2012 (7) TMI 400 - AT - Income Tax

Treatment of surplus of shares transactions as long term capital gains as against business profits assessed by the AO - Held that - Appellant has been maintaining two separate portfolios, one in the name of his proprietorship concern where the shares and securities are held as trading assets and second in his own account where the investments are made on long term basis and the shares and securities are held as long term investment - the assessee has been returning profit and loss in the trading account as business income and the surplus arising on account of purchase and sale of shares in his own account as short term/long term capital gain/loss for a number of years and this practice has been accepted by the AO all along. In respect of the purchase and sale of shares made by the assessee in his personal capacity in the code allotted in his personal name, Security Transactions Tax has been paid by the assessee and income from sale of shares has all along been accepted under the head shortterm/ long-term capital gains and the mere volume of transactions transacted by the assessee would not alter the nature of transaction - thus in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts - against revenue.

Summary

Issues Involved:
1. Whether the surplus from share transactions should be treated as long-term capital gains or business profits.
2. The appellant's right to amend or add grounds of appeal.

Detailed Analysis:

Issue 1: Treatment of Surplus from Share Transactions

The primary issue is whether the surplus from share transactions should be classified as long-term capital gains or business profits. The Revenue challenged the decision of the CIT(A) who treated the surplus as long-term capital gains, contrary to the Assessing Officer (AO), who assessed it as business income.

Facts and Findings:
- The assessee filed a return declaring income of Rs. 21,228, which included a loss from share transactions and commission from insurance.
- The AO noticed significant transactions in shares and questioned the classification of gains as capital gains instead of business income.
- The assessee argued that the shares were held as investments in a personal capacity, supported by references to CBDT circular no. 4 dated 15.6.2007 and Supreme Court decisions in CIT Vs Associated Industrial Development Company Pvt. Ltd. and CIT Vs. H. Holck Larsen.
- The AO, however, classified the gains as business income based on the manner and magnitude of transactions and the use of a current account for business purposes.

CIT(A) Decision:
- The CIT(A) found that the assessee maintained two separate portfolios: one for trading assets under the proprietorship concern and another for long-term investments in a personal account.
- The CIT(A) noted that the assessee had consistently reported profits from trading as business income and gains from personal investments as capital gains, a practice accepted by the department in previous years.
- The CIT(A) emphasized that the shares in question were held for a significant period, and the assessee earned dividend income, indicating an investment motive rather than trading.
- The CIT(A) also highlighted compliance with Security Transactions Tax and the absence of evidence to support frequent fund transfers between business and personal accounts.

Tribunal's Analysis:
- The Tribunal reviewed various judicial precedents and guidelines, including Supreme Court decisions and CBDT circulars, to determine the nature of share transactions.
- Key factors considered included the intention at the time of purchase, the frequency and volume of transactions, the treatment in books of account, and the assessee's historical reporting of such transactions.
- The Tribunal noted that the assessee's consistent practice of treating similar transactions as capital gains in previous years was accepted by the AO, and no new material changes were presented to justify a different treatment.

Conclusion:
- The Tribunal upheld the CIT(A)'s decision, agreeing that the surplus from share transactions should be treated as long-term capital gains, given the assessee's consistent practice, the nature of transactions, and the lack of contrary evidence from the Revenue.
- The Tribunal emphasized the importance of maintaining consistency in tax treatment across assessment years unless material changes in facts are evident.

Issue 2: Amendment or Addition of Grounds of Appeal

The appellant's right to amend or add grounds of appeal was acknowledged but not exercised, as no additional grounds were raised.

Conclusion:
- The Tribunal dismissed the appeal, affirming the CIT(A)'s findings and maintaining the classification of the surplus from share transactions as long-term capital gains.
- The Tribunal's decision was pronounced in the open court, concluding the proceedings.