2010 (11) TMI 714 - AT - Income Tax

Capital gain or Business income - The Central Board of direct Taxes in its instruction no.1827 dated 31.8.1989 had laid down certain tests to distinguish between shares held as stock in trade and shares held as investment - Since there was no change in the modus operandi of the assessee from earlier year, there was no reason to deviate from earlier year s conclusions - Assessee s claim regarding long term capital gain has not been disturbed by the Assessing Officer and, thus, Assessing Officer himself has accepted that the assessee was investor in shares also Appeal is dismissed

Issues Involved
1. Classification of income from share trading as investment income or business income.
2. Consideration of high frequency of transactions in determining the nature of income.
3. Consistency in declaring similar transactions as business income in subsequent years.

Issue-wise Detailed Analysis of the Judgment

1. Classification of Income from Share Trading as Investment Income or Business Income
The primary issue was whether the income from share trading should be classified as investment income or business income. The Assessing Officer (AO) concluded that the income should be treated as business income due to the volume and frequency of transactions, indicating no intention to hold the shares as investments. The AO cited the case of CIT v/s Sutlej Cotton Mills Supply Agency Ltd., where the Supreme Court held that transactions in the ordinary line of business should be treated as business income.

The assessee argued that the shares were acquired and held as investments, supported by the fact that the shares were held for a reasonable period before being sold and were valued at cost in the balance sheet. The assessee also pointed out that no borrowed funds were used for these investments, indicating an intention to hold the shares as investments.

2. Consideration of High Frequency of Transactions in Determining the Nature of Income
The AO emphasized the high frequency of transactions as a basis for treating the income as business income. However, the CIT(A) and the Tribunal noted that the assessee had maintained a distinction between investment and trading portfolios in its records. The Tribunal highlighted that the volume of transactions is an important indicator but not the sole criterion for determining the nature of income. The Tribunal referred to CBDT Circular No.4/2007, which allows taxpayers to have both investment and trading portfolios.

The Tribunal also observed that the assessee had not borrowed funds for making investments, which is a significant factor in determining the intention behind holding shares. The Tribunal concluded that the AO's reasoning was not based on sound rational reasoning, as a prudent investor is allowed to liquidate investments based on market trends without being classified as a trader.

3. Consistency in Declaring Similar Transactions as Business Income in Subsequent Years
The AO pointed out that the assessee had declared similar transactions as business income in subsequent years. However, the Tribunal emphasized the importance of consistency in tax treatment under similar facts and circumstances. The Tribunal noted that in previous assessment years (2001-02 and 2004-05), the AO had accepted the assessee's claim of treating profits from the sale of investments as capital gains.

The Tribunal also referred to various judicial pronouncements and CBDT instructions that support the distinction between shares held as stock-in-trade and those held as investments. The Tribunal concluded that the assessee's consistent treatment of shares as investments in earlier years should not be disregarded without proper reason.

Conclusion
The Tribunal upheld the CIT(A)'s decision to treat the income from share trading as investment income, dismissing the Revenue's appeal. The Tribunal emphasized the importance of maintaining consistency in tax treatment and recognized the assessee's intention to hold shares as investments, supported by the absence of borrowed funds and the maintenance of separate investment portfolios. The Tribunal also noted that the AO's focus on the frequency of transactions was not sufficient to classify the income as business income, especially given the legislative intent and judicial precedents supporting the assessee's position.

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