2014 (4) TMI 1088 - AT - Income Tax

Treatment to sale of shares - capital gains or business income - Held that - assessee has disclosed shares as investment in the balance sheet, there is no claim of any expenses while computing capital gains which demonstrates the intention of the assessee to treat the shares and securities as investment and not as stock-in-trade. No borrowed interest bearing funds was invested in shares. CBDT in its Instruction No 1827 dated 31.08.1989 has laid down certain criteria to determine whether an activity of purchase & sale of shares/securities is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given by the assessee in its books of account as a trading asset or investment; treatment given in the books is indicative of assessee s intention whether to hold the shares with a view to earn dividend & long term appreciation or with a view to carrying on as business. Even various Courts and Tribunals have approved that treatment given by the assessee in its books of account as a vital factor to decide whether the assessee is a trader or an investor. We also found that the assessee has regularly treated shares as investment in the earlier year and has offered gain on sale of shares under the head capital gain . Respectfully following the decision of the Tribunal in case of assessee s brother, wherein facts and circumstances are same, we do not find any merit in the action of the lower authorities for treating the short term capital gain as business income, when the AO himself has accepted assessee s investment in shares which resulted in long term capital gain as it is. - Decided in favour of assessee.

Summary

Issues Involved:
1. Treatment of capital gains on the sale of shares as business income.

Detailed Analysis:

Issue 1: Treatment of Capital Gains on Sale of Shares as Business Income

Facts and Background:
The assessee, a doctor fully occupied in her profession, invested her surplus funds in shares and securities without taking any loans or financial assistance. For the assessment year 2008-09, the assessee reported short-term capital gains of Rs. 1,67,46,642 and long-term capital gains of Rs. 1,13,21,766. The Assessing Officer (AO) accepted the long-term capital gains but treated the short-term capital gains as business income, citing the systematic and regular nature of the share transactions, the short holding period, and the continuity of transactions.

Assessee's Argument:
The assessee argued that her primary occupation was her medical profession, and she did not have the time to monitor the share market actively. Her investments were intended for long-term appreciation and dividend income, not for trading. She maintained that the shares were treated as investments in her books, not as stock-in-trade, and that she used her own capital for these investments, indicating an investor's behavior rather than a trader's. The assessee also highlighted that she did not engage in day trading, took delivery of shares, and the average holding period was 92 days. The assessee cited various judicial precedents, including CIT vs. N.S.S. Investments (P) Ltd., to support her claim that the income should be treated as capital gains.

Assessing Officer's (AO) Argument:
The AO argued that the assessee's activities showed characteristics of a business activity, including systematic and regular transactions with a profit motive. The AO referenced several judicial pronouncements to support the treatment of the short-term capital gains as business income, emphasizing the frequency, volume, and continuity of the transactions.

Tribunal's Findings:
The Tribunal noted that the issue of whether income from the sale and purchase of shares should be treated as capital gains or business income is debatable and must be decided based on the factual situation of each case. The Tribunal found that the assessee, being a full-time doctor, did not have the time to engage in trading activities. The Tribunal observed that the assessee had maintained a distinction between shares held as investments and those held as stock-in-trade, and all transactions were settled by actual delivery of shares, which is typical of an investor rather than a trader.

The Tribunal also highlighted that the AO accepted the long-term capital gains, indicating that the assessee was considered an investor for those transactions. The Tribunal emphasized that reshuffling the investment portfolio to mitigate risks does not necessarily imply trading activity. The assessee's lack of bank borrowings and the absence of interest payments further supported the claim of being an investor.

The Tribunal referred to the decision in the case of the assessee's brother, Dr. Rahul, where similar facts and circumstances led to the conclusion that the income should be treated as capital gains. The Tribunal also considered the assessee's professional achievements and the scrutiny assessment for the subsequent year, where the AO accepted the short-term capital gains/loss.

Conclusion:
The Tribunal concluded that the lower authorities erred in treating the short-term capital gains as business income. The Tribunal directed the AO to treat the short-term capital gains as declared by the assessee. The appeal filed by the assessee was allowed, and the AO's decision was reversed.

Order:
The appeal filed by the assessee is allowed. The AO is directed to treat the short-term capital gains as declared by the assessee. The order was pronounced in the open court on April 22, 2014.