2013 (12) TMI 1113 - AT - Income Tax

Tribunal rules short term capital gains as capital gains, not business income, emphasizing investment nature.

The Tribunal overturned the lower authorities' decision and ruled in favor of the assessee, classifying the short term capital gains as capital gains ... Gain on sale of shares – capital gain or business income – Held that:- Following Associated Industrial Development Co. (P.) Ltd [1971 (9) TMI 3 - SUPREME Court] - If any body proves that the share purchased kept under the investment portfolio and the same are kept under the stock-in-trade, then the same treatment is to be given - The assessee has shown all the purchases under the head investment portfolio - This fact has been admitted by the departmental authority in previous two years, where the short term capital gain shown by the assessee has been accepted - Following V.A.Trivedi [1987 (1) TMI 12 - BOMBAY High Court] - The period of the holding and number of transactions cannot be the only basis to determine whether the assessee has carried out the business in shares transactions - It may be one of the relevant consideration but cannot be the main consideration for deciding whether the assessee in this case is engaged in a business or not – All the surrounding circumstances should also be looked into – Decided in favour of assessee. Issues:1. Classification of short term capital gains as business income.Analysis:The Appellate Tribunal ITAT Mumbai heard the appeal against the order passed by the CIT(A)-26, Mumbai, regarding the assessment year 2007-08. The primary issue revolved around the treatment of short term capital gains amounting to Rs.56,15,867/- as business income by the Assessing Officer (AO) and subsequently confirmed by the CIT(A). The AO contended that the frequent purchase and sale of shares by the assessee indicated a trading motive rather than an investment intention. The AO highlighted the substantial volume of shares traded, lack of dividend income in previous years, and the pattern of large-scale transactions as evidence of trading activity. The AO relied on various case laws to support the conclusion that the assessee was engaged in trading activities rather than investment. Consequently, the entire income from shares was treated as business income.Upon appeal, the CIT(A) partially upheld the AO's order, categorizing the short term capital gains as business income based on the continuous and regular nature of share transactions. The CIT(A) differentiated between long term and short term gains, concluding that the latter reflected a trading intent rather than investment. The assessee then appealed to the Tribunal, arguing that the holding period of shares, the number of transactions, and the investment in specific shares for extended periods demonstrated an investment motive rather than trading.After considering the submissions and reviewing the facts, the Tribunal disagreed with the lower authorities and ruled in favor of the assessee. The Tribunal emphasized that the assessee's actions were consistent with an investment strategy, supported by the holding periods of shares, absence of external loans for share purchases, and the assessee's autonomy in managing investments. The Tribunal cited legal precedents, such as the Supreme Court's observations on distinguishing between investment and stock-in-trade, to support its decision. Notably, the Tribunal highlighted that the department had previously accepted the assessee's short term capital gains as investment income in prior years, reinforcing the investment nature of the transactions.In conclusion, the Tribunal allowed the appeal, determining that the short term capital gains should be assessed under the head of short term capital gains rather than business income. The decision underscored the importance of assessing the assessee's intent and investment patterns while distinguishing between trading and investment activities in share transactions.This detailed analysis of the judgment showcases the meticulous consideration given to the classification of income and the significance of distinguishing between business income and capital gains in the context of share transactions.