2010 (7) TMI 1043 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from trading in shares as Long Term Capital Gains (LTCG) or Short Term Capital Gains (STCG) versus Income from Business or Profession.
2. Consistency in treatment of share transactions in previous and current assessments.
3. Determination of whether shares were held as investments or stock-in-trade.

Issue-wise Detailed Analysis:

1. Classification of Income from Trading in Shares:
The primary issue in these appeals was whether the income earned from trading in shares should be classified under the head "Long Term Capital Gains (LTCG)" or "Short Term Capital Gains (STCG)" as shown by the assessee, or under "Income from Business or Profession" as assessed by the Assessing Officer (AO). The Tribunal noted that the assessee had consistently shown shares as investments in her books of account and balance sheet. The CIT(A) observed that the assessee's intention was to hold shares as investments, evidenced by the earning of LTCG and regular dividend income, and not as stock-in-trade. The Tribunal upheld this view, referencing the principle that merely selling shares at an appropriate time to augment wealth does not classify the activity as trading in shares.

2. Consistency in Treatment of Share Transactions:
The Tribunal emphasized the importance of consistency in the treatment of share transactions across different assessment years. It was noted that the assessee had shown shares as investments in previous years and declared capital gains accordingly. The Tribunal referred to previous decisions, including the case of Gopal Purohit v. JCIT, which highlighted the principle of consistency, stating that similar facts and circumstances should lead to similar tax treatments. The Tribunal found that the AO's reclassification of income from capital gains to business income was inconsistent with the treatment in earlier years.

3. Determination of Investment or Stock-in-Trade:
The Tribunal applied various tests to determine whether the shares were held as investments or stock-in-trade:
- Intention at the Time of Purchase: The shares were shown as investments in the books of account.
- Frequency and Volume of Transactions: The Tribunal found that the number of transactions and scripts were not frequent or large enough to classify the activity as trading.
- Treatment in Books of Account: Shares were valued at cost, indicating they were held as investments.
- Borrowed Funds and Interest Deduction: Although the assessee borrowed funds for investment, no interest was claimed as a deduction, supporting the investment intention.
- Holding Period: The assessee held shares for a sufficient period, further indicating an investment motive.

The Tribunal also referenced the CBDT Circular No. 4/2007, which allows for both trading and investment portfolios, provided they are clearly demarcated. The Tribunal concluded that the assessee had maintained a clear distinction between shares held for investment and those for trading, and there was no evidence to suggest otherwise.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to classify the income from share transactions as LTCG/STCG rather than business income. The Tribunal dismissed the Revenue's appeals, emphasizing the consistency in the assessee's treatment of shares as investments and the lack of evidence to support the AO's reclassification. The assessee's Cross Objections were dismissed as not pressed. The judgment reinforces the importance of consistent treatment of similar transactions and the need for clear evidence to support any reclassification by tax authorities.