2011 (7) TMI 818 - HC - Income Tax

Capital gain vs. business income - If the appellants had held the shares as stock in trade, and not as investment then such shares would stand excluded from the definition of short-term capital asset, and the profit earned on the sale of such shares would not be exigible to tax as short-term capital gain but as profits and gains from business - If the transaction is in the ordinary line of the assessee s business there would hardly be any difficulty in concluding that it was a trading transaction but where it is not the facts must be properly assessed to discover whether it was in the nature of trade - The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case - It is evident from the order of the Income-tax Appellate Tribunal that the voluminous share transactions were in the ordinary line of the appellants business ; purchase of shares by them was not for the purpose of earning dividend but with the dominant intention of resale in order to earn profits - Appeal is dismissed

Summary

Issues Involved:
1. Classification of share transactions as business income or short-term capital gains.
2. Determination of shares as capital assets or stock-in-trade.
3. Applicability of Section 111A of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of Share Transactions:
The appellants filed their returns declaring income from investment in shares, interest, salary, and capital gains. The assessing authority classified the appellants as traders in shares and treated the income from share transactions as business income rather than short-term capital gains. This classification was based on the appellants' activities, which included high frequency of buying and selling shares, short holding periods, and high turnover due to frequent transactions. The appellants contended that the transactions should be taxed as short-term capital gains under Section 111A of the Act, but this was rejected by the assessing authority, CIT(A), and the ITAT.

2. Determination of Shares as Capital Assets or Stock-in-Trade:
The court examined whether the shares held by the appellants were capital assets or stock-in-trade. According to Section 2(14) of the Act, a capital asset does not include stock-in-trade held for business purposes. The court noted that the intention behind holding the shares, the frequency of transactions, and the nature of the transactions were crucial in determining whether the shares were capital assets or stock-in-trade. The court cited several precedents to elucidate the distinction between capital assets and stock-in-trade, emphasizing that the dominant intention of the appellants was to trade shares for profit rather than hold them as investments.

3. Applicability of Section 111A:
Section 111A of the Act relates to tax on short-term capital gains from equity shares subject to securities transaction tax, taxed at a lower rate of 15%. The court noted that if the shares were held as capital assets, the gains would fall under Section 111A. However, since the shares were classified as stock-in-trade, the profits from their sale were treated as business income and taxed at a higher rate. The court emphasized that the classification of shares in the appellants' books as investments was not conclusive. The appellants' intention, as inferred from their conduct and the nature of transactions, indicated that the shares were held as stock-in-trade.

Conclusion:
The court upheld the findings of the assessing authority, CIT(A), and ITAT, concluding that the shares were held as stock-in-trade and not as investments. The factors considered included the high frequency of transactions, short holding periods, and the intention to make quick profits. The court dismissed the appeals, stating that the orders of the lower authorities were well-reasoned and did not warrant interference. The profits from the sale of shares were correctly treated as business income, and the appeals under Section 260A of the Act were dismissed.