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2011 (11) TMI 452 - AT - Income TaxSale of shares - Capital gain vs Business income - Held that - If the Department has accepted that some of the shares were purchased and held by the assessee as investment allowing the claim of the assessee for long term capital gain arising from sale thereof, there is no justification for them to contend that the assessee had purchased and held other shares as stock in trade merely because they were sold within a period of one year especially when other facts relevant thereto are almost similar. Further, intention of the assessee at the time of purchase of shares is relevant. See Gopal Purohit (2010 (1) TMI 7 - BOMBAY HIGH COURT ). Decided in favour of assessee.
Issues Involved:
1. Classification of income from sale of shares as either short term capital gain or business income. Detailed Analysis: 1. Classification of Income from Sale of Shares: Facts and Background: - The assessee, an individual, filed a return declaring a total income of Rs. 2,91,69,761/-, which included short term capital gains of Rs. 2,28,16,373/-, income from F&O and speculative transactions of Rs. 64,29,182/-, and long term capital gains of Rs. 1,17,41,141/- claimed as exempt under section 10(38). - The assessee declared income from F&O transactions as business income and profits from delivery-based share transactions as capital gains. - The AO questioned why the profits from share transactions shown under "Capital Gains" should not be treated as business income. Assessee's Submissions: - Investments were made from personal funds. - Shares were shown as investments in the books. - Investments were diversified to safeguard interests. - Transactions were delivery-based and routed through BSE and NSE. - The intention behind transactions should be considered, not the volume or frequency. AO's Findings: - The AO concluded that the assessee was engaged in systematic and organized share trading aimed at profit-making. - The assessee traded in a large volume of shares, frequently changed portfolios, and used borrowed funds for share purchases. - The AO noted that the assessee's primary motive was to earn profit from share dealings, not to receive dividends. - The AO treated the entire profit from share transactions as business income. CIT(A)'s Decision: - The CIT(A) found merit in the assessee's submissions and observed that the assessee had consistently declared capital gains in previous years, which were accepted by the Department. - The CIT(A) noted that the assessee maintained separate portfolios for investments and trading. - The CIT(A) emphasized that the AO did not provide concrete evidence to classify the shares as stock in trade. - The CIT(A) relied on CBDT Circular No. 4/2007 and judicial precedents to support the assessee's claim. - The CIT(A) directed the AO to treat the profits from share transactions as capital gains, both short term and long term. Revenue's Appeal: - The Revenue challenged the CIT(A)'s decision to treat the short term capital gains as business income. - The Revenue argued that the primary motive of the assessee was to earn profit from share transactions. - The Revenue cited various Tribunal decisions supporting the classification of similar transactions as business income. Tribunal's Analysis and Decision: - The Tribunal noted the consistent treatment of the assessee as an investor in previous years. - The Tribunal emphasized that the intention behind the transactions should be considered, not just the period of holding. - The Tribunal observed that the Department did not challenge the CIT(A)'s decision regarding long term capital gains, indicating acceptance of the assessee's investor status. - The Tribunal upheld the CIT(A)'s decision, treating the profits from share transactions as capital gains based on the rule of consistency and the absence of any change in relevant facts. Conclusion: - The Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to classify the profits from share transactions as capital gains, both short term and long term, depending on the period of holding.
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