2017 (10) TMI 1468 - AT - Income Tax

Tax Case: Capital Gain Treatment as Business Income Upheld

The case involved determining whether a short-term capital gain should be treated as business income based on the distinction between shares held as ... Characterization of income - Income from sale of shares - STCG or Business income - HELD THAT:- Shares were purchased with a view to sell them at a profit and in fact, those shares were sold within the same accounting year, the conduct of the assessee was not to hold them as investment and earn some interest but to trade in shares. It was clear from the frequency and nature of transactions in shares. In the absence of any material to show that assessee had made investments only, the authorities below were correct in concluding that gains were assessable as business income. Assessee, however, relied upon the decision in the case of Rohit Anand [2009 (7) TMI 901 - ITAT DELHI] in which assessee had demonstrated that his intention was never to trade in shares. In the case of Vinod N. Shah [2010 (2) TMI 875 - ITAT, MUMBAI] it was found that on an average there was only 3-4 cases of purchase and sale of shares during a month. These decisions, therefore, would not support the case of the assessee. The authorities below have rightly assessed the income from 'profits and gains of business as from shares' and accordingly, the appeal of the assessee stands dismissed. Issues Involved:1. Whether the short-term capital gain of Rs. 65,55,066 should be treated as business income.2. The distinction between shares held as stock-in-trade and shares held as investment.3. The criteria for determining whether transactions in securities constitute business activity or investment.Detailed Analysis:Issue 1: Treatment of Short-Term Capital Gain as Business IncomeThe primary issue in this case is whether the short-term capital gain of Rs. 65,55,066 should be treated as business income. The assessee declared an income of Rs. 73,94,138 for the assessment year 2006-07, which included income from business, capital gains, and other sources. The Assessing Officer (AO) scrutinized the case and observed that the assessee was involved in a large number of securities transactions, indicating that the assessee was a trader in securities rather than an investor.Issue 2: Distinction Between Shares Held as Stock-in-Trade and Shares Held as InvestmentThe AO referred to Circular No. 4 of 2007, dated 15th June 2007, which provides guidelines for distinguishing between shares held as stock-in-trade and shares held as investment. The circular outlines several factors, including the substantial nature of transactions, the manner of maintaining books of account, and the ratio between purchase and sales, to determine the nature of transactions. The AO also cited various judicial decisions to support the assessment that the assessee was engaged in business activities rather than investment.Issue 3: Criteria for Determining Business Activity or InvestmentThe AO applied the criteria from the circular and judicial precedents to the assessee's case:- The assessee's main business was financial consultancy with a net income of Rs. 83,142, while the short-term capital gain from shares was Rs. 65,55,066 with a transaction turnover of Rs. 17,79,98,405.- The assessee earned a negligible dividend of Rs. 3,71,459 compared to the capital gains, indicating that the primary motive was profit from trading rather than earning dividends.- The assessee engaged in speculative transactions and borrowed funds for purchasing shares, further indicating business activity.- The transactions were continuous and regular, with a high frequency of buying and selling shares, and no shares were held for more than 12 months.- The assessee did not maintain any distinction between shares held as investment and those held as stock-in-trade.Findings of the CIT(A) and ITATThe CIT(A) upheld the AO's decision, noting the substantial scale of transactions, the use of borrowed funds, and the short holding period of shares. The ITAT also concurred, emphasizing that the assessee's activities were consistent with those of a trader in securities. The ITAT referred to the Supreme Court's decision in Dalhousie Investment Trust Co. Ltd. v. CIT, which held that the nature of transactions must be assessed based on the facts and circumstances of each case.ConclusionThe ITAT concluded that the assessee's activities were indicative of business rather than investment. The short-term capital gain of Rs. 65,55,066 was rightly assessed as business income. The appeal of the assessee was dismissed, affirming the AO's and CIT(A)'s findings.