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 Tribunal noted that in all other years from AY 2003-04 to 2008-09, except the impugned AY 2006-07, the AO had consistently accepted similar gains as STCG. Applying the rule of consistency laid down by the jurisdictional HC in Gopal Purohit, ITAT set aside the order of CIT(A) and directed the AO to accept the STCG as declared. The assessee's appeal was allowed.

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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 STCG

The 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 STCG

The 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.

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