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2011 (11) TMI 499 - AT - Income TaxPurchase and sale of shares Short term capital gain vs Business income - Nature of Income Held that - Once the AO accepted the transaction as investment in the earlier year and also in the subsequent years, then, in the absence of any glaring material change in the facts and circumstances, the AO ought to have maintained the consistent view on the issue. AO cannot be allowed to treat the share as stock in trade when accepted the same as investment in the earlier year. Further, consistency in the pattern of purchase and sales of share over the years and also uniformity in treatment of the transactions, shows that the intention of the assessee to hold the share as investment. Also the like investment made out of own funds or borrowed funds, frequency of transactions, valuation of shares in balance sheet etc the income is assessable as short term capital gain. See Gopal Purohit. Versus JCIT (2009 (2) TMI 233 - ITAT BOMBAY-G).- Decided in favor of assessee
Issues Involved:
1. Whether the income earned by the assessee on purchase and sale of shares is business income or short-term capital gain? Issue-wise Detailed Analysis: 1. Nature of Income from Share Transactions: The primary issue for adjudication was whether the income earned by the assessee from the purchase and sale of shares should be classified as business income or short-term capital gain. The assessee, an individual involved in family-run firms and companies, had consistently declared income from share transactions as short-term capital gain since the Assessment Year (AY) 2002-03, which was accepted by the department except for AYs 2005-06 and 2006-07. The Assessing Officer (AO) reclassified this income as business income due to the high frequency and volume of transactions, and the short holding periods of the shares. 2. Consistency in Assessments: The CIT(A) upheld the AO's decision for AY 2005-06 but reversed it for AY 2006-07, citing the Tribunal's decision in Gopal Purohit v. Jt. CIT, which allowed the assessee's claim. The Tribunal emphasized the importance of consistency in assessments, noting that the AO had accepted the transactions as investments in previous and subsequent years. The Tribunal cited the principle that, in the absence of any significant change in facts or circumstances, the AO should maintain a consistent approach. 3. Analysis of Transactions and Intention: The Tribunal examined the details of the transactions, including the holding periods and the nature of the funds used. It was noted that the assessee used personal funds, not borrowed money, for purchasing shares, which were consistently shown as investments in the balance sheet. The Tribunal found that the assessee's intention was to hold the shares as investments rather than for trading purposes, as evidenced by the treatment of shares in the books of accounts and the substantial holding periods for many shares. 4. Precedent and Guiding Principles: The Tribunal referred to various precedents and the CBDT circular dated 15.6.2007, which outlines the criteria for determining whether transactions are in the nature of trade or investment. The Tribunal concluded that the facts of the case indicated the assessee's intention to hold the shares as investments. 5. Specific Findings: - For AY 2005-06, the assessee declared short-term gains of Rs. 79,96,944 (taxable at 30%) and Rs. 1,24,09,333 (taxable at 10% post-amendment) and long-term gains of Rs. 10,81,261 (exempt under section 10(38)). - The AO treated the total short-term gains of Rs. 2,04,06,277 as business income but accepted the long-term gains as declared. - For AY 2006-07, the assessee declared short-term gains of Rs. 1,97,10,401 and business income from derivatives of Rs. 2,28,36,122. - The Tribunal noted that the assessee's pattern of transactions and the treatment of shares as investments were consistent over the years. 6. Tribunal's Conclusion: The Tribunal concluded that the income from the purchase and sale of shares held as investments should be assessed as capital gains and not as business income. The Tribunal emphasized the importance of the assessee's intention at the time of purchase, the consistent treatment of shares as investments, and the absence of borrowed funds for these transactions. Final Judgment: The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, thereby classifying the income from share transactions as short-term capital gain rather than business income for both AY 2005-06 and AY 2006-07.
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