2011 (12) TMI 391 - AT - Income Tax

Short term capital gain or business income - assessee claimed Long Term Capital Gain on ₹ 1,20,07,344/- and Short Term Capital Gain of ₹ 2,09,20,782/- aggregating to ₹ 3,29,28,126 - Assessing Officer has treated said capital gain shown by assessee by purchase and sale of shares as business income - In addition to the Capital Gains earned from the Investment in shares, the appellant had declared income from dividend of ₹ 30.59 lacs; received from the said shares being held as investment by the appellant - The intention of the appellant was to earn dividend income and also to reap the benefits of appreciation in price of shares occasionally, which every investor in shares always does - The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether in a given case, the shares are held by the assessee as investment or stock-in-trade - Held that assessee is dealing in or trading in shares but the entire investment in purchase and sale of shares/mutual fund has been shown by assessee under the head investment only and no investment is shown under the head trading activity - Merely because assessee has shown shares/mutual fund under the head investment cannot alter the situation. It is the settled proposition of law that entries in books of account are not conclusive - Held that transactions entered into by assessee for purchases and sale of shares in the year under consideration is in the nature of trade and not by way of investment - Appeals are dismissed

Summary

Issues Involved:
1. Classification of Short Term Capital Gains as Business Income.
2. Consistency in treatment of similar transactions in previous assessment years.
3. Determination of the nature of transactions (investment vs. trading).
4. Application of CBDT Circular No. 4/2007.
5. Re-computation of income based on holding periods.

Detailed Analysis:

1. Classification of Short Term Capital Gains as Business Income:
The primary issue is whether the gains from the purchase and sale of shares and mutual funds should be treated as Short Term Capital Gains (STCG) or as business income. The Assessing Officer (AO) treated the gains as business income, citing numerous and regular transactions, major activity in shares, and expenses directed towards share trading. The CIT(A) confirmed this, noting high volume and frequency of transactions with short holding periods, indicating a profit motive.

2. Consistency in Treatment of Similar Transactions in Previous Assessment Years:
The assessee argued that similar transactions in previous years were treated as capital gains and not business income. The assessee emphasized that the modus operandi remained unchanged, and the investments were shown under the head "investment" in the balance sheet. However, the tribunal noted that the principle of res judicata does not apply to income tax proceedings, and each assessment year is separate and distinct.

3. Determination of the Nature of Transactions (Investment vs. Trading):
The tribunal considered various factors to determine the nature of transactions, including volume, frequency, regularity, and the intention behind the transactions. The tribunal observed repeated transactions in the same scrips on the same day and short holding periods, indicating a trading motive rather than investment. The tribunal also noted that the assessee's main business was consultancy, and substantial funds were invested in shares, with a low yield from dividends.

4. Application of CBDT Circular No. 4/2007:
The CIT(A) and the tribunal referred to CBDT Circular No. 4/2007, which advises assessing officers to consider the total effect of all principles to determine whether shares are held as investments or stock-in-trade. The tribunal agreed with the CIT(A) that the transactions indicated a profit motive, aligning with the guidance provided by the circular.

5. Re-computation of Income Based on Holding Periods:
The tribunal noted discrepancies in the holding periods of certain shares, where some were held for more than 365 days, qualifying them as Long Term Capital Gains (LTCG). The tribunal directed the AO to re-compute the income, treating gains from shares held for more than 365 days as LTCG, while maintaining the classification of other gains as business income.

Conclusion:
The tribunal upheld the CIT(A)'s decision to treat the gains from the sale of shares and mutual funds as business income, except for transactions where the holding period exceeded 365 days, which should be treated as LTCG. The tribunal emphasized the importance of the intention behind transactions and the consistency in applying legal principles to determine the nature of income. The appeals for both assessment years 2006-07 and 2007-08 were dismissed, subject to the re-computation of income as directed.