2023 (9) TMI 207 - AT - Income Tax

Appellate Tribunal rules short-term capital gain from share sale as capital gain, not business income.

The Appellate Tribunal held that the short term capital gain from the sale of shares should be treated as capital gain, not business income. The Tribunal ... Correct head of income - gain from sale of shares - business income or short term capital gain - assessee has categorized the purchases of shares/securities in two categories; one is investment portfolio and the second is trading portfolio and has shown the gain/income these shares under these two sections as and when the shares were sold - HELD THAT:- It is the decision of the assessee as to which purchase to be treated as investment and which to be treated in trading section. The mere fact that the assessee has purchased shares and disposed them off within a short span of time will not justify the gain to be treated as business income while the same was shown in the investment portfolio in the books of the assessee. In our opinion, the decision of both the authorities below is not sustainable as this being a factual issue and the assessee has maintained the books clearly maintaining the dichotomy in the purchase of securities in the books of accounts. The case of the assessee finds support from the decision of HK Financers Pvt. Ltd. [2015 (5) TMI 828 - CALCUTTA HIGH COURT] and Purvanchal Leasing Ltd. [2022 (2) TMI 437 - CALCUTTA HIGH COURT] - Thus we direct Ld. AO to treat it as short term capital gain. Appeal filed by the assessee is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether gains from sale of shares, shown by the assessee as short-term capital gain in the books, can be recharacterised by the Assessing Officer as business income on account of short holding period, frequency and volume of transactions. 2. Whether the assessee's contemporaneous classification in books of accounts (investment portfolio vs trading portfolio), audit treatment and application of accounting standards (AS-13 valuation vs AS-2 stock-in-trade valuation) are determinative of the nature of profit (capital gain v. business profit). 3. Standard of review on appellate intervention when the factual classification by the assessee is supported by books of account and whether contrary findings by lower authorities are sustainable. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Recharacterisation of short-term capital gains as business income on account of short holding period, frequency and volume Legal framework: Income from transfer of shares can be either capital gain or business income depending on the dominant intention, frequency, volume, holding period and other attendant facts. Taxing authorities may recharacterise the nature of income when transactions exhibit characteristics of trading rather than investment. Precedent treatment: Lower authorities (Assessing Officer and Commissioner (Appeals)) applied the test of frequency, magnitude and short holding periods to treat a subset of transactions as business income. The Assessing Officer converted Rs. 20,66,939 of short-term capital gains into business income; the Commissioner (Appeals) sustained that view based on frequency and holding period analysis. The Tribunal reviewed these findings in light of the assessee's books and precedents cited for the opposite conclusion. Interpretation and reasoning: The Tribunal recognised that frequency, holding period and volume are relevant indicia. However, it emphasised that these indicia are to be weighed against the assessee's contemporaneous classification and documentary evidence. The Tribunal found that the assessee maintained two distinct portfolios (investment and trading), consistently recorded transactions in books accordingly, and the gains in question arose from shares classified in the investment portfolio. Mere short holding period in some transactions, without more (e.g., lack of documentary renunciation of investment intent, absence of trading infrastructure or business conduct), does not automatically convert declared investment transactions into business activity. The Tribunal also noted that it is the assessee's business judgment to designate purchases as investment or trading in the books, and recharacterisation must confront and overturn that contemporaneous documentary partition with cogent reasons. Accordingly, the Tribunal held that the AO's reliance solely on short holding period and frequency (as applied to 30 transactions) was insufficient to displace the assessee's classification. Ratio vs. Obiter: Ratio - where an assessee contemporaneously maintains distinct investment and trading portfolios and records transactions accordingly, recharacterisation to business income requires persuasive and specific contrary material beyond mere short holding period and transaction frequency. The finding that the specified amount was short-term capital gain is a binding ratio for the facts before the Tribunal. Observations on the relevance of frequency and holding period as general indicia are explanatory (obiter) but consistent with settled law. Conclusions: The Tribunal set aside the opposite factual conclusion of the lower authorities and directed that the amount be treated as short-term capital gain, holding that AO's analysis based primarily on holding period and frequency was not sufficient in the presence of clear books showing investment classification. Issue 2 - Evidentiary weight of contemporaneous books, audit report and accounting standards in determining nature of income Legal framework: Contemporaneous books of account and audit classification are relevant primary evidence of the assessee's intent and the nature of holding. Accounting standards may guide valuation and classification but do not alone determine tax character; courts consider classification in books as persuasive unless rebutted by compelling contrary evidence. Precedent treatment: The Tribunal relied on earlier High Court decisions favouring the assessee where similar facts (distinct portfolios in books, investments shown as such) led courts to treat gains as capital in nature. The lower authorities had discounted the assessee's application of AS-13 and audit presentation, treating valuation choices as immaterial when factual indicia suggested trading. Interpretation and reasoning: The Tribunal held that the method of valuation (AS-13 for investments versus AS-2 for stock-in-trade) and audit disclosure showing assets as investments are significant indicia of intention and classification. Where books consistently distinguish between investment and trading portfolios, that contemporaneous documentary record cannot be lightly disregarded. The Tribunal observed that the form of accounting treatment (including following AS-13 and showing value at cost) is relevant and tended to support the assessee's claim that the transactions were investments. The Tribunal considered the lower authorities' contention that valuation approach is 'immaterial' but rejected it in the factual matrix where the assessee maintained a clear dichotomy in books and supporting audits. Ratio vs. Obiter: Ratio - contemporaneous books and audit treatment that segregate investment and trading portfolios carry substantial evidentiary weight and, absent strong contrary evidence, should be accepted in determining tax character of gains. Obiter - comments on the immateriality of accounting standard differences when overwhelming contrary factual indicia exist. Conclusions: The Tribunal found the assessee's documentary classification persuasive and directed that the gains in question be treated as short-term capital gain. It remitted directions to the Assessing Officer to record the amount accordingly. Issue 3 - Standard of appellate review where the classification of transactions is a factual determination Legal framework: Classification of receipts as capital or revenue is essentially a question of fact; appellate authorities may interfere only if lower authorities' conclusions are unsustainable on record or suffer from legal or factual infirmities. Precedent treatment: Lower authorities exercised recharacterisation based on transactional indicia. The Tribunal examined whether that exercise amounted to permissible reappraisal of facts or an impermissible substitution of view in face of clear documentary records. Interpretation and reasoning: The Tribunal emphasized that because the issue is factual, deference is due to the assessee's records when they are coherent and contemporaneous. The Tribunal found that the AO's analysis lacked adequacy to override the books; the Commissioner (Appeals) similarly upheld AO without sufficiently discounting the assessee's documentary evidence. The Tribunal applied the standard that appellate interference is warranted where the lower authorities' conclusions are not sustainable in the light of the record and relevant legal principles. Ratio vs. Obiter: Ratio - appellate authority may set aside recharacterisation where factual findings of lower authorities are not supported by the contemporaneous record and where the assessee's classification is prima facie consistent and credible. Obiter - procedural observations on how AO/CIT(A) should weigh accounting evidence in future cases. Conclusions: The Tribunal allowed the appeal, restored the assessee's classification of the disputed amount as short-term capital gain, and directed reassessment in accordance with that view, holding that the lower authorities' findings were unsustainable on the record.