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2011 (2) TMI 84 - AT - Income TaxCapital gain or Business income - The assessee is holding the shares as investment from year to year - It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee - Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction - Similar transaction of sale and purchase of shares in the preceding years have been held to be income from capital gains both on Long Term and Short Term basis - The purchase of shares is same as in the preceding years and the same merits to be accepted as Short Term Capital Gains - There is no basis for treating the assessee as a trader in shares, when his intention was to hold the shares in Indian companies as an investment and not as stock-in-trade - The mere magnitude of transaction does not change the nature of transaction, which are being assessed as income from Capital Gains in the past several years Hence, the A.O. is directed to accept the claim of short term capital gain and long term capital gain - The A.O. shall withdraw rebate allowed u/s.88E of the I.T. Act by order u/s. 154 dated 03.02.2009 so far as it relates to capital gain - The appeal of the Revenue is dismissed.
Issues Involved:
1. Classification of income from share transactions as Capital Gains or Business Income. 2. Consistency in the treatment of share transactions in previous assessment years. Detailed Analysis: 1. Classification of income from share transactions as Capital Gains or Business Income: The core issue in this appeal is whether the income arising from the purchase and sale of shares should be classified as "Capital Gains" or "Business Income." The Assessing Officer (AO) argued that due to the regularity, volume, turnover, period of holding, and value of transactions, the income should be categorized as business income. The AO noted that the assessee engaged in frequent trading of shares, derivatives, F&O transactions, and speculation, maintaining regular books of accounts for these activities. The AO relied on various case laws and Circular No. 4 of 2007 dated 15-06-2007 of the CBDT to support this classification. The CIT(Appeals) disagreed with the AO, holding that the income in question should be assessed under the head "Capital Gains." The CIT(A) considered the holding period of shares, noting that many shares were held for several years, indicating an investment intent rather than trading. For example, shares of Satyam Computers were held for over 12 years, Kitply Industries for over 10 years, Pidilite Industries and Radico Khaitan for more than 13 and 11 years respectively, and IFCI for 11 years and 6 months. This demonstrated that the assessee acted as an investor, not a trader, and thus the income from these shares should be assessed as Long Term Capital Gains. For Short Term Capital Gains, the CIT(A) observed that there was no intraday trading and most shares were held for periods ranging from 2 to 5 months, with some shares held for over 330 days. The assessee had already offered income from speculation and Futures and Options as business income. The CIT(A) concluded that the delivery-based transactions should be assessed under Capital Gains, not business income. 2. Consistency in the treatment of share transactions in previous assessment years: The principle of consistency was a significant factor in this judgment. The CIT(A) noted that in the previous assessment year (2005-2006), the AO had accepted the assessee's claim of long term capital gain and short term capital loss for delivery-based transactions. The AO's change in stance for the current assessment year was not justified, especially since the shares were shown as investments in the balance sheet, and there were no borrowed funds used for share transactions. The CIT(A) referenced several judicial precedents supporting the principle of consistency. The Hon'ble Hyderabad Tribunal in Shah-La Investments and Financial Consultants Pvt. Ltd. vs. Dy. CIT held that an assessee could engage in both business and investment in shares. The Hon'ble ITAT in Gopal Purohit vs. JCIT emphasized that the legislative change requiring payment of securities transaction tax did not alter the nature of transactions. The Hon'ble Mumbai ITAT in Janak S. Kangwala vs. ACIT reiterated that the volume of transactions does not alter their nature from investment to business. The CIT(A) concluded that the AO's assessment was incorrect and directed the AO to accept the assessee's claim of short term and long term capital gains, withdrawing the rebate allowed under section 88E of the I.T. Act related to capital gains. Conclusion: The appeal filed by the Revenue was dismissed, and the cross objection filed by the assessee, which aimed to support the CIT(A)'s order, required no separate adjudication and was also dismissed. The judgment upheld the classification of income from share transactions as Capital Gains based on the assessee's intent, holding period, and consistency in treatment in previous assessment years. The order was pronounced in the open court on 25th February 2011.
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