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The Revenue filed an appeal against the order dated 10-9-2009 of CIT (A)-VI, Hyderabad, for the assessment year 2005-06. The primary issue was the CIT (A)'s treatment of the income earned by the assessee from the sale of shares as capital gains.
The assessee, an individual, declared income of Rs. 48,01,020/- for the impugned assessment year, including total capital gains from the sale of shares amounting to Rs. 56,56,487/-. The breakdown was as follows: Long term capital gains of Rs. 13,57,512/-, short term capital gains before 30-9-04 of Rs. 2,97,547/-, and short term capital gains after 30-9-04 of Rs. 40,11,428/-.
The Assessing Officer (AO) accepted the assessee's claim of exemption under section 10(38) of the Act for long-term capital gains. However, for short-term capital gains, the AO found that the frequency of buying and selling shares was very high, with a short holding period and high turnover due to frequent transactions. The AO concluded that the assessee's intention was to make a profit from the sale of shares rather than earn dividends, thereby treating the income from the sale of shares as business income rather than capital gains.
The CIT (A), however, considered the submissions of the assessee and followed the decision of the Income-tax Appellate Tribunal, Mumbai Bench, in the case of Sri Kunvarji Nanjikernia V/s. Additional CIT. The CIT (A) noted that in previous years, the shares were declared as investments, and the gains were taxed accordingly as short-term or long-term capital gains. The CIT (A) directed the AO to treat the income derived from the sale of shares held for less than one year as short-term capital gains and allow the benefit under section 111A of the Act.
The Departmental Representative argued that the frequency of transactions and the short holding period indicated that the assessee was not holding shares as an investment but rather as a trader. The Departmental Representative cited several cases to support this view.
The assessee's representative argued that the assessee was primarily engaged in the transport business and invested surplus funds in shares. The shares were held as investments, not stock in trade, and no borrowed funds were used for purchasing shares. The representative cited various decisions to argue that the frequency and volume of transactions alone do not determine the nature of the income.
The Tribunal considered the submissions and materials on record. It noted that the intention behind the transactions was crucial in determining whether the income was from business or capital gains. The Tribunal referred to the jurisdictional High Court's decision in PVS Raju V/s. Additional CIT, which laid down certain tests/guidelines to determine the nature of such transactions. These included the frequency of transactions, holding period, quantum of turnover, intention to make quick profits, and whether the transactions were systematic and regular.
Applying these guidelines, the Tribunal found that the assessee's transactions in shares were frequent and systematic, with a short holding period and high turnover. The intention was to earn profits rather than dividends. Therefore, the Tribunal concluded that the assessee's activity was in the nature of business, and the income from the sale of shares should be treated as business income.
The Tribunal set aside the order of the CIT (A) and restored the order of the AO, thereby allowing the appeal filed by the department.
In conclusion, the Tribunal held that the income derived by the assessee from the sale of shares should be treated as profit from business, not capital gains.
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