2010 (11) TMI 987 - AT - Income Tax

Summary

Issues Involved:
1. Whether profit earned on the sale of shares should be assessed as capital gains or business income.
2. Whether the transaction was an adventure in the nature of trade u/s 2(13).

Summary:

Issue 1: Assessment of Profit on Sale of Shares as Capital Gains or Business Income

The main issue was whether the profit earned on the sale of shares should be assessed as capital gains or business income. The assessee declared profits of Rs. 59,68,498/- as long-term capital gains and Rs. 1,24,011/- as short-term capital gains. The AO contended that these should be assessed as business income, citing the composite nature of the activity and the lack of separate portfolios for trading and investment. The AO's reasoning included the high number of transactions, substantial sale consideration, and the application of criteria from Board's Circular No.1827.

The CIT(A) reversed the AO's findings, holding that the profits should be assessed under the head capital gains. The CIT(A) noted that the shares were shown as investments in the balance sheet, the assessee used own funds for investment, and the transactions did not pass through the profit and loss account. The Tribunal upheld the CIT(A)'s decision, emphasizing the intention of the assessee at the time of acquiring the shares and the maintenance of separate accounts for trading and investment portfolios.

The Tribunal referenced several judgments, including Sarnath Infrastructure Ltd. vs. ACIT, which laid down principles for determining whether transactions are in the nature of trade or investment. The Tribunal concluded that the assessee had discharged the primary onus of showing that the shares were held as investments, and the Revenue failed to prove otherwise. The Tribunal applied the criteria from the case of Shri Suganchand C. Shah vs. ACIT, determining that shares held for more than 30 days should be treated as investments, resulting in Rs. 59,69,498/- as long-term capital gains, Rs. (-)1,70,841/- as short-term capital loss, and Rs. 2,94,847/- as business profit.

Issue 2: Adventure in the Nature of Trade u/s 2(13)

The AO argued that the transactions were an adventure in the nature of trade u/s 2(13), citing the motive of purchasing shares for resale at a profit rather than for earning dividends. The Tribunal, however, emphasized the need to look into the intention of the assessee in acquiring the shares. The Tribunal found that the assessee's intention was to hold the shares as investments, as evidenced by the treatment in the balance sheet, the use of own funds, and the low frequency of transactions. The Tribunal concluded that the Revenue did not provide sufficient evidence to prove that the transactions were an adventure in the nature of trade.

Conclusion:

The Tribunal partly allowed the appeal, treating Rs. 59,69,498/- as long-term capital gains, Rs. (-)1,70,841/- as short-term capital loss, and Rs. 2,94,847/- as business profit. The order was pronounced in open Court on 12.11.10.