2010 (1) TMI 966 - AT - Income Tax

Gain arising from sale of shares - capital gain or business income - HELD THAT - In view of the facts and circumstances we hold that the capital gain offered on account of sale of investment was correct and the AO should have accepted the same. Accordingly we direct the AO to consider the profit shown on account of sale of investment as short-term capital gains or long-term capital gains as the case may be. In the result the appeal filed by the assessee is allowed. During the year the assessee has stopped trading activity and whatever the stock was there major portion of the same was sold during the year under consideration and the business profit was offered for taxation. In fact there was an opening stock of Rs. 2, 69, 87, 538 and out of the same was sold at Rs. 1, 80, 98, 024 and remaining stock of Rs. 88, 89, 514 was transferred to investment account. No sale whatever was effected on account of transfer to investment during the year under consideration sale of stock of Rs.1, 80, 98, 024 has been offered as business income. The stock transferred to investment account was sold in the subsequent year. The details to this effect are placed at page 29 of the paper book. There is no ban to do both these activities together i.e. trading in shares and investment in shares. There is a Board circular also in this regard. Therefore not accepting the explanation of the assessee at the end of the AO or at the end of the CIT (A) in our considered view was not justified. We order accordingly.

Summary

Issues:
- Classification of short-term and long-term capital gains in shares and securities as business income.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai involved the classification of short-term and long-term capital gains in shares and securities as business income for the assessment year 2005-06. The assessee objected to the Assessing Officer's treatment of these gains as business income. The Assessing Officer contended that the nature of the assessee's transactions, with a short holding period and systematic purchase and sales activity, indicated an intention to earn quick profits rather than make investments. The Commissioner of Income-tax (Appeals) upheld the Assessing Officer's decision, leading to the appeal before the Tribunal.

The assessee argued that the transactions in question were on account of investments and not trading activities, pointing out that the remaining stock was transferred to an investment account without any sales during the year. The assessee had a history of showing profits from trading as business income and profits from investments as capital gains, which had been accepted by the Department in previous years. The Tribunal noted that the assessee had ceased trading activities during the year and offered the profits from the sale of stock as business income, while the stock transferred to the investment account was sold in the subsequent year.

After considering the submissions and evidence, the Tribunal found in favor of the assessee. It concluded that the capital gains from the sale of investments should be classified as short-term or long-term capital gains, as appropriate, rather than as business income. The Tribunal highlighted that the assessee had a consistent practice of distinguishing between profits from trading and investments, as evidenced by the accounts for previous assessment years. Therefore, the Tribunal directed the Assessing Officer to accept the capital gains on account of the sale of investments as per the appropriate capital gains classification.

In summary, the Tribunal allowed the appeal filed by the assessee, overturning the decision to treat the capital gains in shares and securities as business income. The judgment emphasized the distinction between trading profits and investment gains based on the assessee's historical practices and the nature of transactions during the relevant assessment year.