2012 (3) TMI 479 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from sale of shares as short-term capital gain or business income.
2. Applicability of penalties u/s 271A and 271B.

Summary:

Issue 1: Classification of Income from Sale of Shares
The revenue appealed against the order of Ld. CIT(A) dated 18.10.2011 for the assessment year 2008-09, challenging the treatment of Rs. 4,89,64,389/- as short-term capital gain instead of business income. The assessee filed its return on 1st July 2008, declaring an income of Rs. 4,91,39,431/-. The AO issued a notice u/s 143(2) and subsequently passed the assessment order u/s 143(3), treating the receipts from the sale of shares as business income. The AO based his decision on several factors, including the frequency and volume of transactions, short holding periods, and the use of borrowed funds. The AO cited CBDT Circular No. 4/2007 and Supreme Court judgments to support his stance.

The Ld. CIT(A) reversed the AO's decision, noting that the assessee's transactions were limited to 12 companies, the holding period was reasonable, and the transactions were not continuous but sporadic. The CIT(A) also noted that the assessee did not use borrowed funds and treated the shares as investments in its books. The CIT(A) concluded that the transactions were investments rather than trading activities.

The Tribunal upheld the CIT(A)'s decision, emphasizing the difficulty in distinguishing between investment and trading activities. It referred to the broad principles laid out in the ITAT Lucknow case of Sarnath Infrastructure (P) Ltd. vs. ACIT, which included factors such as the intention at the time of purchase, the treatment in books of accounts, the use of borrowed funds, and the frequency of transactions. The Tribunal found that the assessee's actions aligned more with investment activities and upheld the CIT(A)'s order.

Issue 2: Applicability of Penalties u/s 271A and 271B
The revenue also contested the CIT(A)'s decision to drop proceedings u/s 271A and 271B. The Tribunal noted that since the assessee was deemed an investor and not a trader, it was not mandatory to maintain books of accounts, and thus, penalties u/s 271A and 271B were not applicable. The Tribunal found no error in the CIT(A)'s order on this issue.

Conclusion:
The appeal of the revenue was dismissed, and the order of the CIT(A) was upheld, treating the income from the sale of shares as short-term capital gain and not imposing penalties u/s 271A and 271B.