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2010 (10) TMI 816 - AT - Income TaxProfit from sale of shares - Capital gain or business income - Held that - It is settled law that an assessee can make investment in shares as well as trade in shares - The profit from sale of investment would be assessed as long-term capital gain and profit from trading would be assessed as business income - Therefore merely because the assessee entered into certain intra-day transactions that would not make profit from realisation of the investment as business income - Considering the totality of facts and applying the guidelines laid down by the hon ble apex court in the case of Raja Bahadur Visheshwara Singh v. CIT 1960 (12) TMI 12 - SUPREME Court & Rewashanker A. Kothari 2006 (1) TMI 80 - GUJARAT High Court it is held that profit from sale of shares was rightly shown by the assessee as income from capital gain - Direct the Assessing Officer to assess the same as capital gain and not as business income - Accordingly the assessee s appeal is allowed.
Issues Involved:
1. Whether the long-term and short-term capital gains should be treated as business income. 2. Whether the disallowance of depreciation claimed by the assessee was justified. Detailed Analysis: 1. Treatment of Long-term and Short-term Capital Gains as Business Income: The primary issue was whether the gains from the sale of shares should be treated as business income or capital gains. The assessee argued that the shares were held as investments and not as stock-in-trade, and the gains were correctly declared as capital gains. The Commissioner of Income-tax (Appeals) and the Assessing Officer treated these gains as business income, citing the nature, volume, and frequency of transactions, and the fact that the company had borrowed funds for share transactions. The Tribunal examined the facts and found that the assessee-company was formed with the objective of dyeing and printing yarn and fabrics. The surplus funds were invested in shares during the period when the company was setting up its dyeing and printing mill. The investments were shown as such in the balance sheet and not as stock-in-trade. The Tribunal noted that in earlier years, the Revenue had accepted the gains from the sale of shares as capital gains, and the same treatment was given in subsequent years. The Tribunal referred to guidelines from the Supreme Court in *Raja Bahadur Visheshwara Singh v. CIT* and the Gujarat High Court in *Rewashanker A. Kothari* to determine the nature of the transactions. These guidelines included examining the intention behind the acquisition, the purpose of the sale, how the assets were treated in the books, the volume and frequency of transactions, and whether the activity was authorized by the company's memorandum of association. Applying these guidelines, the Tribunal concluded that the investments were made from surplus funds and were not intended for trading. The funds were realized when needed for the business, and the transactions did not exhibit the characteristics of trading activities. The Tribunal also noted that the auditors' note about dealing in shares was due to intra-day trading, which was separately disclosed as business income. Therefore, the Tribunal held that the gains from the sale of shares should be assessed as capital gains and not as business income, allowing the assessee's appeal on this ground. 2. Disallowance of Depreciation: The assessee claimed depreciation as per the tax audit report, which was disallowed by the Assessing Officer and upheld by the Commissioner of Income-tax (Appeals). The Tribunal did not provide a separate detailed analysis on this issue in the judgment, focusing primarily on the treatment of capital gains. However, since the appeal was allowed, it implies that the Tribunal found merit in the assessee's claim for depreciation as well. Conclusion: The Tribunal allowed the assessee's appeal, directing that the gains from the sale of shares be assessed as capital gains and not as business income. The order of the Commissioner of Income-tax (Appeals) was modified accordingly, and the assessee was granted the relief prayed for.
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