2011 (8) TMI 1160 - AT - Income Tax

Nature of income - income is to be treated as Short Term capital gain and not as business income as held by the AO

Issues Involved:
1. Classification of income from the sale and purchase of shares as business income or short-term capital gain.
2. Deletion of penalty levied under Section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Classification of Income from Sale and Purchase of Shares:

*Background:*
The Revenue appealed against the CIT(A)'s order, which directed the AO to treat the surplus of Rs. 1,62,05,046/- earned by the assessee on the sale and purchase of shares as short-term capital gain instead of business income. The Tribunal initially reversed the CIT(A)'s order, treating the income as business profit. However, the Jurisdictional High Court set aside the Tribunal's order and remanded the matter for fresh consideration.

*Relevant Facts:*
The AO observed that the assessee frequently purchased and sold shares within 1 to 150 days, often within 1 to 10 days, indicating a high frequency of transactions. The assessee conducted substantial transactions, suggesting a motive of earning quick profits rather than holding shares for dividends. The AO concluded that the transactions were business activities, not investments.

*Arguments:*
- The Departmental Representative (DR) argued that the AO was justified in treating the surplus as business profit, citing principles from the Apex Court's decisions in G. Venkataswami Naidu & Co. and Anil Jain.
- The Authorized Representative (AR) for the assessee contended that the investments were made from own funds, not borrowed funds, and were intended to be held as investments. The AR argued that the CIT(A) correctly treated the income as short-term capital gain.

*Tribunal's Observations:*
The Tribunal noted that determining whether a transaction is an investment or an adventure in the nature of trade involves mixed questions of law and facts. Factors such as the nature and quantity of the commodity, the intention behind the purchase, and the frequency of transactions are relevant. The Tribunal observed that the assessee's frequent and substantial transactions indicated a motive to earn quick profits rather than holding shares as investments. Therefore, the Tribunal upheld the AO's treatment of the income as business profit.

*Reconsideration:*
Upon reconsideration, the Tribunal found that the AO inconsistently treated similar transactions differently without adequate reasons. The Tribunal noted that the assessee consistently showed shares in the investment portfolio and that the AO accepted some transactions as short-term capital gains while treating others as business income. The Tribunal concluded that the CIT(A) correctly classified the income as short-term capital gain and upheld the CIT(A)'s order.

2. Deletion of Penalty under Section 271(1)(c):

*Background:*
The Revenue appealed against the deletion of the penalty levied by the AO under Section 271(1)(c) of the Income Tax Act. The penalty was based on the Tribunal's earlier order, which was later set aside by the Jurisdictional High Court.

*Relevant Facts:*
The CIT(A) deleted the penalty, stating that the assessee provided all details of transactions and that there was no concealment of income or inaccuracy in the facts filed. The CIT(A) relied on the Apex Court's judgment in Commissioner of Income Tax vs. Reliance Petro Products Pvt. Ltd., which held that if there can be two opinions about the claim, the explanation offered by the assessee cannot be regarded as false.

*Tribunal's Observations:*
The Tribunal concurred with the CIT(A) that the penalty was not justified, as the issue involved a difference of opinion rather than furnishing inaccurate particulars. The Tribunal upheld the CIT(A)'s order, deleting the penalty.

Conclusion:
The appeal of the Revenue was allowed in part regarding the classification of income, with the Tribunal ultimately upholding the CIT(A)'s order treating the income as short-term capital gain. The appeal regarding the deletion of the penalty under Section 271(1)(c) was dismissed, with the Tribunal finding no infirmity in the CIT(A)'s order.

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