2011 (8) TMI 631 - AT - Income Tax

Nature of Income- Business Income Versus Capital Income - sale of shares- shares held as stock in trade converted to investments in preceding Assessment year- Held that - The assessee was acting only as an investor rather than as trader which is proved by the average holding period of shares being more than two years similiar to an investor, when the IT Act 1961 itself requires only one year holding period to classify capital gain as long term. Instances of sales were less than instances of purchase once again similiar to an investor and mere emphasis on the proposition that asset was initially purchased with the sole intension of selling the same later at a profit, does not qualify it to be an adventure in the nature of trade. Investments are made for being sold at the appropriate time for realizing the capital appreciation. Moreover, all delivery based transactions are to be held as investment transactions and profits arising therefrom have to be taxed as capital gains only. See CITvs Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT . Decided in favor of the assessee.

Issues Involved:
1. Whether the profits earned by the appellant during the year are taxable as capital gains or as business income.
2. The validity of the Assessing Officer's classification of share transactions as business transactions.
3. The implications of converting stock-in-trade into investments.
4. The relevance of the frequency, volume, and regularity of share transactions in determining the nature of income.
5. The impact of the appellant's intention and conduct on the classification of income.
6. The application of relevant case laws and circulars in determining the nature of income.

Detailed Analysis:

1. Taxability of Profits:
The central issue was whether the profits earned by the appellant during the year should be taxed as capital gains or business income. The Assessing Officer (AO) classified the transactions as business income, citing frequent purchases and sales of shares. However, the appellant argued that the shares were held as investments, not for trading. The CIT(A) concluded that the shares were held for long periods, and the majority of transactions were delivery-based, supporting the classification as capital gains.

2. Classification of Share Transactions:
The AO treated the transactions of sale of shares as business transactions, noting the volume and frequency of transactions. The appellant contended that they were an investor, not a trader, and cited limited instances of purchase and sale, long holding periods, and significant dividend income as evidence. The CIT(A) agreed with the appellant, emphasizing the long-term holding and the conversion of shares to investments in previous years.

3. Conversion of Stock-in-Trade to Investments:
The appellant converted part of its shareholdings from stock-in-trade to investments in the year 2004-05 and disclosed this in its final accounts. The AO argued that this conversion was done to take advantage of favorable tax provisions. The CIT(A) found that the conversion was genuine and consistent with the appellant's conduct as an investor, supported by relevant case laws where such conversions were accepted.

4. Frequency, Volume, and Regularity of Transactions:
The AO highlighted the substantial volume and frequency of transactions to classify them as business activities. The appellant countered that the volume of purchases was higher than sales and that they held shares for extended periods, indicative of investment activity. The CIT(A) found that the appellant's pattern of transactions aligned more with investment behavior than trading, considering the long-term holdings and increasing dividend income.

5. Intention and Conduct:
The AO argued that the appellant's initial intention to profit from share transactions indicated a business motive. The appellant maintained that their intention was to invest for capital appreciation and dividend income. The CIT(A) concluded that the appellant's conduct, including the reclassification of shares as investments and the long holding periods, supported their claim of being an investor.

6. Application of Case Laws and Circulars:
The appellant cited several case laws and a circular to support their position. The CIT(A) referenced decisions such as CIT v. Gopal Purohit, which held that delivery-based transactions should be treated as investments, and profits taxed as capital gains. The CIT(A) also considered the decision in ACIT v. Bright Star Investment (P.) Ltd, which supported the appellant's claim of investment income. The CIT(A) found these precedents applicable and relevant to the appellant's case.

Conclusion:
The CIT(A) concluded that the appellant's share transactions should be treated as capital gains, not business income, based on the long-term holding of shares, the conversion of stock-in-trade to investments, and the appellant's conduct as an investor. The appeal by the Revenue was dismissed, affirming the CIT(A)'s decision to classify the profits as capital gains.

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