2010 (12) TMI 1166 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from sale of shares as business income or capital gains.

Summary:

Issue 1: Classification of Income from Sale of Shares

The assessee, an individual, declared income from short-term capital gains of Rs. 60,84,494/- and long-term capital gains of Rs. 59,979/-, along with dividend income and interest on government bonds, claiming exemptions. The AO noted that the assessee had treated share dealings as business income in the assessment year 2004-05 and questioned why the gains from the sale of shares should not be taxed as business income instead of capital gains.

In response, the assessee, a senior citizen, argued that due to health issues, he relied on a broker for share transactions and had shown shares as investments in his books of account. The AO, however, treated the profits from the sale of shares as business income, citing the volume and periodicity of transactions.

On appeal, the CIT(A) upheld the AO's decision, emphasizing the lack of consistency in the assessee's accounting methods and suggesting that the change was motivated by tax benefits introduced by the government.

Before the Tribunal, the assessee's representative argued that except for the assessment year 2004-05, the assessee consistently treated share purchases as investments. The representative provided detailed transaction records, showing that the assessee made 38 purchases and 41 sales during the relevant period, with substantial dividend income and no speculative transactions.

The Tribunal considered the rival contentions and relevant records, noting that the number and frequency of transactions did not indicate trading activity. The intent of the assessee at the time of purchase and sale was crucial, and the transactions appeared to be for investment purposes rather than trading. The Tribunal also noted that the assessee did not book any expenditure against the capital gains and earned significant dividend income.

Applying the principle of consistency, the Tribunal observed that the assessee had shown shares as investments in earlier years and concluded that the transactions were in the nature of investments. Consequently, the Tribunal set aside the orders of the lower authorities and allowed the appeal, treating the income from the sale of shares as capital gains.

Conclusion:
The Tribunal ruled in favor of the assessee, classifying the income from the sale of shares as capital gains rather than business income, based on the intent, consistency in accounting treatment, and the nature of transactions.