlier assessment years

ITAT Mumbai held that gains from the assessee's purchase and sale of shares are to be assessed as short-term capital gains and not as business income. The ... Nature of income from Short Term Capital Gains (STCG) - Business income or Capital gain - trading/investment in shares and securities and commission on sale - Rule of consistency - HELD THAT:- It is the case of the revenue that due to volume, magnitude, frequency, continuity, regularity, the ratio between purchase and sale clearly indicate that income on account of purchase and sale of shares should be treated as income from business and not as income from STCG. According to the ld counsel for the assessee, since the income of STCG has been accepted by the Assessing Officer from Assessment Years 2003-04 to 2008-09 i.e preceding and subsequent years; therefore, following the Rule of consistency, this income from STCG should be accepted during the year in the light of the decision of the jurisdictional High Court in the case of Gopal Purohit [2010 (1) TMI 7 - BOMBAY HIGH COURT]. From the details furnished by the ld counsel for the assessee, we find from Assessment Years 2003-04 to 2008-09, the Assessing Officer has consistently accepted the STCG shown by the assessee except for Assessment Year 2006-07 i.e. the impugned assessment year. Under these circumstances, we are of the considered opinion that Rule of consistency as propounded by the jurisdictional High Court in the case of Gopal Purohit (supra) will squarely be applicable to the facts of the present case. We are of the considered opinion that the income derived from the sale/purchase of share in the instant case has rightly been treated by the assessee as STCG. Therefore, we set aside the order of the CIT(A) and direct the Assessing Officer to accept the STCG as declared by the assessee. We hold and direct accordingly. In the result, the appeal filed by the assessee is allowed. Issues Involved:1. Classification of income from Short Term Capital Gains (STCG) as business income or capital gains.2. Consistency in the treatment of STCG in previous and subsequent assessment years.Detailed Analysis:Issue 1: Classification of Income from STCGThe primary issue in this case is whether the income from Short Term Capital Gains (STCG) should be classified as business income or capital gains. The assessee argued that the income from STCG and Long Term Capital Gains (LTCG) should be treated as capital gains because the investments in shares and securities were made with the intention to hold them for a longer period, and not for trading. The assessee highlighted that the method of accounting had been consistently followed and accepted in previous assessments under section 143(3).The Assessing Officer (AO) disagreed, noting that the assessee was engaged in share trading activities. The AO emphasized several factors to classify the income as business income, including the day-to-day business activities, continuous and organized transactions, profit motive, and the volume and frequency of transactions. The AO concluded that the STCG was an offshoot of the primary share trading business and should be treated as business income.Upon appeal, the CIT(A) upheld the AO's decision, referring to CBDT instructions and various criteria to distinguish between stock-in-trade and investments. The CIT(A) observed that the assessee indulged in large-scale, frequent, and regular share transactions, indicating a trading activity rather than investment. The CIT(A) also noted that the assessee failed to provide evidence that the transactions were carried out using own funds and not borrowed funds.Issue 2: Consistency in Treatment of STCGThe assessee argued that the income from STCG had been consistently declared and accepted as capital gains in previous and subsequent assessment years. The assessee cited the jurisdictional High Court's decision in CIT vs Gopal Purohit, which emphasized the importance of consistency in tax treatment.The Tribunal noted that the AO had accepted the STCG as capital gains in assessment years 2003-04 to 2008-09, except for the impugned assessment year 2006-07. The Tribunal highlighted that the principle of consistency should be applied, as established by the jurisdictional High Court in the case of Gopal Purohit.Conclusion:The Tribunal concluded that the income from the sale/purchase of shares should be treated as STCG, as declared by the assessee. The Tribunal set aside the order of the CIT(A) and directed the AO to accept the STCG as capital gains. The appeal filed by the assessee was allowed, emphasizing the need for consistency in the treatment of STCG across different assessment years.