2011 (12) TMI 21 - AT - Income Tax

Treatment from Sale & Purchase of shares as Business Income or Capital Gain - Held that - where assessee purchased shares from own funds - purchase and sale are not frequent and number of transaction are not substantial - purchases were for retention and appreciation of value and not for realizing profit - Valued at cost instead of market value or net realizable value (whichever is less) - in books were shown as Investments, than in such cases AO is unjustified in treating the same as held for trading. - Special tax Treatment as per Sec. 111(A) to be given.

Issues Involved:
1. Whether the short-term capital gain amounting to Rs. 26,82,115 should be treated as business income.
2. Whether the income of Rs. 31,11,006 earned on trading of long-term shareholding should be treated as 'income under the head capital gain' or 'business income'.

Issue-wise Detailed Analysis:

1. Treatment of Short-term Capital Gain as Business Income:
The assessee filed its return of income electronically for the assessment year 2006-07, declaring a total income of Rs. 3,19,787. The case was selected for scrutiny, and a notice under sec. 143(2) of the Income-tax Act, 1961, was issued. The assessee was engaged in the business of dealing in auto spare parts and investment in bonds, mutual funds, and other securities. The Assessing Officer (AO) scrutinized the accounts and found that the assessee disclosed both long-term and short-term capital gains. The AO believed that the gains from the sale of shares should be assessed as business income and issued a show-cause notice to the assessee. The assessee responded, asserting that the transactions were undertaken as an investor and not as a trader, with shares accounted as investments in the books. However, the AO rejected this claim, citing various reasons, including the lack of separate books for investments and business, no separate bank account, and the use of business income for purchasing shares. The AO also noted the frequent and numerous transactions, concluding that the activities were indicative of a business.

2. Treatment of Long-term Capital Gain as Business Income:
The assessee appealed to the CIT(Appeals), who accepted the claim of long-term capital gain amounting to Rs. 31,13,006 but upheld the AO's decision to treat the short-term capital gain as business income. The revenue appealed against this decision, arguing that the CIT(A) did not provide reasons for segregating the transactions into investment and business categories. The revenue highlighted the frequent transactions and substantial amounts involved, suggesting an organized business activity. The assessee countered, emphasizing that the investments were shown as such in the books, no borrowed funds were used, and the transactions were treated as investments in the previous assessment year 2005-06.

Tribunal's Analysis and Decision:
The Tribunal considered various principles to determine whether the transactions were investments or business activities. These included the intention at the time of purchase, the treatment in the books, the frequency of transactions, the use of borrowed funds, and the valuation in the balance sheet. The Tribunal noted that the assessee treated the purchases as investments in the books, did not use borrowed funds, and valued the shares at cost. Despite the frequent transactions, the Tribunal found that most tests favored the assessee. The Tribunal also considered the fact that the investments were treated as such in the previous assessment year.

Conclusion:
The Tribunal concluded that the CIT(A) erred in treating part of the transactions as investments and part as trading. The Tribunal set aside the CIT(A)'s order and directed the AO to accept the assessee's claim of both long-term and short-term capital gains as investments. Consequently, the assessee's appeal was allowed, and the revenue's appeal was dismissed.

Order Pronounced:
The order was pronounced in the open court on 02.12.2011.

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