2012 (7) TMI 132 - AT - Income Tax

Dispute over income categorization: Business profit vs. capital gains decision upheld by ITAT

The case involved a dispute over categorizing income from share sales as business profit or capital gains. The Assessing Officer deemed it as business ... Capital gain – sale of shares - addition made by treating the profit on sale of shares as business profit as against Short Term Capital Gains and Long Term Capital Gains - assessee derives income from purchase and sale of Biri and match box etc. in the name of proprietary concern as well as from business of share trading – Held that:- Assessee declared Long Term Capital Gain on sale of shares on delivery basis and the intention of the assessee was to earn dividend - dividend has been earned by the assessee in respect of investment in shares - assessee has recorded the share transaction in books of account in first set of transaction as investment in shares and second set of transaction investment in shares for the purpose of business - order of CIT(A) that in A.Y. 2005-06 the CIT(A) accepted the assessee’s claim and set aside the order of A.O - to maintain consistency CIT(A) has rightly set aside the order of A.O. and allowed the claim of the assessee in respect of shares for which the assessee has shown Capital Gain – In favor of assessee Issues:- Determination of income from sale of shares as business profit or capital gains- Application of CBDT Circular No.4 of 2007 in assessing share trading income- Consideration of delivery-based transactions in categorizing share transactions- Consistency in treatment of share transactions for capital gains or business incomeAnalysis:Issue 1: Determination of income from sale of sharesThe case involved a dispute regarding the categorization of income from the sale of shares as business profit or capital gains. The Assessing Officer treated the profit earned on share trading as business income due to the frequency and volume of transactions. However, the CIT(A) examined the details and submissions of the assessee and concluded that the shares were held for investment purposes, with the intention of earning dividends. The CIT(A) noted the dividend income earned by the assessee and the delivery of shares taken, indicating an investment motive. The CIT(A) relied on past decisions and held that the profit earned on shares should be treated as income under the head of capital gains.Issue 2: Application of CBDT Circular and assessment principlesThe Assessing Officer relied on CBDT Circular No.4 of 2007 to differentiate between business income and capital gains from share transactions. The circular provided principles for assessing profit on share sales. The AO emphasized the high volume of transactions and equated the share investment account to a trading account, leading to the addition of Rs.33,90,286 as business income. However, the CIT(A) scrutinized the facts and submissions, emphasizing the importance of delivery-based transactions and the intention to earn dividends, ultimately deciding in favor of treating the profit as capital gains.Issue 3: Consideration of delivery-based transactionsThe CIT(A) considered the nature of delivery-based share transactions in determining the income categorization. The appellant demonstrated the delivery of shares purchased, earning dividends on those shares. The CIT(A) referred to a Bombay High Court judgment highlighting the treatment of delivery-based transactions as investment transactions for capital gains. The CIT(A) emphasized the need for consistency in treatment based on identical facts and circumstances, ultimately directing the AO to treat the income as short-term and long-term capital gains.Issue 4: Consistency in treatment of share transactionsThe case highlighted the importance of consistency in treating share transactions for capital gains or business income. The CIT(A) and the appellant's representative pointed out past decisions and maintained that the shares were held for investment purposes, with a clear intention indicated in the books of accounts. The CIT(A) followed precedent and upheld the appellant's claim, emphasizing the lack of contrary facts presented by the Revenue. The ITAT confirmed the CIT(A)'s order, dismissing the Revenue's appeal and maintaining consistency in the treatment of share transactions.