2011 (3) TMI 1659 - AT - Income Tax

Summary

Issues Involved:
1. Whether the income from the sale of shares should be treated as short-term capital gains or business income.

Detailed Analysis:

1. Treatment of Income from Sale of Shares:
The primary issue in this case is whether the income from the sale of shares should be classified as short-term capital gains (STCG) or business income. The Assessing Officer (AO) assessed the short-term capital gains on the sale of shares held as investments as business income. However, the AO accepted the gains on the sale of Mutual Funds as short-term/long-term capital gains. The assessee argued that the investments in Mutual Funds and shares were made with the objective of capital appreciation and were not held as stock-in-trade. The assessee emphasized that the shares were shown as investments in the balance sheet and the profits on their sale were offered for taxation under the head "capital gains."

2. AO's Stand:
The AO disagreed with the assessee's claim and treated the amount as business income, citing frequent transactions of sale and purchase of shares as indicative of business activity. The AO observed that the assessee's transactions in shares were frequent and spread throughout the year, suggesting a motive to earn profit from trading rather than holding the shares as investments.

3. CIT(A)'s Decision:
The Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to treat the income from the sale of shares as short-term capital gains instead of business income. The CIT(A) noted that the shares were shown as investments, purchased out of the assessee's own funds, and the transactions were authorized by the company's Memorandum of Articles of Association. The CIT(A) highlighted that the volume of transactions was not high, and the assessee had received dividends on the shares, indicating an investment motive.

4. Department's Appeal:
The Department challenged the CIT(A)'s decision, arguing that the assessee was involved in frequent trading of shares and did not maintain separate books of account. The Department relied on various case laws and CBDT Circulars to support its claim that the income should be treated as business income.

5. Tribunal's Analysis:
The Tribunal examined the facts and found that the assessee had consistently shown the shares as investments in its balance sheet and offered the profits under the head "capital gains." The Tribunal noted that the assessee's transactions were not frequent enough to classify the activity as a business. The Tribunal also considered the assessee's infrastructure, which was not indicative of a business activity, and the fact that the investments were made out of the assessee's own funds.

6. Case Laws and Circulars:
The Tribunal referred to various case laws and CBDT Circulars cited by both parties. It distinguished the facts of the present case from those in the cited cases and found that the assessee's treatment of shares as investments was consistent with its main objective as per its Memorandum of Articles of Association. The Tribunal concluded that the CIT(A) had correctly directed the AO to treat the income as short-term capital gains.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to treat the income from the sale of shares as short-term capital gains instead of business income. The appeals filed by the Department were dismissed, and the Tribunal found no error in the CIT(A)'s orders. The decision was based on the consistent treatment of shares as investments by the assessee, the nature and volume of transactions, and the assessee's infrastructure and funds used for investments.