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2010 (3) TMI 1092 - AT - Income TaxCorrect head of income - Income earned from purchase and sale of share - STCG OR business income - Whether considering the magnitude, intention, frequency of transactions which reflects modus operandi of assessee of share business as an adventure in the nature of trade? - HELD THAT - It is held in the case of Motilal Hirabhai Spg. Svg. Co. Ltd. 1977 (8) TMI 33 - GUJARAT HIGH COURT and Raja Bahadur Visheshwara Singh (DECEASED) 1960 (12) TMI 12 - SUPREME COURT that treatment in the books by an assessee will not be conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organised activity with profit motive then it becomes business profit not capital gain. Keeping in view the above principles, the facts in the present case of the assessee are examined. The assessee during the entire previous year had entered into transaction of purchases and sale of shares of about 32 companies totalling to ₹ 1,87,83,440/- and these shares were sold for a value of ₹ 2,69,71,368/-. The transactions were effected by actual delivery of shares at the time of purchase and sale of shares except in the case of Hiran Orgo Chem, where there are 19 transactions of purchase and sale on the same day of various number of shares involving a total purchase of ₹ 7,00,457 and sale of ₹ 6,95,224 with a loss of ₹ 5,232/-. There were expenses incurred with reference to brokerage, interest, security transactions, bank charges , etc. totally to ₹ 1,67,829/-. In all the transactions where capital gain shown during the year the holding period was less than even 6 months. Most of the gain earned by the assessee is in the shares held for a period 31 days to 90 days to an extent of ₹ 30.81 lakhs and 90 day to 180 days, i.e. ₹ 51.29 lakhs. In fact there were no shares which were held for more than 6 months period on which gains were earned. Thus the maximum holding period was from 1 day to a maximum of 180 days. In the first 6 months of the year the assessee has transacted in 25 scrips and gained ₹ 45,659/- and the investment in those shares is not much when compared to the large transactions as discussed above after 01.10.2004. Most of these shares were also purchased and sold immediately and there are no shares which are acquired prior to 01.04.2004 held after 31.01.2005. All these facts indicate that the intention of the assessee is to gain profits by dealing in short term period only. Not only the above, AO also discussed about borrowing of funds, small amount of dividend when compared to the gain in sales and also the fact that assessee group companies are involved in share trading. Conclusion of the Revenue authorities that the income from sale of shares declared by the assessee during the year as short term gain is income from business activity is correct and calls for no interference. there are no long term gains in assessee s case except in small amounts in A.Y. 2001-02 and in the later year only on one group which was discussed above which are from investments discussed above of few company shares. Appeal of the assessee is dismissed.
Issues Involved:
1. Whether the income earned by the assessee on the sale of shares is to be treated as short-term capital gain or income from business. Issue-Wise Detailed Analysis: 1. Treatment of Income from Sale of Shares: Arguments by the Assessee: The assessee, an individual and Director/shareholder in various companies, contended that her income from the sale of shares should be treated as short-term capital gain. She disclosed business and professional income as Nil, short-term capital gain before 01.10.2004 at Rs. 45,659/-, and short-term capital gain after 01.10.2004 at Rs. 79,74,441/-. The assessee argued that she was a pure investor in the stock market, with no frequent transactions to classify her activities as business. She relied on various case laws to support her claim that she was an investor. Findings of the Assessing Officer (AO): The AO observed that the assessee engaged in voluminous transactions of purchase and sale of shares, involving 2,12,281 shares with a purchase cost of Rs. 1.87 crores and sold them for Rs. 2.69 crores. The AO noted: - The assessee and her husband were Directors/substantial shareholders in companies engaged in share trading. - There were transfers of funds between the assessee's account and some concerns. - Transactions included intraday trading, and the assessee took loans by pledging shares. - Dividend income was minimal compared to the gains from share transactions. The AO concluded that the nature, volume, and frequency of transactions indicated a business activity rather than investment, treating the income as business income. Arguments before the Commissioner of Income Tax (Appeals) [CIT(A)]: The assessee reiterated that her intention was to hold shares as investments, not as stock-in-trade. She argued that borrowing money for investments was permissible and cited the case of CIT vs. Rajendra Prasad Moody. The assessee also clarified that the AO's assertion about delivery of shares was incorrect and explained the nature of her transactions. Findings of the CIT(A): The CIT(A) found that the assessee dealt in shares in large volumes, with most shares bought and sold within a few days. The CIT(A) noted: - The assessee borrowed funds extensively for share transactions and paid interest, indicating a business motive. - Shares were pledged for loans, and the assessee used infrastructure facilities of related concerns. - The holding period of shares was short, and transactions were frequent, suggesting a trading activity. The CIT(A) upheld the AO's decision, concluding that the assessee was engaged in trading shares on a full-scale basis. Arguments before the ITAT: The assessee's counsel argued that the assessee was a high net-worth investor with consistent investments over the years. He cited the case of Gopal Purohit vs. JCIT, where the ITAT accepted share transactions as investments, a decision upheld by the Bombay High Court. Findings of the ITAT: The ITAT analyzed the facts and principles from various judicial pronouncements. It noted: - The assessee engaged in frequent transactions with short holding periods, indicating a profit motive. - The volume and frequency of transactions, along with borrowing for share purchases, suggested a business activity. - The ITAT distinguished the assessee's case from Gopal Purohit, noting the lack of long-term investments and consistent short-term gains. The ITAT concurred with the findings of the AO and CIT(A), concluding that the income from the sale of shares should be treated as business income. Conclusion: The appeal of the assessee was dismissed, and the income from the sale of shares was rightly treated as business income by the AO and upheld by the CIT(A) and ITAT. The ITAT emphasized the importance of the volume, frequency, and motive behind share transactions in determining the nature of income.
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