2010 (4) TMI 1102 - AT - Income Tax

Summary

Issues Involved:
1. Classification of income from share transactions as either "business income" or "short term capital gains."

Summary:

Issue 1: Classification of Income from Share Transactions

The revenue appealed against the order of CIT(A) directing the Assessing Officer (AO) to treat the profit from investment activity as short term capital gains. The AO had classified the gains as business income due to the volume and frequency of transactions. The assessee argued that the shares were held as investments, funded by surplus and post-tax income, and not borrowed funds. The shares were held in a Demat account, and the assessee earned substantial dividend income. The AO dismissed these arguments, emphasizing the systematic and organized nature of the transactions, and applied principles from Circular No. 4 of 2007 by CBDT.

Learned CIT(A) concluded that the income should be assessed as capital gains based on several factors: the assessee's primary business was trading in chemicals and dyes, shares were shown as investments in the books, own funds were used for purchases, and the volume and frequency of transactions were not decisive. The CIT(A) also noted that similar transactions were accepted as capital gains in the past, invoking the principle of consistency.

The Tribunal upheld the CIT(A)'s decision, agreeing that the income in question was capital gains. The Tribunal noted that the assessee's main occupation was trading in chemicals, shares were shown as investments, and substantial dividend income was earned. The holding period for shares was about six months, and the assessee had not used borrowed funds for investments. The Tribunal also considered the assessee's conduct and circumstances, which supported the claim that the income was capital gains. The Tribunal distinguished the case from others cited by the revenue, noting differences in facts and circumstances.

In conclusion, the Tribunal dismissed the revenue's appeal and upheld the CIT(A)'s order, classifying the income from share transactions as short term capital gains.