2014 (12) TMI 1237 - AT - Income Tax

Sale of shares - Short term capital gain or business income - Held that - It is an admitted fact that around 90% of the total gains is from sale of the shares of FCS Softwares Solutions Ltd. It is also an undisputed fact that the assessee had applied in the shares of the IPO of the said company from borrowed capital. Merely because the shares were applied through borrowed capital cannot be a ground for treating the capital gains as business income. The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. We also find that there are no repetitive purchase and sale of the same script which means that there is no churning of shares. The total number of days utilized by the assessee for investment in shares is 32 days. Considering all these facts in totality, we do not find any reason to treat the assessee as a trader. We, therefore set aside the findings of the Ld. CIT(A) and direct the AO to treat the Short Term Capital Gain on sale of shares as declared by the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Treatment of Short Term Capital Gain on sale of shares as business income.

Analysis:
The appeal was filed against the order of the Ld. CIT(A) confirming the AO's action of treating the Short Term Capital Gain on the sale of shares as business income. The AO observed that the assessee derived 90% of the income from one transaction involving the allotment of shares in an IPO, funded by borrowed funds, and sold within a short period. The AO considered this as indicative of business activities and asked the assessee to justify why the gain should not be treated as business profit. The assessee claimed to be an investor, explaining the rationale behind selling the shares at a profit. However, both the AO and the Ld. CIT(A) did not accept the assessee's explanation and treated the transaction as business income based on CBDT circulars and instructions.

The assessee contended that he was an investor and made the investment in shares through IPO, selling them at a profit due to a prudent decision. The utilization of borrowed funds was defended as a common practice in investment. It was argued that the assessee's limited dealings in shares and the specific circumstances of the transaction did not warrant the treatment of the gain as business income. On the other hand, the Ld. Departmental Representative supported the lower authorities' decisions.

Upon reviewing the assessment order and the CIT(A)'s order, the Tribunal found that the majority of the gains were from the sale of shares in question, acquired through borrowed funds. However, the Tribunal noted that mere IPO funding through borrowed capital did not automatically classify the gains as business income. Emphasizing the intention and behavior of the assessee, the Tribunal concluded that the assessee's actions aligned more with an investor than a trader. The absence of repetitive transactions and the short duration of holding the shares further supported the investor classification. Consequently, the Tribunal set aside the CIT(A)'s findings and directed the AO to treat the Short Term Capital Gain as declared by the assessee.

In conclusion, the appeal filed by the assessee was allowed, and the Tribunal directed the AO to treat the Short Term Capital Gain on the sale of shares as declared by the assessee, rejecting the classification of the gain as business income.