2011 (11) TMI 253 - AT - Income Tax

Short term capital gain vs Business income assessee engaged in purchase & sale of shares in addition to business of marketing and distribution of books and magazines Held that - Shares were treated as investments investments were made from own funds assessee does not have his own infrastructure to carry on share trading activity easy access to the infrastructure of Quantum Securities (P.) Ltd. short period of holding availability of experience and knowledge and undertaking large number of transactions do not override the original intention of investment in shares. Further prior and subsequent acceptance of the assessee as investor in shares coupled with the fact that bulk of profit has been earned from sale of bonus shares which are taken as investment because of the history of the case out weigh other factors. Accordingly surplus realized on sale of shares is taxable under the head capital gains .- Decided against the Revenue.

Summary

Issues Involved:
1. Classification of income from share transactions as Short-Term Capital Gain (STCG) or Business Income.
2. Application of Board Circular No. 4/2007.
3. Examination of various factors determining the nature of income.
4. Analysis of precedents and relevant case laws.
5. Consideration of the assessee's past treatment of share transactions.
6. Evaluation of the assessee's intention and conduct regarding share transactions.

Detailed Analysis:

1. Classification of Income from Share Transactions as STCG or Business Income:
The primary issue in this appeal was whether the profit of Rs. 8,78,16,545/- from share transactions should be treated as Short-Term Capital Gain (STCG) or Business Income. The Assessing Officer (AO) had classified it as business income, while the Commissioner of Income Tax (Appeals) [CIT(A)] reversed this decision, treating it as STCG.

2. Application of Board Circular No. 4/2007:
The CIT, DR referred to the Board Circular No. 4/2007, which outlines factors to determine the nature of income from share transactions. These factors include the substantial nature of transactions, magnitude of purchases and sales, ratio between purchases and sales and holdings, the motive behind purchase and sale, manner of maintenance of books of account, and treatment of shareholding as "stock-in-trade" or otherwise.

3. Examination of Various Factors Determining the Nature of Income:
The tribunal examined several factors to ascertain the nature of income:
- The substantial nature of transactions: The assessee dealt in 47 scrips, with significant profits from Unitech Ltd. bonus shares.
- Magnitude and frequency of transactions: The assessee undertook numerous transactions systematically.
- The motive behind transactions: The assessee's conduct indicated an intention to earn profits rather than dividends.
- Maintenance of books and treatment of shares: The shares were shown as investments in the balance sheet, not as stock-in-trade.

4. Analysis of Precedents and Relevant Case Laws:
The tribunal considered various case laws to determine the nature of income:
- Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT: Emphasized the intention at the time of purchase, frequency of transactions, and method of valuation.
- Smt. Harsha N. Mehta v. Dy. CIT: Highlighted the importance of infrastructure and frequency of transactions.
- Synthetic Fibre Trading Co. v. Asstt. CIT: Discussed the systematic and regular nature of transactions.
- Smt. Sadhna Nabera v. Asstt. CIT: Focused on the duration of holding and intention behind transactions.
- CIT v. Madan Gopal Radhey Lal: Stressed that bonus shares are capital receipts and should be treated as investments.

5. Consideration of the Assessee's Past Treatment of Share Transactions:
The assessee had consistently shown and been assessed for share transactions as capital gains in past years. The tribunal noted that the assessee had been treated as an investor in previous years, and there was no significant change in facts to alter this treatment.

6. Evaluation of the Assessee's Intention and Conduct Regarding Share Transactions:
The tribunal evaluated the assessee's intention and conduct:
- The assessee had been investing in shares for over 30 years.
- Investments were made from own funds, and shares were held as investments in the balance sheet.
- The assessee did not have a setup to deal in shares and was primarily engaged in the business of marketing and distribution of books and magazines.
- The bulk of profit came from the sale of bonus shares of Unitech Ltd., which were treated as investments.

Conclusion:
The tribunal concluded that the original intention of the assessee was to hold shares as investments. Despite the large number of transactions and the infrastructure available through Quantum Securities (P.) Ltd., the prior and subsequent acceptance of the assessee as an investor, coupled with the nature of the bonus shares, outweighed other factors. Thus, the CIT(A) was correct in treating the surplus from share transactions as Short-Term Capital Gain (STCG).

Judgment:
The appeal by the revenue was dismissed, affirming the CIT(A)'s decision to classify the income as STCG.