2013 (9) TMI 157 - AT - Income Tax

Income from share transactions classified as Short Term Capital Gain (STCG) by Tribunal

ASSISTANT COMMISSIONER OF INCOME TAX Versus Mrs ANJANA SUSHIL MISHRA

The Tribunal upheld the CIT(A)'s decision to classify income from share transactions as Short Term Capital Gain (STCG) rather than business income. The ... Short term capital gain or business profit on sale of shares - Assessee is dealing in large volume of shares, most of the shares are bought and sold within short period – Held that:- Relying upon the judgment of Hon’ble Tribunal in the case of Gopal Purohit vs. JCIT[2009 (2) TMI 233 - ITAT BOMBAY-G], it has been held that assessee has entered into two different types of transactions, where both activities are entirely different in nature i.e. one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery) - Delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short term capital gain or long term capital gain depending upon the period of holding. Further, relying upon the judgment in the case of Janak S. Rangwalla vs. ACIT [2006 (12) TMI 261 - ITAT MUMBAI], it has held that frequency and magnitude of transaction cannot be the criteria for determining the head of income - It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts – Decided against the Revenue. Issues Involved:1. Classification of income from share transactions as Short Term Capital Gain (STCG) or business income.2. Determination of the nature of transactions based on frequency, volume, and holding period of shares.3. Consideration of borrowed funds and interest payments in assessing the nature of transactions.4. Application of judicial precedents and consistency in tax treatment.Issue-wise Detailed Analysis:1. Classification of Income from Share Transactions:The primary issue in the appeal was whether the income derived from share transactions should be classified as Short Term Capital Gain (STCG) or business income. The Assessing Officer (AO) argued that the transactions were frequent and organized, indicating a profit motive, thus treating the income as business income. Conversely, the assessee claimed the transactions were investments, not business activities, and should be treated as STCG.2. Nature of Transactions Based on Frequency, Volume, and Holding Period:The AO's assessment was based on the frequency and volume of transactions, concluding that the assessee was engaged in the business of share trading. The AO noted that most shares were bought and sold within a short period, suggesting a business motive. However, the CIT(A) and the Tribunal observed that a significant portion of the shares were held for more than six months, indicating an investment intent. The CIT(A) highlighted that more than 50% of the STCG was earned from shares held for over five to six months, contradicting the AO's claim of short-term holding.3. Consideration of Borrowed Funds and Interest Payments:The AO considered the use of borrowed funds as a factor in determining the nature of transactions. However, the assessee contended that no significant borrowed funds were used, and no interest expenditure was claimed. The CIT(A) found that the few loans taken were from friends and relatives without interest payments, supporting the assessee's claim of investment rather than business activity.4. Application of Judicial Precedents and Consistency in Tax Treatment:The CIT(A) and Tribunal relied on several judicial precedents, including the cases of Gopal Purohit vs. JCIT and Janak S. Rangwalla vs. ACIT, which established that the frequency and magnitude of transactions alone cannot determine the nature of income. The Tribunal emphasized the importance of consistency in tax treatment, referencing the principle that similar facts should lead to similar tax treatment across different assessment years unless there is a material change.The Tribunal noted that the assessee maintained separate portfolios for investment and trading activities, a fact not disputed by the AO. This distinction was crucial in supporting the assessee's claim of investment activity. The Tribunal also referenced the Supreme Court's approval of the Gopal Purohit decision, reinforcing the principle that delivery-based transactions should be treated as investments.Conclusion:The Tribunal upheld the CIT(A)'s decision to classify the income from share transactions as STCG rather than business income. The Tribunal found no reason to disturb the CIT(A)'s order, given the consistency in the assessee's treatment of investments, the significant holding periods of shares, and the lack of interest-bearing borrowed funds. The appeal filed by the department was dismissed, affirming the assessee's claim of STCG. The order was pronounced in the open court on June 19, 2013.