2010 (12) TMI 678 - AT - Income Tax

Capital gain vs. Business income - whether the shares were purchased and held by the assessee as investment or stock in trade and this will depend upon the intention of the assessee at the time of purchase of relevant shares - It is well settled that such intention is to be gathered from the relevant facts of each case and as agreed by the learned representatives of both the sides there are certain guidelines laid down in the circulars/instructions issued by the CBDT from time to time - It is observed that the claim of the assessee right from the beginning was that all the shares were being purchased and held by her as investment and there was no intention on her part to trade in the delivery based shares - The Assessing Officer thus treated the shares dealt in by the assessee partly as investment and partly as stock in trade merely on the basis of period of holding of the said shares ignoring the fact that the same were purchased by the assessee in a similar manner and treated as investment - n the result appeal of the revenue is dismissed and the cross objection of the assessee is allowed

2012 (2) TMI 169 - AT

Issues Involved:
1. Whether the transactions in shares should be treated as business activity or investment activity.
2. The treatment of income from share transactions as business income or capital gains.
3. The application of guidelines and circulars issued by CBDT in determining the nature of share transactions.
4. The period of holding shares as a determinant for classifying income from share transactions.

Issue-Wise Detailed Analysis:

1. Whether the transactions in shares should be treated as business activity or investment activity:

The Assessing Officer (AO) found that the assessee had engaged in a high frequency of share transactions, with 395 transactions resulting in short-term capital gains and 98 transactions resulting in long-term capital gains. The AO argued that the volume and frequency of these transactions indicated a business activity rather than an investment activity. The AO referred to CBDT instructions and guidelines to support this view, emphasizing factors like the intention behind the purchase, the scale of activity, and the holding period of the shares.

The assessee contended that the shares were held as investments, pointing out that she did not possess any formal qualifications in stock markets, reinvested surplus income, did not use borrowed funds, and intended to earn dividends. She also argued that the income from speculation was separately declared as business income, and the favourable market conditions led to the sale of shares.

2. The treatment of income from share transactions as business income or capital gains:

The AO treated the income from share transactions as business income, arguing that the primary intention of the assessee was to make profits from the transactions, and the holding period of shares was very short in many cases. The AO also noted that the assessee's substantial involvement in share transactions indicated a business activity.

The CIT (Appeals) partially accepted the assessee's claim, treating the profits from shares held for more than 30 days as short-term capital gains and those held for less than 30 days as business income. The CIT (Appeals) considered the assessee as both an investor and a trader, noting that the assessee's substantial dividend income and average holding period supported the investment intention.

3. The application of guidelines and circulars issued by CBDT in determining the nature of share transactions:

The AO referred to CBDT instruction 1827 dated 31.8.1989 and the instruction issued on 16.05.2006, which identify factors to consider in determining whether shares are held as stock in trade or investment. The AO examined the facts of the assessee's case in light of these factors, concluding that the transactions were in the nature of business activity.

The assessee relied on CBDT circular no.4 of 2007 dated 15.06.2007, which provides guidelines to distinguish between shares held as stock in trade and as investment. The assessee argued that her intention to hold shares as investments was supported by substantial dividend income, a reasonable holding period, and consistent treatment of shares as investments in the books of account.

4. The period of holding shares as a determinant for classifying income from share transactions:

The CIT (Appeals) used the holding period of shares as a key factor in determining the nature of the income. He treated profits from shares held for more than 30 days as short-term capital gains and those held for less than 30 days as business income. This approach was challenged by both the revenue and the assessee.

The Tribunal noted that the AO had accepted the assessee's claim of long-term capital gains for shares held for more than one year, indicating that these were considered as investments. The Tribunal found it inconsistent to treat shares held for less than one year differently, especially when purchased in the same manner. The Tribunal concluded that the intention behind the purchase of shares should not be determined solely based on the holding period.

Conclusion:

The Tribunal set aside the orders of the lower authorities, directing the AO to treat the profit earned by the assessee from the sale of shares within a period of one year as short-term capital gains, consistent with the treatment of shares held for more than one year. The decision was based on the peculiar facts of the case, emphasizing that the intention behind the purchase of shares should not be determined solely based on the holding period. The appeal of the revenue was dismissed, and the cross-objection of the assessee was allowed.

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