2015 (6) TMI 605 - AT - Income Tax

Tribunal reclassifies share gains as capital gains, emphasizing intent & conduct.

The tribunal allowed the appeal, setting aside the CIT(A)'s order and directing that gains from the sale of shares be treated as capital gains, ... Sale of shares - business income OR capital gains - CIT(A) confirming action of the assessing officer in assessing the gains arising on sale from long-term capital assets and gains arising on sale of short term capital assets, being investment in equity shares, as 'business income' instead of 'capital gains' declared by the appellant - Held that:- It was submitted by the ld. AR's that as and when the opportunity arose, the assessee sold the shares in the open market. According to him, the said gain was in the nature of short term capital gain which was duly offered for taxation in the return of income filed by the assessee firm for the year under consideration as well as earned long term capital gain on shares which were sold after one year. Further, it was brought to our notice that assessee has not borrowed funds for the purpose of making investments so as to call its activities as business. The CBDT Circular No. 4/2007, dated 15.06.2007, which has specifically spelled out the conditions to determine the nature of transaction which is in question of being whether it is in the nature of investment or trade. In the said circular of CBDT it has stated the principle laid down in the case of Associated Industrial Development Company (P) Ltd. [1971 (9) TMI 3 - SUPREME Court ] and in the case of H. Hoick Larsen (1986 (5) TMI 30 - SUPREME Court ) which afforded adequate guidance to the Assessing Officer while determining whether a transaction is in the nature of investment or trade. When the ratio of these decisions when applied to the facts of the present case, then it would be found that assessee satisfied the requirements because as a rule, the assessee had taken delivery at the time of purchase and given delivery at the time of sale in respect of all the shares in its investment portfolio and the assessee had also kept separate records to record the transactions of each category, i.e., delivery based and non-delivery based (F&O). Also, by treating the delivery based transaction as an investment, the assessee clearly established that it did not take the first step as a trader, hence, the result of the delivery based transaction it was treated as short term capital gain or long term capital gain depending upon the period of holding of such shares. The tests of badges of trade evolved by Royal Commission of England and approved by the Hon‟ble Supreme Court are also not met by the assessee. Therefore, it cannot be said that the assessee has dressed up in such way so as to wear the badge of trading. CIT(A) erred by holding that the Assessing Officer was justified in changing the treatment of income of appellant from Short term capital gains and long term capital gain to income from business. The impugned order to treat the income of ₹ 4,06,124/- declared by the assessee as Short term capital gains as Business Income and to treat the income declared by the assessee as long term capital gain of ₹ 2,77,73,257/- as business income is not sustainable in the eyes of law and so it need to set-aside and we do so. In the background of the aforesaid discussions, we set aside the finding of the ld CIT(A) and we allow the appeal. - Decided in favour of assessee. Issues Involved:1. Assessment of total income.2. Classification of gains from the sale of shares as business income or capital gains.3. Charging of interest under sections 234B and 234C of the Income Tax Act.Issue-wise Detailed Analysis:1. Assessment of Total Income:The appellant contested the determination of total income at Rs. 2,91,83,600/- by the CIT(A) as opposed to the declared income of Rs. 14,10,350/-. The tribunal did not adjudicate this ground as it was deemed general in nature.2. Classification of Gains from Sale of Shares:The primary issue was whether the gains from the sale of shares should be classified as business income or capital gains. The appellant declared long-term capital gains of Rs. 2,77,73,257/- and short-term capital gains of Rs. 4,06,124/- from the sale of shares, which the Assessing Officer (AO) reclassified as business income.- Facts and Arguments:- The appellant derived income from salary, interest, and share transactions through a proprietary concern.- The AO issued a show-cause notice questioning why the gains from the sale of shares should not be treated as business income, citing the nature of business as 'share transaction' in the audit report.- The appellant argued that the shares were held as investments, not trading assets, and provided evidence of long-term holding and lack of frequent trading.- AO's Observations:- The AO noted significant transactions in shares and high turnover, concluding that the appellant's activities indicated trading rather than investment.- The AO relied on the frequency, magnitude, and continuity of transactions to classify the gains as business income.- Appellant's Counterarguments:- The appellant maintained separate portfolios for investment and trading, with the investment portfolio reflected in the balance sheet.- The appellant pointed out that the shares were purchased with own funds, held for long periods, and aimed at capital appreciation.- Previous assessments had accepted the appellant's classification of gains as capital gains.- Tribunal's Analysis:- The tribunal emphasized the intention behind the purchase of shares and the conduct of the appellant.- It noted that the appellant's shares were held for substantial periods, and the transactions were delivery-based.- The tribunal referenced various judicial precedents and CBDT circulars supporting the classification of gains based on the intention and holding period.- The tribunal found the AO's reliance on the frequency of transactions and the audit report insufficient to reclassify the gains as business income.- Conclusion:- The tribunal concluded that the gains from the sale of shares should be treated as capital gains, not business income.- The tribunal set aside the CIT(A)'s order and allowed the appeal, restoring the appellant's classification of gains.3. Charging of Interest under Sections 234B and 234C:The tribunal did not specifically address the issue of charging interest under sections 234B and 234C, as the primary contention was the classification of gains.Final Judgment:The appeal was allowed, and the tribunal set aside the CIT(A)'s order, directing that the gains from the sale of shares be treated as capital gains. The tribunal emphasized the importance of the appellant's intention and conduct in determining the nature of the gains.