2015 (1) TMI 363 - AT - Income Tax

Distinguishing Capital Gains from Business Income: Importance of Intention in Share Transactions

ACIT, Circle 36(1), New Delhi Versus Sh. Naveen Shrivastava

The Tribunal allowed the Revenue's appeal, remanding the case to the Assessing Officer for fresh adjudication. The decision emphasized the need for a ... Nature or sale of shares – Capital gains or business income - Whether the short term gains from sale of shares should be treated as capital gains (as treated by the assessee) or a business gain – Held that:- FAA has not considered the fact that the assessee's investment was amounting to ₹ 55.64 lakhs, whereas the turnover in purchase and sale of shares was ₹ 31,72,15,256/- Such huge turnovers definitely gives an indication that the assessee has done trading in shares - the assessee was well equipped being an employee of a stock broking firm, having the entire infrastructure readily available for him, having knowledge, information and acumen for carrying on share trading - by no stretch of imagination an investor holding an investment of approximately ₹ 56 lakhs would have a trading volume of approximately ₹ 31 crores. The assessee has not filed any paper book, to come to a factual finding as to the number of transactions and the values, where the assessee has purchased and sold shares on the same day or within two or three days - FAA has not given any facts or figures to controvert this finding of the AO - merely because the assessee also is an investor in shares, it does not mean that he would not have done trading in shares this year - if the assessee had an intention of holding the shares as investment, then purchase and sale of shares in such volumes and at such high frequency is contradictory to such intention - Classification in the Balance Sheet is an indication but not a conclusive proof that the assessee is only an investor - The figures that are available does demonstrate that the assessee has traded in shares, in addition to him being an investor in shares - if a share is held for more than two or three months and then sold, the transaction cannot be properly classified as trading in shares - This segregation of profits between short term capital gain and business income requires a further analysis of the transactions – thus, the matter is remitted back to the AO for fresh adjudication – Decided in favour of revenue. Issues:1. Determination of whether short term gains from the sale of shares should be treated as capital gains or business income.Analysis:The appeal was filed by the Revenue against the order of the Ld. Commissioner of Income Tax (Appeals) for the Assessment Year 2008-09. The assessee, an employee of a share broking concern, had shown long term capital gains and short term gains from share transactions. The Assessing Officer (AO) questioned whether the short term gains should be treated as capital gains or business income. The AO contended that the income from the purchase and sale of shares should be assessed under the head 'profits and gains of business.' The First Appellate Authority ruled in favor of the assessee. The Revenue appealed, arguing that the assessee was actively trading shares in an organized manner, indicating business income. The assessee maintained that the shares were held as investments and not as stock-in-trade, citing various factors to support this claim.The Tribunal considered the facts and legal precedents in the case. The Delhi High Court's decision in CIT vs. Rohit Anand was referenced, emphasizing that the intention behind the share transactions determines their classification as capital gains or business income. The AO noted the high volume and frequency of share transactions by the assessee, suggesting a trading pattern. However, the First Appellate Authority highlighted factors supporting the assessee's investment intent, such as the treatment of unsold shares as investments and the absence of borrowed funds for share purchases.The Tribunal concluded that while the assessee's investment activities were substantial, the high turnover in share transactions indicated trading activity. The lack of detailed information on transaction specifics led the Tribunal to remand the case to the AO for further examination. The Tribunal emphasized the need for a thorough analysis to differentiate between short term capital gains and business income. As such, the appeal of the Revenue was allowed for statistical purposes, and the matter was referred back to the AO for fresh adjudication.In summary, the judgment revolved around the classification of the assessee's share transactions as capital gains or business income. The Tribunal considered the factual findings, legal principles, and conflicting arguments presented by the parties before remanding the case for further assessment by the AO.