2009 (8) TMI 815 - AT - Income Tax

Activity of dealing in shares - badla transaction and the speculative transactions - investment activity or business activity - The main and the only legal objection of the Assessing Officer as reflected in the beginning of the order itself was that activity of dealing in shares was treated by the assessee as an investment activity however according to Assessing Officer the activity of the assessee of dealing in shares was a business activity - Held that - that the appellant had simply acted in the fashion to maximize the value of its wealth holding in the shape of shares - Such an activity cannot be held a profit making activity of a business concern but safely it can be held as a profit seeking activity of an investor - Decided in favour of assessee.

Issues Involved:
1. Classification of income from share transactions as "business income" or "capital gains."
2. Determination of whether the activities of the appellant constitute a business activity or an investment activity.
3. Evaluation of the role of Portfolio Managers in the appellant's share transactions.
4. Analysis of the appellant's method of accounting and valuation of shares.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue was whether the income from share transactions should be classified as "profits and gains from business" or "capital gains." The Assessing Officer (AO) treated the activity of dealing in shares as a business activity, citing the "high volume, frequency, continuity, and regularity of the transactions," and assessed the income under "profits and gains from business." The appellant contended that the transactions were investment activities and should be classified under "capital gains."

2. Determination of Business Activity vs. Investment Activity:
The AO referred to section 2(13) of the IT Act to define "business" and cited several case laws to support the view that the appellant's activities were business activities. The AO noted that the appellant engaged in systematic and organized transactions through brokers and Portfolio Managers, indicating a business motive. The AO also pointed out that the majority of transactions were short-term, conducted on a day-to-day basis.

The appellant argued that the activities were conducted through Portfolio Managers, and the appellant played a passive role. The appellant emphasized that the investments were made using own funds, not with a business motive, and were consistently classified as investments in the accounts. The appellant also highlighted that the shares were held for long periods, and the transactions were not speculative.

3. Role of Portfolio Managers:
The appellant's transactions were managed by Portfolio Managers, who were appointed to preserve and grow the capital. The Portfolio Managers were restricted from engaging in speculative transactions and were required to provide quarterly valuations of the portfolio. The appellant argued that the Portfolio Managers' activities should be considered independent of the appellant's intentions, emphasizing that the primary objective was long-term capital appreciation.

4. Method of Accounting and Valuation of Shares:
The appellant valued the investments at cost price, not adopting the market value or cost whichever is lower method, commonly used for stock-in-trade. The appellant argued that this method of valuation, consistently followed, supported the classification of the shares as investments. The AO, however, noted that expenses related to the transactions were debited to the Profit & Loss account, indicating a business activity.

Tribunal's Findings:
The Tribunal examined the definitions of "capital asset," "long term capital asset," and "business" under the IT Act. It referred to several precedents, including decisions of the Supreme Court and CBDT circulars, to distinguish between capital assets and trading assets. The Tribunal noted that the intention at the time of purchase, the conduct of the assessee, and the surrounding circumstances are crucial in determining the nature of the transactions.

The Tribunal observed that the appellant's activities were managed by Portfolio Managers, and the appellant did not directly engage in trading. The investments were made using own funds, and the transactions were on a delivery basis, not speculative. The Tribunal concluded that the appellant's intention was to maximize the value of the investments, not to conduct a trading business.

Conclusion:
The Tribunal held that the appellant's activities constituted investment activities, not business activities. The income from the share transactions should be classified under "capital gains," and not "profits and gains from business." The appeals were allowed in favor of the appellant.

← Previous Next →