2014 (5) TMI 79 - AT - Income Tax

Shares sale classified as capital gains not business income. Tribunal emphasizes holding periods, investment patterns, and compliance.

Asstt. Commissioner of Income Tax–9(3) Mumbai Versus Mrs. Vineet Sethi

The Tribunal upheld the Commissioner (Appeals)'s decision, ruling in favor of the assessee that gains from the sale of shares should be treated as capital ... Nature of Income - Income from transfer of shares - Whether or not the short term capital gain and long term capital gain on transfer of shares amount to business income – Held that:- The transaction of shares which have been assessed as “Short Term Capital Gain” and “Long Term Capital Gain” are to be treated as “Business Income” - it is evident from the period of holding of the shares under the head “Long Term Capital Gain” that they remain for substantial period and maximum period being more than ten years - In the case of “Short Term Capital Gain”, the maximum gain has been received from the transactions of shares, which were held between three months to twelve months - all the investments have been made out of own funds and no borrowed funds have been utilized - the assessee is also maintaining separate records and portfolio for the investment purpose and Security Transaction Tax (for short “STT”) has been paid in respect of the shares, on transfer of which, capital gain has been earned – the decision in The Commissioner of Income Tax Versus Gopal Purohit [2010 (1) TMI 7 - BOMBAY HIGH COURT] followed – the order of the CIT(A) upheld – Decided against Revenue. Issues Involved:1. Whether the short-term capital gain and long-term capital gain on the transfer of shares amount to business income.Detailed Analysis of the Judgment:1. Background and Facts:The appeal was filed by the Revenue against the order dated 15th March 2010 by the Commissioner of Income Tax (Appeals) XXI, Mumbai, concerning the assessment year 2006-07. The core issue was whether the gains from the sale of shares, declared under 'Short Term Capital Gain' and 'Long Term Capital Gain,' should be classified as 'Business Income.'The assessee, an individual with income from various sources including business partnerships, capital gains from shares and securities, and other sources, had declared the following income:- Business Income: Rs. 6,18,316- Long Term Capital Gain (exempt u/s 10(38)): Rs. 16,36,053- Short Term Capital Gain: Rs. 56,53,869- Speculation Profit on Shares: Rs. 2,96,560- Income from Other Sources: Rs. 5,04,376- Income on transfer of Unit Trust of India (exempt u/s 10(33)): Rs. 38,15,1332. Assessing Officer's Findings:The Assessing Officer (AO) observed that the assessee engaged in numerous transactions of purchase and sale of shares, indicating a high volume of transactions. The AO noted that the assessee frequently purchased and sold shares for nominal profits, suggesting trading activity rather than investment. Consequently, the AO treated the declared short-term and long-term capital gains as business income, rejecting the assessee's explanation.3. Commissioner (Appeals) Decision:The assessee provided a detailed explanation to the Commissioner (Appeals), emphasizing that the shares under 'Long Term Capital Gain' were held for periods ranging from five to ten years, while those under 'Short Term Capital Gain' had an average holding period of more than nine months. The Commissioner (Appeals) accepted the assessee's contention, noting that the assessee made investments from own funds, maintained separate records, and did not use borrowed funds. The Commissioner (Appeals) directed the AO to accept the assessee's claim of capital gains and apply the relevant tax rates for short-term and long-term capital gains, while treating non-delivery speculative transactions as part of speculation business.4. Tribunal's Analysis and Decision:The Tribunal reviewed the findings and noted that similar issues were decided in favor of the assessee's family members in previous cases. The Tribunal observed that the shares under 'Long Term Capital Gain' were held for substantial periods, and the maximum gains under 'Short Term Capital Gain' were from shares held between three to twelve months. The Tribunal emphasized that profit motive alone cannot determine the nature of transactions, as investments inherently aim for profit. The Tribunal also highlighted that the assessee used own funds, maintained separate portfolios, and paid Security Transaction Tax (STT) on the shares.Respecting the decisions of the Tribunal in similar cases and the Jurisdictional High Court's ruling in CIT v/s Gopal Purohit, the Tribunal upheld the Commissioner (Appeals)'s order, rejecting the Revenue's appeal.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming that the gains from the sale of shares should be treated as capital gains and not business income, based on the facts and consistent judicial precedents.(Order pronounced in the open Court on 24.1.2014)