2016 (9) TMI 252 - HC - Income Tax

Court classifies investor over dealer in shares; income from sale as capital gains, not business income.

Deepali Ajaybhai Patel Versus Deputy Commissioner of Income Tax (Assessment)

The High Court classified the assessee as an investor rather than a dealer in shares, emphasizing the treatment of shares in the books of accounts and ... Profits from sale of shares - 'business income' OR 'capital gain' - Tribunal held that the assessee lady was a dealer in shares and was not an investor in shares - Held that:- This Court is of the opinion the ITAT has committed serious error of law in holding that the assessee lady was a dealer in shares and was not an investor in shares. It is required to be noted that for the assessment year 1992-93 the department had accepted the status of the assessee to be an investor and purchasing the shares of six companies and selling the shares of three companies could not have converted the status of the assessee from investor into a dealer. - Decided in favour of assessee. Issues Involved:1. Whether the assessee was a dealer in shares or an investor in shares.2. Determination of the nature of income from the sale of shares: business income or capital gains.Issue-wise Detailed Analysis:1. Whether the assessee was a dealer in shares or an investor in shares:The primary issue in the appeal was whether the assessee should be classified as a dealer in shares or an investor in shares. The AO had treated the assessee as a dealer in shares due to the magnitude and frequency of transactions, thereby categorizing the income from the sale of shares as business income. The assessee contended that for the assessment year 1992-93, the department had accepted the status of the assessee as an investor, and the transactions in subsequent years should not alter this status. The assessee also argued that the shares were shown as investments in the books of accounts, not as stock-in-trade.2. Determination of the nature of income from the sale of shares: business income or capital gains:The AO's decision to treat the income from the sale of shares as business income was upheld by the CIT (A) and the ITAT. The assessee argued that the ITAT failed to appreciate the nature of the transactions and the intention behind them. The assessee relied on various judicial precedents, including the decision in Commissioner of Income-Tax v. Excel Industries Ltd. and other similar cases, to support the claim that the income should be treated as capital gains.Judgment Analysis:1. Classification as Dealer or Investor:The High Court noted that for the assessment year 1992-93, the department had accepted the assessee's status as an investor. The Court emphasized that merely purchasing shares of six companies and selling shares of three companies should not convert the status of the assessee from an investor to a dealer. The Court referred to previous judgments, including the case of Dy. C.I.T. v. Smt. Divyaben C. Shah, where similar facts led to the conclusion that the assessee was an investor.2. Nature of Income - Business Income vs. Capital Gains:The Court observed that the shares were not shown as stock-in-trade and there was no finding of any conversion of shares into stock-in-trade. The Court reiterated the tests laid down in previous cases to determine the nature of the transaction, such as the source of funds, the holding period, and the intention behind the purchase. The Court referred to the decision in Janki Ram Bahadur Ram v. Commissioner of Income-tax, which held that the profit motive alone is not decisive in determining the nature of the transaction.The Court also considered the CBDT Circular No. 6 of 2016, which provides guidelines for determining whether income from the sale of shares should be treated as capital gains or business income. The Circular emphasizes the importance of the assessee's intention and the treatment of shares in the books of accounts.Conclusion:The High Court concluded that the ITAT had committed a serious error of law in holding that the assessee was a dealer in shares. The Court held that the assessee should be treated as an investor and the income from the sale of shares should be assessed under the head 'capital gains' and not 'profit and gains of business or profession.' The appeal was allowed in favor of the assessee, and the order of the ITAT was set aside.