2015 (10) TMI 2054 - AT - Income Tax

Tribunal rules shares in investment portfolio as investments, not stock-in-trade

Shri Vishal Dipak Shah Versus Additional Commissioner of Income-tax Range 19 (2), Mumbai.

The Tribunal allowed the appeal, determining that the shares held in the investment portfolio should be treated as investments, not stock-in-trade. As a ... Share transactions - short term capital gain or trading profits - Held that:- It is clear that for the purpose of evaluating the nature of transaction and intention of the assessee, predominant facts are to be taken into account. It is pertinent to note that when the assessee has given a treatment of these shares held under the investment portfolio in the books of account as investment, then, in absence of any thing contrary brought on record to disprove the primary evidence to reflect the intention of the assessee in carrying out the transaction the nature transaction being investment cannot be treated as trading. In view of the above facts and circumstances of the case, we hold that the shares held by the assessee in the investment portfolio cannot be treated as stock-in-trade and consequently the transactions are in the nature of investment and not trading. Accordingly, we set aside the orders of the authorities below and allow the claim of the assessee of STCG. - Decided in favour of assessee. Issues Involved:1. Treatment of short-term capital gain (STCG) as trading profits.2. Rejection of the previous year's order by the CIT(A) without specific reasons.3. Differentiation of facts between the current and preceding assessment year.4. Volume-based differentiations upheld by CIT(A).5. Allegation of fallacious assessment upheld by CIT(A).Issue-wise Detailed Analysis:1. Treatment of Short-Term Capital Gain (STCG) as Trading Profits:The primary issue was whether the STCG from the purchase and sale of shares should be treated as business income or as capital gains. The Assessing Officer (AO) treated the STCG as business income due to the frequency and volume of transactions, considering the assessee's main activity as dealing in shares. The CIT(A) upheld this decision, rejecting the assessee's contention that the transactions should be treated as STCG due to the introduction of the Securities Transaction Tax (STT) and the new tax scheme under the Finance Act, 2004. The Tribunal, however, found that the transactions were indeed investments, considering factors such as the assessee's use of own funds, separate portfolios for trading and investment, and the holding period of shares.2. Rejection of Previous Year's Order by CIT(A) Without Specific Reasons:The assessee argued that the CIT(A) erred in rejecting the previous year's order without specific reasons. The CIT(A) held that the principle of res judicata does not apply to tax matters and that each assessment year is separate. The Tribunal agreed with the CIT(A) that the facts of the current year were different from the previous year, justifying the independent assessment for the current year.3. Differentiation of Facts Between Current and Preceding Assessment Year:The CIT(A) concluded that the facts for the assessment year under appeal were different from those in the preceding year. The Tribunal examined the facts and found substantial differences in the pattern of transactions, such as the number of scrips and the average holding period. For the current year, the major STCG was from 11 scrips with an average holding period of 143 days, compared to 24 scrips with an average holding period of 69 days in the preceding year. This justified the CIT(A)'s differentiation of facts.4. Volume-Based Differentiations Upheld by CIT(A):The CIT(A) upheld volume-based differentiations, which the assessee contended were not justified. The Tribunal noted that the AO had artificially inflated the number of transactions by considering each execution of a large order in small quantities as separate transactions. The Tribunal found that the actual number of transactions was much lower and that the assessee's transactions were primarily investment activities, not trading.5. Allegation of Fallacious Assessment Upheld by CIT(A):The assessee argued that the CIT(A) upheld a fallacious assessment. The Tribunal found that the AO misunderstood repetitive transactions and wrongly assumed the use of borrowed funds for investments. The Tribunal clarified that the assessee used own funds, maintained separate portfolios, and treated shares in the investment portfolio as investments in the balance sheet. The Tribunal concluded that the transactions were investments, not trading, and set aside the orders of the authorities below.Conclusion:The Tribunal allowed the appeal of the assessee, holding that the shares held in the investment portfolio should be treated as investments and not as stock-in-trade. Consequently, the transactions were in the nature of investment, and the STCG should be accepted as such. The Tribunal emphasized that the volume of transactions alone is not a decisive factor and that the overall facts and circumstances, including the intention of the assessee, must be considered.