2014 (1) TMI 341 - AT - Income Tax

Tax Tribunal: Share income taxed as capital gains.

The Tribunal upheld the CIT (A)'s decision, dismissing the department's appeal and confirming that the income from share transactions, treated as ... Income from sale of shares - Business income or capital gains - Held that:- The assessee has been treating such income as capital gains - Except in the impugned assessment year, the Assessing Officer in all other assessment years, prior and subsequent, has accepted the dealings in shares as investments only by assessing the gain there from as either long or short term capital gain - Consistency has to be maintained with regard to the assessability of gain from sale of shares - The Assessing Officer has not at all spelt out what are the distinguishing features which provoked him to take a different view in the impugned assessment year - He has not at all considered the facts at depth and has approached the entire issue in a superfluous manner - Following Spectra Shares and Scrips Pvt. Ltd. Vs. CIT [2013 (6) TMI 173 - ANDHRA PRADESH HIGH COURT] - Whether a particular activity is in the nature of investment or trade is purely a factual issue and would depend upon the particular facts involved in each case - Considering the totality of facts and circumstances in assessee’s case and applying the tests laid down in case of Spectra Shares and Scrips Pvt. Ltd - The finding of the CIT (A) in holding the dealing in shares by the assessee as its investment and directing the Assessing Officer to assess it as income under the head capital gain is most reasonable and appropriate - Decided against assessee. Issues Involved:1. Whether the income from share transactions should be treated as capital gains or business income.Issue-wise Detailed Analysis:1. Income from Share Transactions: Capital Gains or Business IncomeThe core issue in this appeal is whether the income of Rs.1,49,14,360/- from share transactions should be treated as capital gains or business income. The assessee, a Non-Banking Finance Company (NBFC), claimed that the income derived from share transactions should be treated as capital gains, as these transactions were investments. The Assessing Officer (AO), however, treated this income as business income, arguing that the assessee's activities indicated regular trading in shares.Facts and Arguments by the Assessee:The assessee, incorporated in August 1995, is registered with the RBI as an NBFC, primarily functioning as an investment company. For the assessment year 2006-07, the assessee filed its return of income, showing long-term and short-term capital gains. During scrutiny, the AO noted that the income from the sale of shares was reflected in the Profit & Loss account but was treated as capital gains in the computation. The assessee contended that the shares were acquired as investments, not for trading, and pointed out that the department had accepted this treatment in previous years. The assessee also highlighted that the shares were acquired from companies listed on NSE and that the dividend income received was substantial.Assessing Officer's View:The AO rejected the assessee's contentions, arguing that the assessee's activities indicated a business motive, with regular buying and selling of shares for profit. The AO noted the diversity and volume of shares traded, suggesting a professional and aggressive business approach. Consequently, the AO treated the income from share transactions as business income.CIT (A)'s Decision:The CIT (A) sided with the assessee, treating the income as capital gains. The CIT (A) emphasized the consistent approach taken by the assessee and accepted by the department in previous years. The CIT (A) noted that the assessee classified its holdings as investments from the beginning and that there was no significant frequency of buying and selling shares. The CIT (A) concluded that the dominant impression was that the assessee was an investor, not a trader, and thus the income should be taxed under the head 'Capital gains.'Arguments by the Departmental Representative (DR):The DR argued that investment in shares involves significant research and daily monitoring, akin to business activities. The DR highlighted the complexity and risk associated with share investments, contrasting it with other investments like gold or real estate. The DR pointed out instances of frequent transactions within the same year, suggesting a trading activity. The DR also noted that the assessee's main income was from share transactions, not from NBFC activities, and that a substantial portion of investments was funded by unsecured loans.Arguments by the Assessee's Representative (AR):The AR reiterated that the assessee consistently treated share transactions as investments and offered income under capital gains. The AR emphasized that the department had accepted this treatment in previous and subsequent years. The AR pointed out that the assessee's main object was to make investments in shares, as stated in the memorandum of association. The AR also highlighted that the shares were held for substantial periods, and the income from dividends was significant. The AR argued that the assessee's method of valuing shares at cost, not at market price, indicated an investment approach. The AR also noted that the assessee had no employees or significant administrative expenses, further supporting the investment claim.Tribunal's Analysis and Conclusion:The Tribunal examined the facts and the consistent treatment of share transactions as investments by both the assessee and the department in previous years. The Tribunal referenced the Supreme Court's principle in Radhasoami Satsang vs. CIT, emphasizing consistency in tax treatment unless new facts emerge. The Tribunal found no changed circumstances justifying the AO's different stand in the impugned year. The Tribunal also applied the tests laid down by the jurisdictional High Court in Spectra Shares and Scrips Pvt. Ltd. vs. CIT, which supported the assessee's claim of investments. The Tribunal noted that the assessee made investments with own funds, valued closing stock at cost, earned substantial dividend income, and did not engage in futures, derivatives, or options. The Tribunal concluded that the transactions were investments, and the income should be treated as capital gains.Decision:The Tribunal upheld the CIT (A)'s order, dismissing the department's appeal and confirming that the income from share transactions should be taxed under the head 'Capital gains.'Result:The department's appeal is dismissed. The order was pronounced in open court on 17.12.2013.