2014 (1) TMI 182 - AT - Income Tax

Shares sale treated as capital gains, not business income. Tribunal emphasizes transaction intention and consistent treatment.

Dy. CIT, Cir-3(3), Hyderabad Versus M/s. Zen Insurance Services Pvt. Ltd.

The Tribunal concluded that gains from the sale of shares should be treated as capital gains, not business income. The department's appeals were ... Whether the purchase and sale of shares are 'investments' - Held that:- Following Spectra Shares and Scrips Pvt. Ltd. Vs. CIT [2013 (6) TMI 173 - ANDHRA PRADESH HIGH COURT] - The character of transaction cannot be determined solely on the application of any abstract rule, principle or test - No single criterion is decisive in determining the question whether a particular receipt is capital or revenue. The intention of the party, nature of transaction, and various other factors have to be considered cumulatively to find out whether it is investment or trading activity - For deciding whether transactions in shares entered into by the assessee is in the nature of trade, cumulative effect of the various parameters have to be looked into - From the very beginning the assessee is treating the shares as investments only and declaring income from sale of shares as long/short term capital gains - The department has also accepted the claim of the assessee in all other assessment years excepting the two impugned assessment year - The Assessing Officer apart from pointing out two instances of sale of share within a period of one month from the date of purchase has not been able to bring any material on record to disprove the assessee's claim with any cogent or valid reasons - The Assessing Officer accepts assessee's claim of exemption u/s 10(38) of the Act so far as long term capital gain further weakens the reasoning of the Assessing Officer to treat share transaction as trading activity - The Assessing Officer certainly cannot decide the nature of share transaction either as trading activity or investments solely on the basis of period of holding of the shares - During the interregnum it has parked its surplus by investing in shares for appreciation cannot be ignored - Decided against Revenue. Issues Involved:1. Whether the gain derived by the assessee on the sale of shares is to be assessed as income from business or capital gain.Detailed Analysis:Issue 1: Whether the gain derived by the assessee on the sale of shares is to be assessed as income from business or capital gain.The department's appeals revolved around the classification of gains from the sale of shares by the assessee. The core issue was whether these gains should be assessed as business income or capital gains. The assessee, a company primarily engaged in insurance broking services, had invested its surplus funds in shares and mutual funds while awaiting regulatory approval from IRDA.Assessing Officer's (AO) Stand:The AO observed frequent purchases and sales of shares by the assessee, indicating a speculation business rather than investments. The AO provided several reasons for treating the gains as business income:- The transactions were substantial and conducted continuously.- Purchases were made with the intention of resale at a profit.- The activity was regular and systematic.- The assessee devoted full time to this activity, indicating it as a means of livelihood.The AO relied on judicial precedents to support this view, including decisions from the M.P. High Court and other cases, arguing that such transactions should be considered business income.CIT(A)'s Stand:The CIT(A) disagreed with the AO, noting that the assessee's primary business was insurance broking, not trading in shares. The CIT(A) emphasized that the assessee had consistently shown these transactions as investments in its returns, which were accepted by the department in previous years. Key observations included:- The assessee's investments were made from its own funds, not borrowed money.- The shares were held for varying periods, often sold after achieving expected appreciation.- The transactions were delivery-based, not speculative.- The assessee's conduct and consistent treatment of these transactions as investments indicated an intention to invest, not trade.The CIT(A) referred to several judicial precedents, including decisions from the Supreme Court and High Courts, which supported the view that such transactions should be treated as capital gains when the intention was to invest surplus funds temporarily.Tribunal's Analysis:The Tribunal upheld the CIT(A)'s decision, agreeing that the assessee's transactions were investments, not trading activities. The Tribunal emphasized that there is no single criterion to determine the nature of such transactions; it depends on various factors, including the intention of the party, the nature of transactions, and the treatment in books of accounts. The Tribunal noted:- The assessee's primary business was insurance broking, and the investments were made from surplus funds.- The transactions were delivery-based and consistent with the assessee's treatment of these as investments in previous years.- The assessee's conduct, including earning dividend income and valuing shares at cost, supported the investment nature of the transactions.The Tribunal also referred to the jurisdictional High Court's decisions, which laid down parameters for determining the nature of such transactions. Applying these parameters, the Tribunal found that the assessee's case met the criteria for treating the transactions as investments.Conclusion:The Tribunal concluded that the gains from the sale of shares by the assessee should be treated as capital gains, not business income. The appeals filed by the department were dismissed, and the CIT(A)'s decision was upheld. The Tribunal emphasized the importance of the intention behind the transactions and the consistent treatment of these transactions as investments by the assessee.