2012 (10) TMI 485 - AT - Income Tax

Income from share transactions classified as 'business income' based on trading activity criteria. Assessee's intention crucial.

Assistant Commissioner of Income Tax, Circle 31 (1), Versus Manoj Kumar Samdaria Prop. Love Art India,

The Tribunal allowed the Revenue's appeal, classifying the income from the sale and purchase of shares as 'business income' instead of 'short-term capital ... Income from sale purchase of shares - income from short term capital gain v/s business income - Held that:- Habitual dealing in a particular item is indicative of the assessee’s intention of trading. Merely for taking benefit of provisions of sec. 111A applicable from the AY 2005-06, the assessee can not be categorised as an investor, especially when the aforesaid facts speak otherwise and lead to the conclusion that the assessee is indulging in activities of a trader in shares - the character of a transaction cannot be determined solely on the application of any abstract test or rule and the cumulative factors affecting the transactions have to be seen The voluminous share transactions were in the nature of the business, purchase of shares by them was not for the purpose of earning dividend, but with the dominant intention of resale in order to earn profits, the profit made by the assessee is not of mere enhancement of value of the shares, but is a profit made in the carrying on of a business scheme of profit making & huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”, the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the assessee had not purchased the shares as an investment, but with the intention to trade in such scrips. Thus the CIT(A) was not justified in accepting the claim of the assessee as investor in shares. Accordingly the findings of the CIT(A) are vacated and restore the order of the AO - against assessee. Issues Involved:1. Classification of income from sale and purchase of shares as either 'business income' or 'short-term capital gain.'Issue-wise Detailed Analysis:1. Classification of Income from Sale and Purchase of Shares:The primary issue in this case is whether the income of Rs. 65,45,321/- from the sale and purchase of shares should be treated as 'business income' or 'short-term capital gain.' The Assessing Officer (AO) concluded that the income should be classified as business income due to the magnitude and frequency of transactions, indicating a profit motive. The AO relied on CBDT Instruction No. 1827 and Circular No. 4/2007, observing that the assessee traded in shares with the motive for profits, evidenced by the substantial volume of transactions and the high turnover of shares.On appeal, the CIT(A) accepted the assessee's claim of treating the income as short-term capital gain, citing several factors:- The assessee's primary business was exporting jewelry and handicrafts.- No borrowed funds were used for share transactions.- The assessee earned dividend income, suggesting an investment motive.- The average holding period of shares and the number of scripts were indicative of investment rather than trading.- The assessee lacked infrastructure typical of a trading business.- The assessee's claim as an investor had been accepted in previous assessments.The CIT(A) also referred to the judgment in CIT vs. Gopal Purohit, which supported the view that delivery-based transactions should be treated as investments.The Revenue appealed against the CIT(A)'s decision, arguing that the substantial nature of transactions, the high volume of purchases and sales, and the short holding periods indicated a trading activity rather than investment. The Tribunal examined the relevant provisions of the Income Tax Act, including sections 2(14), 2(22), 2(42-A), 2(42-B), 28(i), and 45(1), and considered various judicial precedents and CBDT Circular No. 4/2007.The Tribunal emphasized that the intention of the assessee at the time of purchase is crucial in determining whether the shares were held as investments or stock-in-trade. The Tribunal noted that the assessee's frequent and high-volume transactions, short holding periods, and the substantial turnover indicated a trading activity. The Tribunal also highlighted that the assessee's primary motive appeared to be profit from resale rather than earning dividend income.The Tribunal concluded that the voluminous share transactions were in the nature of business, and the assessee's activities reflected a trader's intention rather than an investor's. Consequently, the Tribunal vacated the CIT(A)'s findings and restored the AO's order, treating the income as business income.Conclusion:The Tribunal allowed the Revenue's appeal, concluding that the income from the sale and purchase of shares should be classified as 'business income' rather than 'short-term capital gain.' The decision was based on the substantial volume and frequency of transactions, the short holding periods, and the profit motive, which indicated a trading activity rather than an investment. The Tribunal's analysis was supported by various judicial precedents and CBDT Circular No. 4/2007.