Tribunal rules share transactions qualify as investment activity not business income despite large volumes

ITAT Rajkot held that the assessee's share transactions constituted investment activity, not business income. The tribunal noted the assessee maintained separate accounts for investment and trading, with the AO accepting investor status in previous assessment years. Despite large transaction volumes across 16 scrips, the tribunal found that volume alone cannot determine investment versus trading classification. Key factors supporting investor status included: no borrowed funds used, delivery-based purchases, and consistent treatment in earlier years. The tribunal directed the AO to assess gains as short-term capital gains rather than business income, allowing the assessee's appeal.

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Issues:
Assessment of short term capital gain as business income.

Detailed Analysis:
The appeal before the Tribunal revolves around the issue of the ld.CIT(A) treating the income disclosed by the assessee under "short term capital gain" as business income. The assessee maintained two sets of accounts - one as an investor and the other as a trader. The ld.AO was not satisfied with the short term capital gain declaration and treated the assessee as a trader, assessing the gain as business income.

On appeal, the ld.CIT(A) granted partial relief, accepting the gain from the opening or last year's investment as short term capital gain but treating the gain from purchases made during the year as business income. The Tribunal noted the highly debatable nature of assessing gain from share sales as business income or capital gain, requiring an understanding of the assessee's intention during the transactions. The Tribunal referred to principles from a previous ITAT Lucknow Bench case to determine if transactions are for trade or investment purposes.

The Tribunal also cited the Hon'ble Gujarat High Court's tests to ascertain if an assessee is engaged in business activities, focusing on factors like intention at the time of acquisition, treatment in books of account, frequency of transactions, and volume of transactions. In the present case, the assessee maintained separate accounts for investment and trading, with no use of borrowed funds and transactions on a delivery basis. Previous assessments also recognized the assessee as an investor, and the volume of transactions alone was not considered sufficient to doubt the investment treatment.

Consequently, the Tribunal allowed the appeal, directing the Assessing Officer to treat the assessee's investment as an investor and assess the income from the sale of such investments as short term capital gain. The judgment was pronounced in favor of the assessee on 3rd November 2017 at Rajkot.

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