2012 (5) TMI 360 - AT - Income Tax

Business income or capital gain - appellant has purchased and sold shares to realize the profit based on share price movements. Normally, this is done by some one who is the activity of share trading - principally it does not seems to be a case of mistake because if it was really a mistake then the broker would not have given the profit to the assessee because in the reverse situation i.e. if it was a case of loss assessee would not have made payment of loss to the broker. Moreover, there is no evidence to show that the broker has accepted that it was a case of mistake by him - When these few transactions are considered with the transactions regarding sale of shares of Wyeth Ltd., which were held for almost 10 years, it becomes clear that assessee is only an investor and cannot be called a trader - transactions of sale and purchase of shares have to be assessed under the head capital gains only - Appeal is allowed

Issues Involved:
1. Classification of income from the sale of shares as "Profits of the business" versus "Short Term Capital Gains."
2. Determination of whether the assessee's activities constituted share trading or investment.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue in this appeal was whether the income of Rs.77,12,025/- from the sale of shares should be treated as "Profits of the business" or "Short Term Capital Gains." The assessee contended that the income should be classified as short-term capital gains, arguing that she was a housewife investing surplus funds in shares and units, and not engaged in the business of trading shares. The assessee highlighted that the shares were treated as investments in the balance sheet and that the frequency of transactions was low, averaging one transaction every eleven days. She also pointed out that most shares were held for more than four months.

The AO, however, observed a high frequency of transactions and noted that the assessee had also engaged in speculative transactions. The AO argued that the pattern of transactions indicated a business activity, with frequent purchases and sales aimed at making profits. The AO cited instances of high transaction volumes on specific dates and concluded that the transactions were in the nature of business, thus classifying the income as business income.

2. Determination of Share Trading vs. Investment:
The CIT(A) upheld the AO's decision, stating that the pattern of transactions suggested trading rather than investment. The CIT(A) noted that the assessee regularly purchased and sold shares throughout the year and was sensitive to market trends, seizing opportunities to make profits. The CIT(A) dismissed the argument that the volume of transactions was low and concluded that the nature of transactions indicated share trading.

Before the Tribunal, the assessee reiterated the arguments made before the AO and CIT(A), emphasizing that the transactions were investments and not business activities. The assessee pointed out that most transactions involved shares acquired through IPOs and that the large number of transactions on specific dates were due to a single order being split by the electronic system. The assessee also highlighted that previous assessment years had treated similar gains as short-term capital gains, arguing for consistency.

The Tribunal considered the rival submissions and found that the assessee's activities did not constitute share trading. The Tribunal noted that the assessee had shown long-term capital gains from shares held for many years and that the major transactions involved reinvestment of proceeds from long-held shares. The Tribunal also observed that the transactions were few and primarily involved shares acquired through IPOs. The Tribunal concluded that the assessee was an investor, not a trader, and directed that the transactions be assessed under the head "capital gains."

Conclusion:
The Tribunal set aside the order of the CIT(A) and directed the AO to classify the income from the sale of shares as "Short Term Capital Gains" rather than "Profits of the business." The appeal was allowed, and the transactions were to be assessed under the head "capital gains."

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