2012 (4) TMI 266 - AT - Income Tax

Profit from purchase and sale of shares - Capital gain or business income - Held that - assessee did not place any material, other than Board resolution, while the auditor reports and facts for the years under consideration, reflecting intention of the assessee, lead to the conclusion that the assessee is continuing its activities as in earlier years of a trader in shares - the voluminous share transactions were in the ordinary line of the assessee s 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 - the repetition and continuity of the transactions, give them a flavour of trade - ld. CIT(A) was not justified in accepting the claim of the assessee as investor in shares - restore the order of the AO.

Issues Involved:
1. Classification of income from purchase and sale of shares as either business income or capital gains.
2. The validity of the conversion of stock-in-trade into investment.
3. The applicability of various judicial precedents and CBDT instructions to the facts of the case.

Detailed Analysis:

1. Classification of Income from Purchase and Sale of Shares:
The primary issue revolves around whether the profit from the purchase and sale of shares should be treated as business income or capital gains. The Assessing Officer (AO) treated the income as business income, arguing that the transactions were in the nature of trade. The AO noted the substantial number of transactions, the short holding period, and the significant volume of shares traded, which indicated a trading activity rather than investment. The AO relied on various judicial precedents, including the Hon'ble Supreme Court's decisions in CIT v. Associated Industrial Development Co. (P) Ltd. and CIT v. H. Holck Larsen, to substantiate the claim that the transactions were business in nature.

Conversely, the assessee argued that the shares were held as investments, supported by a Board resolution converting stock-in-trade to investments. The CIT(A) accepted this argument, relying on decisions in Sarnath Infrastructure (P.) Ltd. v. Asstt. CIT and Asstt. CIT v. Bright Star Investment (P.) Ltd., and held that the income should be treated as capital gains.

2. Conversion of Stock-in-Trade into Investment:
The AO scrutinized the conversion of stock-in-trade to investments and found it to be motivated by tax benefits. The AO observed that the shares were sold shortly after conversion, indicating that the intention was not to hold them as long-term investments. The AO also noted that the company continued to trade in mutual funds, further supporting the argument that the primary activity was trading.

The CIT(A), however, found the conversion to be genuine, noting that the company had followed the same method of valuation at cost price on a permanent basis and had taken the market value as on 31st March 2004 as the cost of acquisition for the converted shares.

3. Applicability of Judicial Precedents and CBDT Instructions:
The AO and CIT(A) both referred to various judicial precedents and CBDT instructions to support their respective positions. The AO cited the CBDT Instruction No. 4/2007 and decisions of the Hon'ble Supreme Court to argue that the transactions were in the nature of trade. The CIT(A) relied on decisions in Sarnath Infrastructure (P.) Ltd. and Bright Star Investment (P.) Ltd., which supported the assessee's claim of being an investor.

The Tribunal analyzed these precedents and the facts of the case, emphasizing that the cumulative effect of several factors must be considered. The Tribunal noted that the assessee had been trading in shares for many years, and the nature of transactions had not changed materially in the years under consideration. The Tribunal found that the substantial volume of transactions, the short holding period, and the continual increase in turnover indicated a trading activity rather than investment.

Conclusion:
The Tribunal concluded that the CIT(A) was not justified in accepting the assessee's claim of being an investor in shares. The Tribunal restored the AO's order, treating the income from the purchase and sale of shares as business income. The appeals were allowed, and the findings of the CIT(A) were vacated. The Tribunal emphasized that the character of a transaction cannot be determined solely on any abstract test or rule, and the cumulative factors affecting the transactions must be considered.

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