2011 (6) TMI 102 - AT - Income Tax

Tribunal rules on share sales & derivatives: Capital gain, business income, and losses clarified

The Tribunal held that income from the sale of shares held as investments should be treated as short-term capital gain and not as business income. The ... Sale and purchase of shares – CIT treated the income as business income on account of trading in shares as period of holding was not more than 30 days - as short term capital gain by applying the share holding period for short term capital gain as more than 30 days but less than 1 year. – The Assessing Officer held that the derivative transaction prior to 25-1-2006 are speculative in nature and from 25-1-2006 to 31-3-2006 are as business income. The Assessing Officer's view is based on the notification issued by the CBDT on recognizing stock exchange with effect from 25-1-2006 for carryout the derivative trading as per the provisions of section 43(5)(d). – CIT(A) uphold the order of AO - Held that: - income arising from purchase and sale of share held by the assessee as investment cannot be treated as business income - there is enough evidence to show that the assessee is an investor in shares and therefore the surplus arising on the sale of shares should be assessed as short term or long term capital gains, depending on the period of holding and not as business income. Issues Involved:1. Classification of surplus/loss from share trading as business income or short-term capital gain.2. Treatment of derivative transaction losses as speculative or business losses.Detailed Analysis:Issue 1: Classification of Surplus/Loss from Share TradingFacts and Arguments:- The assessee declared income under business income, short-term capital gain, and long-term capital gain for various assessment years.- The Assessing Officer (AO) treated the entire income from share transactions as business income due to frequent and large-scale transactions, systematic trading activity, and the nature of expenses claimed.- The CIT(A) bifurcated the short-term capital gains into two categories: shares held for less than 30 days treated as business income and shares held for more than 30 days treated as short-term capital gain.Assessee's Contentions:- The assessee consistently treated shares as investments in accounts, valuing them at cost.- The intention at the time of purchase was investment, not trading.- The assessee used own funds for purchasing shares, not borrowed funds.- The frequency of transactions was a result of market operations, not indicative of trading.- The principle of consistency should be applied as the revenue accepted similar treatment in previous years.Revenue's Contentions:- The volume and frequency of transactions indicate trading activity.- The assessee's activities were organized and systematic, aimed at profit-making.- The use of borrowed funds and involvement in speculative transactions further support the trading nature.Tribunal's Findings:- The CIT(A)'s bifurcation based on a 30-day holding period is not justified as the statute defines short-term capital assets based on a 12-month holding period for shares.- The assessee maintained separate portfolios for investments and trading, treating shares as investments in books.- The assessee's intention at the time of purchase, the use of own funds, and the valuation of shares at cost support the investment nature.- The principle of consistency applies, and the revenue cannot change the treatment of similar transactions without substantial reasons.Conclusion:The Tribunal held that the income from the sale of shares held as investments should be treated as short-term capital gain and not as business income. The CIT(A)'s bifurcation based on a 30-day holding period was incorrect.Issue 2: Treatment of Derivative Transaction LossesFacts and Arguments:- The AO treated derivative transaction losses before 25-01-2006 as speculative losses and those after as business losses, based on the CBDT notification recognizing stock exchanges for derivative trading.- The CIT(A) upheld the AO's decision.Assessee's Contentions:- Once the stock exchange is recognized within the relevant year, the approval should apply retrospectively from the beginning of the year.- The transactions should be treated as business income for the entire year.Revenue's Contentions:- The recognition of stock exchanges from 25-01-2006 should apply only from that date.Tribunal's Findings:- The Tribunal referred to previous decisions, holding that the recognition of stock exchanges should apply retrospectively within the relevant year.- The derivative transactions should be treated as business income for the entire assessment year 2006-07.Conclusion:The Tribunal decided in favor of the assessee, treating derivative transaction losses as business losses for the entire assessment year 2006-07.Final Order:The appeals and cross objections filed by the assessee were allowed, and the appeals filed by the revenue were dismissed.