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2011 (8) TMI 468 - AT - Income TaxCapital gain or Income from business - Sale of share/securities - The assessee had shown long-term capital gain of ₹ 1,25,336 after claiming exemption under section 10(38) of the Act and short-term capital gain at ₹ 24,00,367 on account of sale of share/securities - The Assessing Officer has treated such gain as assessable under the head Income from business and not as Capital gains - the assessee is not having singular activity of investment in shares - In fact, the assessee has been holding shares as investment from year to year - It is also an emerging factor that investments have been made out of surplus/own funds and the assessee is otherwise engaged in other business activities - Before the lower authorities the assessee also canvassed with reference to his Balance sheet that he had substantial funds and it is only to realize better return, the investments in shares have been made - It is pointed out that primarily the assessee has held the shares for more than one year so as to earn long-term capital gains; that merely because certain shares were sold for a period less than one year, the same would be indicative of a business transaction is not correct - Having considered the manner in which the assessee has transacted in shares and having invested only the surplus funds in the transaction of shares, the same has been rightly declared by the assessee as falling under the head as Capital gain and not as Business income - Therefore reverse the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to treat the impugned income from sale of shares as assessable under the head Capital gains and not as Business income .
Issues Involved:
1. Classification of income from the sale of shares as 'Income from business' versus 'Capital gains'. Issue-wise Detailed Analysis: 1. Classification of Income from Sale of Shares: Background and Facts: The assessee filed a return for the assessment year 2006-07, declaring long-term capital gain of Rs. 1,25,336 and short-term capital gain of Rs. 24,00,367 from the sale of shares/securities. The Assessing Officer (AO) examined the transactions and noted that the assessee had engaged in frequent and high-volume transactions through multiple brokers. Assessing Officer's Findings: The AO observed the following: - The regularity, frequency, volume, and continuity of transactions were very high. - The dominant intention behind purchasing shares was to earn profit quickly. - The intention of holding shares for dividends was missing. - No separate accounts were maintained to distinguish between investment and stock. - The assessee was actively engaged in trading shares to make quick profits. Based on these observations, the AO concluded that the transactions were conducted in an organized manner with a profit motive, thus classifying the income as 'Income from business' rather than 'Capital gains'. The AO relied on several judicial decisions to support this view. Commissioner of Income-tax (Appeals) [CIT(A)] Findings: The CIT(A) upheld the AO's decision, stating that the totality of facts indicated that the assessee was engaged in a systematic and organized activity of trading in shares, which constituted a business. The CIT(A) noted the frequency of transactions and the reinvestment of sale proceeds into further shares as indicative of a profit motive. Assessee's Arguments: The assessee argued that: - Frequency, volume, and holding period do not determine the nature of the asset as stock in trade or investment. - The AO should have considered section 2(14) of the Act, which treats assets held by a trader as capital assets unless held as stock in trade. - The investments were made from surplus funds without borrowing, indicating an intention to invest rather than trade. - The assessee was a full-time working partner in other businesses and did not have the infrastructure to carry out a share trading business. - CBDT Circular No 4/2007 recognizes that shares held as investments should be taxed as capital gains. Tribunal's Analysis and Decision: The Tribunal noted that determining whether a transaction is an investment or an adventure in the nature of trade is a mixed question of law and fact, requiring consideration of multiple factors such as the trader's usual business, the nature and quantity of commodities traded, frequency of transactions, and the intention at the time of acquisition. The Tribunal found that: - The mere volume of transactions is not determinative of the nature of the transaction. - The assessee had been holding shares as investments from year to year and had substantial funds. - Investments were made from surplus funds, and the primary intention was to earn long-term capital gains. Given these factors, the Tribunal concluded that the transactions were rightly declared by the assessee as 'Capital gains' and not 'Business income'. The Tribunal reversed the CIT(A)'s order and directed the AO to treat the income from the sale of shares as 'Capital gains'. Conclusion: The appeal of the assessee was allowed, and the income from the sale of shares was directed to be treated as 'Capital gains'.
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