2012 (2) TMI 14 - AT - Income Tax

Nature of Income - Capital gain vs Business income Insurance agent purchase & sale of shares Held that - Applying the ratio of the various decisions to the facts of the present case with regard to intention of assessee, frequency of transactions, treatment in Balance sheet, borrowed funds etc, it becomes abundantly clear that the transactions in the shares and mutual funds were made by the assessee as investor and not as a trader, therefore, the profit earned from the said transactions is short term capital gain, not business income. Order of A.O. & CIT are set aside and it is directed to A.O. to treat the income as income from short term capital gains and not business income. See CIT vs Gopal Purohit ( 2010 (11) TMI 222 - SUPREME COURT ), Sarnath Infrastructure (P.) Ltd. v. ACIT 2007 (12) TMI 261 - ITAT LUCKNOW-B - Decided in favor of assessee.

Issues Involved:
1. Classification of income from share transactions as either short-term capital gains or business income.
2. Determination of the intention behind the purchase and sale of shares.
3. Analysis of the frequency and volume of share transactions.
4. Consideration of borrowed funds and their impact on the nature of transactions.
5. Evaluation of the holding period of shares.
6. Treatment of shares in the books of accounts.
7. Relevance of earning dividends in determining the nature of transactions.

Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue is whether the income from share transactions should be classified as short-term capital gains or business income. The assessee reported a short-term capital gain of Rs. 10,52,137/- from the sale of shares, which the Assessing Officer (AO) reclassified as business income. The AO based this reclassification on criteria such as the frequency of transactions, the volume of shares traded, and the profit motive.

2. Intention Behind Purchase and Sale of Shares:
The intention of the assessee at the time of purchasing shares is crucial in determining the nature of income. The assessee argued that the shares were held as investments, not as stock-in-trade. The AO, however, inferred a business motive from the regularity and volume of transactions. The Tribunal emphasized that the intention must be gathered from the facts of the case, including the conduct of the assessee.

3. Frequency and Volume of Transactions:
The AO noted that the transactions were regular and frequent, involving large quantities of shares. The assessee countered that the average holding period was more than 125 days and that the transactions per script were minimal. The Tribunal found that the frequency and volume of transactions alone do not determine the nature of income; the intention behind these transactions is more significant.

4. Borrowed Funds:
The AO observed that the assessee had borrowed funds from family members to invest in shares. The assessee clarified that these loans were interest-free and that substantial funds were advanced to family members and group concerns. The Tribunal noted that the investments were made mainly out of the assessee's own capital and non-interest-bearing funds, which supported the claim of treating the shares as investments.

5. Holding Period of Shares:
The holding period of shares is a critical factor. The assessee demonstrated that a significant portion of the gains came from shares held for more than 100 days. The Tribunal highlighted that the percentage of gains from shares held for less than 30 days was only 5.13%, which was negligible. This supported the assessee's claim of being an investor rather than a trader.

6. Treatment in Books of Accounts:
The assessee treated the shares as investments in the balance sheet, not as stock-in-trade. The AO did not challenge the genuineness of these entries or reject the books of accounts. The Tribunal emphasized that the classification in the books of accounts is a strong indicator of the nature of the transactions.

7. Earning Dividends:
The AO argued that the lack of dividend income indicated a trading motive. The assessee contended that investment decisions are often based on capital appreciation rather than dividends. The Tribunal agreed that earning dividends is not a decisive factor in determining the nature of transactions.

Conclusion:
The Tribunal applied the guidelines from various judicial pronouncements and found that the transactions in shares and mutual funds were made by the assessee as an investor, not as a trader. Consequently, the profit from these transactions should be treated as short-term capital gains, not business income. The Tribunal reversed the orders of the AO and the CIT(A), directing the AO to treat the profit of Rs. 10,52,137/- as short-term capital gains. The appeal of the assessee was allowed.

← Previous Next →