2012 (9) TMI 685 - AT - Income Tax

Share transactions profits classified as business income, not capital gains. Volume and turnover key factors. Decision upheld.

The Tribunal classified the profits from share transactions as business income rather than short-term capital gains. The Tribunal rejected the assessee's ... Addition on account profits from share transaction as trading activity - Whether profits out of share transactions, treat it as investment activity or trading activity – Shares sold without taking delivery, same has been shown as speculative gains - Where the part of delivery has been taken, the same has been shown as short term capital gains – Held that:- Following the test laid down by Hon’ble Gujarat HC in the case of Rewashanker A Kothari (2006 (1) TMI 80) that the most important test is volume, frequency, continuity and regularity of transactions of purchase and sale of goods concern, on the basis of which, an inference can be drawn whether the activity is in the nature of business or not. Assessee has ploughed back or rolled back the available capital almost 7 to 8 times in order to earn income out of purchase and sale of shares. Assessee sold 91.6% shares purchased during the year. 40% of overall transactions are those scripts in which the holding period was 30 days or less. 10% of overall transactions where the period of holding is more than 6 months. Therefore, shares transactions from which assessee has earned short term capital gains were in the nature of trading activity of the assessee. Decision in favour of revenue. Addition on adhoc basis treating share transaction as trading activity – CIT(A) upheld the 17% addition out of transaction in shares treated as investment – And balance as trading activity on basis of opening & closing stock, shares turnover – Held that:- As the part of the profit should be considered in the nature of short term capital gains but no reason has been given which could be set to fit in the principles laid down in judgement of various cases of Hon’ble Supreme Court as well as Hon’ble High Courts to support the said observation of ld CIT(A). Therefore, hold that the entire profits shown by the assessee on purchase and sale of shares has rightly been considered by AO as profit from business and not short term capital gains. Decision in favour of revenue Issues Involved:1. Classification of income from share transactions as business income or short-term capital gains.2. Admissibility of the assessee's arguments and supporting documents.3. Evaluation of the Assessing Officer's (AO) analysis and conclusions.4. Determination of the appellate authority's (CIT(A)) judgment validity.Issue-wise Detailed Analysis:1. Classification of Income from Share Transactions:The primary issue was whether the profits from the assessee's share transactions should be classified as business income or short-term capital gains. The AO argued that the assessee's frequent and repetitive transactions, the high volume of trades, and the quick turnover of shares indicated a trading activity rather than an investment. The AO noted that the assessee had engaged in 1228 transactions with a purchase amount of Rs. 3,01,60,968 and sales of Rs. 3,56,43,806, while the available liquid capital was only Rs. 40 lakhs. The AO concluded that the assessee's behavior was characteristic of a trader, not an investor.2. Admissibility of the Assessee's Arguments and Supporting Documents:The assessee contended that the shares were held as investments, supported by the balance sheet, and referenced various legal precedents and CBDT Circular No. 4/2007. The assessee also highlighted that the intention at the time of acquisition was for investment purposes, not trading. However, the AO pointed out that the assessee failed to align these guiding principles with the specific facts of the case. The AO emphasized that the assessee's actions-such as selling shares within short periods and engaging in speculative transactions-contradicted the claim of being an investor.3. Evaluation of the AO's Analysis and Conclusions:The AO detailed several instances where the assessee's transactions suggested trading rather than investment. For example, shares of GNFC were bought and partially sold on the same day, with the remaining shares sold within two days. Similar patterns were observed with other scrips, indicating frequent buying and selling. The AO also noted that 91.6% of shares purchased during the year were sold, with 40% of transactions involving shares held for 30 days or less. These facts led the AO to conclude that the assessee's activities were more aligned with trading.4. Determination of the Appellate Authority's (CIT(A)) Judgment Validity:The CIT(A) partially agreed with the AO, concluding that most of the assessee's income was from business activities. However, CIT(A) treated approximately 17% of the income as short-term capital gains based on an ad-hoc basis. The Tribunal found this approach unjustified, as CIT(A) did not provide a solid rationale for this split. The Tribunal emphasized that the intention behind the transactions, the frequency, and the volume of trades indicated a trading activity. The Tribunal referenced the Supreme Court's decision in CIT vs. Madangopal Radhey Lal, which highlighted the importance of the assessee's intention and actual conduct. The Tribunal also considered the Delhi High Court's decision in CIT vs. Sahara India Housing Corporation Ltd., which outlined tests for determining the nature of transactions, such as volume, frequency, and regularity.Conclusion:The Tribunal concluded that the entire profit of Rs. 54,82,838 from the share transactions should be treated as business income, not short-term capital gains. The Tribunal rejected the assessee's appeal and allowed the department's appeal, affirming the AO's decision.Judgment:In the result, the appeal filed by the assessee is dismissed, and the appeal filed by the department is allowed. The judgment was pronounced in the open court on 4th July 2012.