2011 (7) TMI 1187 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from purchase and sale of shares as "capital gains" or "business income".
2. Use of borrowed funds for purchase of shares.
3. Consistency in treatment of share transactions in previous and subsequent assessment years.

Summary:

1. Classification of Income from Purchase and Sale of Shares:
The primary issue was whether the income from the purchase and sale of shares should be taxed under "capital gains" or "profits and gains of business and profession". The Assessing Officer (AO) argued that the transactions were frequent, involved large investments, and were conducted with borrowed funds, indicating a business activity. The AO cited several case laws, including Rajputana Textiles (Agencies) Limited vs. CIT and Rajabahadur Vishweshwarasingh vs. CIT, to support this view. However, the assessee contended that the shares were held as investments, shown as such in the balance sheet, and the transactions were not allied to its main business. The assessee relied on case laws like Gopal Purohit V Jt. CIT and Sarnath Infrastructure Pvt. Limited to argue that the transactions should be treated as capital gains.

2. Use of Borrowed Funds:
The AO noted that the assessee used borrowed funds for purchasing shares, which suggested a business motive. The assessee countered this by stating that it had net interest income and had not used borrowed funds for share transactions. The assessee cited the case of CIT Vs Reliance Utilities & Power Ltd., where it was held that if common interest-free funds are available, the presumption is that investments are made from such funds.

3. Consistency in Treatment of Share Transactions:
The assessee highlighted that in the previous assessment year (2005-06), the transactions were accepted as capital gains u/s 143(3), and for the subsequent year (2007-08), the return was accepted u/s 143(1). The Tribunal noted that the Hon'ble jurisdictional High Court in CIT vs. Darius Pandole held that once income from the sale of shares is treated as business income in an earlier year, it cannot be taken as capital gain in the next year. Conversely, since the income was consistently treated as capital gains in the past and future, it should not be treated as business income for the current year.

Conclusion:
The Tribunal concluded that the assessee's holdings of shares should be treated as investments, and the profit on the sale of shares should be treated as capital gains. The appeal of the assessee was allowed, and the order was pronounced on 15th July 2011.