2011 (5) TMI 525 - AT - Income Tax

Share transactions - Capital gains or busniss income - as submitted by assessee that the average period of holding of shares in all the transactions of purchase and sale of shares was about 300 days - Held that - There were no funds borrowed by the assessee for making investment in shares and all these investments were made by it out of own fund - if all these relevant facts of the assessee s case are taken into consideration in totality, it becomes abundantly clear that transactions in shares were made by the assessee as an investor and not as a trader and the profit earned by it from the said transactions was capital gains and not business income as rightly held by the CIT (Appeals) - Appeal of the Revenue is dismissed.

Issues Involved:
1. Classification of income from share transactions as either capital gains or business income.

Detailed Analysis:

Issue 1: Classification of Income from Share Transactions

Arguments by the Assessing Officer:

1. Primary Activity: The main activity of the assessee was share trading, with advisory income earned only from one party.
2. Volume and Frequency: The assessee engaged in 434 trading transactions resulting in short-term capital gains (STCG) and 90 transactions involving shares held for more than a year.
3. Dividend Yield: The investment of Rs. 10.39 crores yielded a dividend of only Rs. 7.80 lakhs (0.78%), which was considered insufficient to prove the intention of investment.
4. Nature of Transactions: The transactions could be given the color of either investment or business.
5. Investor Intention: Citing Pari Mangaldas Girdhardas v. CIT, if the intention is to profit, such income should be treated as business income.
6. Turnover: The turnover of Rs. 2.43 crores and the frequency of transactions indicated no intention for investment.
7. Balance Sheet Treatment: The treatment of shares as investment in the balance sheet was not conclusive evidence of investment intention.
8. Consistency in Treatment: Prior and subsequent assessments by the Department were not conclusive proof of investment.
9. Memorandum of Understanding: The authorization for investment activity in the memorandum was not proof of investment intention.
10. Profit Motive: As per Fidelity Advisors Series, purchase and sale of shares with a profit motive would result in business income.

Arguments by the Assessee:

1. Company Background: The appellant is a public limited company listed on the Bombay Stock Exchange, incorporated in 1994.
2. Business Activity: The company's main activity was consultancy services, and surplus money was invested in shares and mutual funds.
3. Book Entries: All entries in the books of account supported the fact that shares were held as investments.
4. Transaction Count: The assessee disputed the number of transactions cited by the Assessing Officer, asserting 164 transactions for STCG and 55 for long-term capital gains (LTCG).
5. Holding Period: The average holding period for shares was 115 days for STCG and 523 days for LTCG.
6. Dividend Yield Correction: The correct average investment was Rs. 3.48 crores, yielding a 2.24% return, not 0.78%.
7. Historical Treatment: For the last 11 years, share transactions were recorded as investments, not stock-in-trade.
8. Investment in Unlisted Shares and Mutual Funds: Significant investments in unlisted shares and mutual funds indicated an investment intention.
9. Consistency in Treatment: The Department had consistently treated income from share transactions as capital gains in prior years.
10. Transaction Nature: All transactions were delivery-based, with no day trading.
11. Own Funds: Investments were made from own funds, not borrowed amounts.
12. CBDT Circular: Citing Circular No. 4, no single criterion is decisive; the totality of facts should be considered.

Findings of CIT (Appeals):

1. Average Holding Period: Shares sold for LTCG were held for an average of 523 days, and for STCG, 115 days.
2. Portfolio Maintenance: The assessee maintained only one portfolio (investment) and treated all shares as investments since incorporation in 1994.
3. No Borrowed Funds: Investments were made from own funds, with no intra-day trading or trading in futures and options.
4. Investment in Unlisted Companies and Mutual Funds: Substantial investments were made in unlisted companies and mutual funds.
5. Historical Treatment: The Department had always assessed income from share transactions as capital gains.

Tribunal's Analysis and Judgment:

1. Intention and Conduct: The intention behind purchasing shares is crucial and must be inferred from the facts and conduct of the assessee.
2. Guidelines from Sarnath Infrastructure (P.) Ltd.: The Tribunal applied principles from the Sarnath Infrastructure case, considering aspects like the intention at the time of purchase, treatment in books, frequency of transactions, and whether the assessee borrowed funds for investment.
3. Memorandum of Association: The main object was to advise clients on investments, not trading.
4. Consistent Treatment: The consistent treatment of shares as investments in the books and prior assessments supported the assessee's claim.
5. No Borrowed Funds and No Day Trading: Investments were made from own funds with no intra-day trading or futures and options trading.
6. Totality of Facts: Considering the totality of facts, the Tribunal agreed with the CIT (Appeals) that the transactions were made as an investor, not a trader.

Conclusion:

The Tribunal upheld the CIT (Appeals) decision, directing the Assessing Officer to treat the profit earned from share transactions as capital gains and not business income. The appeal by the Revenue was dismissed.

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