2010 (7) TMI 663 - AT - Income Tax

Short term capital gain or business income - According to the Assessing Officer the nature of activity, the frequency and magnitude suggest that the profit declared by the assessee on account of transactions in purchase and sale of shares is business income - CBDT also wishes to emphasise that it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets - It is possible for an assessee to be both an investor as well as dealer in shares - the assessee is employed in Twin Earth Securities Pvt. Ltd. which is a stock broking company and member of the Bombay Stock Exchange Ltd - Purchase of shares during the year and selling them frequently in short period, in our opinion, do indicate that the assessee has purchased the shares with a motive to earn profit in a short period - Each case has to be decided on the basis of its own set of facts - The profit on account of purchase and sale of shares by the assessee in the instant case has to be treated as income from business as held by the Assessing Officer - In the result, the appeal of the revenue is allowed and the appeal of the assessee is dismissed

Issues Involved:
1. Classification of income from the sale of shares as business income or short-term capital gains.
2. Applicability of CBDT Circular No. 4/2007.
3. Consistency with previous years' treatment of similar transactions.

Issue-Wise Detailed Analysis:

1. Classification of income from the sale of shares as business income or short-term capital gains:

The primary issue in this case is whether the income from the sale of shares should be treated as business income or short-term capital gains. The Assessing Officer (AO) treated the income as business income, citing the volume and frequency of transactions, the short holding period, and the assessee's employment background in a stockbroking company. The AO noted that the assessee had sold shares worth Rs. 2,99,83,303, with a purchase cost of Rs. 2,70,93,635, involving 35 scrips and 70 transactions. The average holding period was very short, with 70% of transactions held for one month or less. The AO argued that the magnitude and frequency of transactions indicated that the assessee was engaged in the business of trading shares.

The CIT(A) partially agreed with the AO, stating that transactions with a holding period of less than 31 days should be treated as business income, while those held for more than 31 days should be treated as short-term capital gains. The CIT(A) noted that the assessee had both investment and trading portfolios but had treated all transactions as investments. The CIT(A) thus adopted a middle path, treating Rs. 7,95,900 as business income and the balance as short-term capital gains.

The Tribunal, however, disagreed with the CIT(A) and upheld the AO's decision. It emphasized that the frequency and volume of transactions indicated a trading motive rather than an investment motive. The Tribunal noted that the shares were held for a very short period, with no case exceeding 200 days. It concluded that the entire profit from the sale of shares should be treated as business income, as the transactions were in the nature of trade.

2. Applicability of CBDT Circular No. 4/2007:

The AO relied on CBDT Circular No. 4/2007, which provides guidelines for distinguishing between shares held as investments and those held as stock-in-trade. The circular acknowledges that an assessee can have two portfolios: an investment portfolio and a trading portfolio. The Tribunal noted that the circular emphasizes that no single principle is decisive and that the total effect of all principles should be considered. The Tribunal applied the principles laid down in the circular, including the substantial nature of transactions, the manner of maintaining books of account, and the ratio between purchases and sales. It concluded that the assessee's transactions were in the nature of trade, given the short holding period and frequent transactions.

3. Consistency with previous years' treatment of similar transactions:

The assessee argued that in the previous assessment year (2004-05), the revenue had accepted the capital gains declared by the assessee. However, the Tribunal held that the principle of res judicata does not apply to income-tax proceedings, and each assessment year is separate and independent. The Tribunal noted that the AO had accepted the short-term capital gains in the previous year, but this did not preclude the AO from treating similar transactions as business income in the current year, given the different facts and circumstances.

Conclusion:

The Tribunal concluded that the entire profit from the sale of shares should be treated as business income. It set aside the order of the CIT(A) and restored the order of the AO. The appeal of the revenue was allowed, and the appeal of the assessee was dismissed. The Tribunal emphasized that the frequency and volume of transactions, along with the short holding period, indicated a trading motive, and the transactions were in the nature of trade. The Tribunal's decision was based on the principles laid down in CBDT Circular No. 4/2007 and various judicial decisions.

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