2015 (2) TMI 1186 - AT - Income Tax

Sale of shares - STCG or business income - Held that - The assessee was consistently investing in shares. Capital gains offered by the assessee either as long term or short term was accepted by the department in all the earlier assessment years u/s.143(3). The assessee has also placed on record the assessment order framed u/s.143(3) for the A.Y.2005-06 & 2006-07. After giving detailed finding at para 4, the CIT(A) found that assessee has earned long term capital gains of ₹ 14,10,430/- on sale of shares and mutual funds which is liable to exemption u/s.10(38). The CIT(A) has also directed AO to verify the transaction of shares and mutual funds held for less than twelve months, which are delivery based and treat the same as giving rise to short term capital gains. The findings recorded by CIT(A) have not been controverted by ld. DR. Accordingly, we do not find any reason to interfere in the order of CIT(A) for allowing assessee s claim of long term and short term capital gains earned on sale of shares and mutual funds. - Decided against revenue

Summary

Issues:
- Treatment of STC Gain on sale of shares as business income
- Interpretation of circular no. 4 of 2007 for determining nature of gains
- Consideration of transaction motive for tax treatment
- Classification of shares and mutual funds as stock in trade or investments

Analysis:

Issue 1: Treatment of STC Gain on sale of shares as business income
The Revenue appealed against the CIT(A)'s decision to treat short term capital gain (STC) as business income. The CIT(A) directed the AO to treat the STC as short term capital gain after considering the nature of the transactions. The CIT(A) analyzed the details of the gains from the sale of shares and mutual funds, emphasizing the distinction between capital gains and business income. The appellant argued that the gains should be treated as capital gains based on past assessments and legal precedents. The CIT(A) agreed with the appellant's position and directed the AO to treat the gains as capital gains, allowing exemption under section 10(38) of the Act.

Issue 2: Interpretation of circular no. 4 of 2007 for determining nature of gains
The Revenue contended that the CIT(A) failed to consider Circular No. 4 of 2007 while deciding the nature of gains. However, the CIT(A) examined the circular and other relevant factors to determine the appropriate tax treatment. The appellant's argument, supported by legal references, highlighted the distinction between investment activities and trading. The CIT(A) relied on legal precedents and directed the AO to treat the gains as capital gains, following the principles established in previous judgments.

Issue 3: Consideration of transaction motive for tax treatment
The Revenue raised concerns regarding the motive behind the transactions and argued for treating the gains as business income. However, the CIT(A) carefully analyzed the appellant's investment history and the nature of the transactions to conclude that the gains should be treated as capital gains. The CIT(A) emphasized the importance of maintaining separate portfolios for investment and business activities, as recognized in legal precedents. The AO's decision to treat the appellant as a trader without sufficient justification was questioned, leading the CIT(A) to uphold the appellant's claim for capital gains treatment.

Issue 4: Classification of shares and mutual funds as stock in trade or investments
The Revenue challenged the classification of shares and mutual funds as investments rather than stock in trade. The CIT(A) reviewed the appellant's consistent investment approach and the department's acceptance of capital gains in previous assessments. The CIT(A) directed the AO to verify and treat delivery-based transactions as short term capital gains, in line with the appellant's investment strategy. The absence of contrary evidence led to the dismissal of the Revenue's appeal, upholding the treatment of gains as capital gains.

In conclusion, the ITAT Mumbai upheld the CIT(A)'s decision to treat the gains from the sale of shares and mutual funds as capital gains, providing relief to the appellant and dismissing the Revenue's appeal. The judgment emphasized the importance of considering transaction nature, historical assessments, and legal principles in determining the appropriate tax treatment for such transactions.