2016 (3) TMI 1180 - AT - Income Tax

Profit from share transaction - business income or short term capital gains - Held that - The assessee has not opted to treat its holding of listed shares and securities as stock in trade and nor any income arising from transfer of such shares/securities has been treated as its business income rather assessee has been disclosing income from sale/purchase of shares as long term and short term capital gain consistently in its income tax return and also relying on the decision in the case of CIT vs. Vaibhav J. Shah HUF (2012 (8) TMI 306 - GUJARAT HIGH COURT) and Dev Ashok Karvat vs. DCIT (2012 (2) TMI 14 - ITAT MUMBAI) we are of the view that AO was not correct in treating the income from capital gains as business income. Further nothing has been doubted in regard to the genuineness of the transactions of purchase/sale of shares entered into by the assessee during the year as well as in the following years wherein claim of long term capital gains and short term capital gain has been accepted by the Assessing Officer as filed in the return of income by the assessee. In these circumstances and in view of above judicial pronouncements and Board Circular, we are of the view that income of the assessee shown from short term capital gain from sale of shares should not be treated as business income. - Decided in favour of assessee

Summary

Issues Involved:

1. Classification of income from share transactions as business income or short-term capital gains.
2. Applicability of Section 111A of the IT Act, 1961 for tax on short-term capital gains.
3. Consistency in treatment of share transactions in previous and subsequent assessment years.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:

The primary issue in the appeals for Assessment Years 2005-06 and 2006-07 was whether the income from share transactions should be treated as business income or short-term capital gains. The Assessing Officer (AO) treated the income from share transactions as business income based on the frequency and nature of transactions, short holding periods, and the use of borrowed funds. The AO's decision was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)], who noted that the assessee was regularly dealing in shares for profit, maintaining a single account for consultancy charges, and had substantial activity in share trading, indicating a business activity.

2. Applicability of Section 111A of the IT Act, 1961:

The assessee argued that the income from share transactions should be taxed as short-term capital gains under Section 111A of the IT Act, 1961, which provides a concessional tax rate of 10% on short-term capital gains. The assessee maintained that the transactions were investments, not business activities, and were made from own funds, not borrowed funds. The assessee also pointed out that the transactions were consistently treated as capital gains in previous years.

3. Consistency in Treatment of Share Transactions:

The Tribunal considered the consistency in the assessee's treatment of share transactions in previous and subsequent assessment years. The Tribunal referred to the decision of the Honorable Gujarat High Court in the case of CIT vs. Vaibhav J. Shah (HUF), which emphasized the importance of consistency in the treatment of share transactions. The Tribunal also cited the CBDT Circular No. 6/2016, which provides guidelines for determining whether income from share transactions should be treated as capital gains or business income.

Judgment:

The Tribunal concluded that the assessee's income from share transactions should be treated as short-term capital gains, not business income. The Tribunal noted that the assessee had consistently treated the transactions as capital gains in previous years, and there was no substantial borrowing to finance the transactions. The Tribunal also emphasized that the assessee's intention and conduct indicated investment activity rather than business activity. The Tribunal allowed the appeals for both Assessment Years 2005-06 and 2006-07, directing the AO to treat the income from share transactions as short-term capital gains and apply the concessional tax rate under Section 111A of the IT Act, 1961.

Conclusion:

The Tribunal's decision underscores the importance of consistency in the treatment of share transactions and the need to consider the assessee's intention and conduct. The judgment aligns with the principles laid down by higher courts and the CBDT's guidelines, providing clarity on the classification of income from share transactions. The appeals were allowed, and the income from share transactions was directed to be treated as short-term capital gains, subject to the concessional tax rate under Section 111A.