2012 (8) TMI 269 - AT - Income Tax

Treatment of capital gain earned by the assessee - AO stated Profit on Sale of Shares should not be treated as Business Income - Held that - The assessee was investing in shares and securities and also applying for initial public offer. After holding the shares for reasonable period, whenever occasion arose, the assessee sold the same and offered short term capital gain on sale of shares - the assessee has earned capital gains only in respect of delivery based shares - existence of profit motive cannot be taken as decisive test for treating any share dealing transaction as business activity as investments are also made with the motive and intention on earning profits - where the assessee has shown income from delivery based transaction as capital gains and non delivery based transaction as business income that intention of the assessee was to make investment in shares and that the assessee can have two portfolios with the one for investment and other for share trading - Investment in shares were made for earning dividend income which was also offered by assessee in his return of income - in favour of assessee.

Summary

Issues:
Treatment of capital gain as business income

Analysis:

1. Issue: Treatment of capital gain earned by the assessee as business income

- The Assessing Officer observed that the assessee had shown income from short term capital gains on the sale of securities, leading to the question of whether it should be treated as business income. The assessee argued that they were not trading in equity shares and that their intention was to invest in shares for dividends and as a form of investment, not as stock-in-trade for trading purposes. The assessee provided various reasons and evidence to support their claim, including the absence of speculative transactions, lack of derivatives-based transactions, and the holding of shares for more than 3 months before selling them. The assessee also cited relevant legal precedents to support their position.

2. Analysis of CIT(A) Order:

- The CIT(A) held that the assessee's activities were indeed investments in shares, and therefore, the profit from the sale of such investments should be taxed as capital gains, not as business profit. The CIT(A) examined the details of the share transactions and found that most transactions were through initial public offers and delivery-based, with a focus on earning dividend income. The CIT(A) also noted that the shares were not held as penny stocks or for short periods for quick profit-making, indicating a genuine investment intent by the assessee. The CIT(A) emphasized that the presence of a profit motive alone cannot determine whether a share transaction is a business activity, as investments are also made with the intention of profit. The CIT(A) directed the Assessing Officer to treat the income as short-term capital gains as declared by the appellant.

3. Appellate Tribunal's Decision:

- The Appellate Tribunal agreed with the CIT(A) and found that the assessee was investing in shares and securities, not engaging in trading activities. The Tribunal noted that the assessee primarily earned capital gains from delivery-based shares held for a reasonable period. The Tribunal highlighted the distinction between investment activities and business activities in share transactions, citing legal precedents and the intention of the assessee to earn profits through investments. The Tribunal upheld the CIT(A)'s decision to treat the profit from the sale of shares held as investments as short-term capital gains, dismissing the Revenue's appeal.

4. Conclusion:

- The Tribunal's decision affirmed the treatment of the profit arising from the sale of shares as short-term capital gains rather than business income, based on the assessee's investment intent, holding period, and nature of transactions. The case highlighted the importance of distinguishing between investment activities and business activities in share dealings, emphasizing the motive behind the transactions and the nature of the shares held.