2013 (2) TMI 683 - AT - Income Tax

Income from sale of shares - capital gains OR business - Held that - Going through the order of Commissioner of Income Tax (Appeals) we find no good reason to interfere with the findings of Commissioner of Income Tax (Appeals) in holding that the assessee is only an investor and the intention of the assessee is only to invest in shares and there is no motive of trading in business activities in shares. The Commissioner of Income Tax (Appeals) also held that all the transactions are delivery based transactions and no borrowed funds were utilized for making such investments . The assessee has been dealing in investments in shares in earlier years and reported as income from sale of shares either under the head short term capital gains or long term capital gains and this position was not disturbed by the Department. The Revenue could not file any material evidence to rebut the above findings of the Commissioner of Income Tax (Appeals). - Decided against revenue.

Summary

Issues:
1. Whether the income from the sale of shares should be assessed under the head 'capital gains' or 'business' for the assessment year 2006-07.

Analysis:
The appeal before the Appellate Tribunal ITAT Chennai involved a dispute between the Revenue and the assessee regarding the characterization of income from the sale of shares for the assessment year 2006-07. The primary issue was whether the income should be treated as 'capital gains' as claimed by the assessee or as 'business income' as assessed by the Assessing Officer. The Commissioner of Income Tax (Appeals) had ruled in favor of the assessee, holding that the assessee was an investor and not a trader, and therefore, the gains from the sale of shares should be assessed under the head 'capital gains.'

The assessee, a Director in a company, had reported long term capital gains from the sale of shares in the return of income. However, the Assessing Officer assessed the income from the sale of shares as 'business income' on the grounds that the assessee was engaged in trading activities of shares. On appeal, the Commissioner of Income Tax (Appeals) accepted the contention of the assessee that he was an investor and not a trader, directing the assessing officer to treat the income as 'capital gains.'

The Commissioner of Income Tax (Appeals) extensively analyzed the facts and arguments presented, emphasizing that the assessee had consistently treated such transactions as capital gains in previous years. The Commissioner also highlighted that the assessee was not a share broker, did not engage in derivative transactions, and had held some shares for more than 5 years. Moreover, the assessee had not used borrowed funds for investments, received substantial dividends, and all transactions were delivery-based. These factors led to the conclusion that the income should be assessed under the head 'capital gains.'

The Appellate Tribunal, after reviewing the Commissioner's order and considering the lack of material evidence presented by the Revenue to challenge the findings, affirmed the decision in favor of the assessee. The Tribunal concurred with the Commissioner's reasoning that the assessee's activities were that of an investor, not a trader, and that the income from the sale of shares should indeed be treated as 'capital gains.' Consequently, the appeal of the Revenue was dismissed, upholding the order of the Commissioner of Income Tax (Appeals).

In conclusion, the judgment clarified the distinction between 'capital gains' and 'business income' in the context of share transactions, emphasizing the importance of the assessee's intent, conduct, and the nature of transactions in determining the appropriate tax treatment.