2012 (8) TMI 396 - AT - Income Tax

Capital gain vs Business income - dispute regarding nature of income from sale and purchase of shares - assessee alleged of involved in scam of getting allotment of shares reserved for small investors by making multiple applications in ficticious /benami names - Held that - It is found that assessee was financing such activities. Shares allotted were transferred by Smt. Roopal N. Panchal and M/s. Sugandh Estate and Investments P. Ltd.(in whose case search was conducted revealing involvement of assessee in scam) to the assessee and other financiers who sold shares in the market on the day of listing or immediately thereafter for making profits. It is therefore clear that the assessee had acquired shares in public issues from borrowed funds through an organized effort almost at allotment price, through irregular and illegal manner and selling them on profit soon after shares were listed on stock exchange. The income from share transactions has, therefore, been rightly assessed as business income, however, Security Transaction tax (STT) has to be allowed as a deduction - Decided against assessee.

Summary

Issues:
Nature of income from sale and purchase of shares.

Analysis:
The appeal concerned the nature of income from the sale and purchase of shares for the assessment year 2006-07. The Assessing Officer (AO) noted that a search and seizure action revealed that the group involved in trading shares had engaged in irregular activities, including cornering IPO shares through multiple applications in fictitious names. The group transferred shares to financiers for profit, with the assessee being one of the financiers. The AO scrutinized the assessee's transactions, which showed substantial purchases of shares and mutual fund units. The assessee declared the income as short-term capital gain but later agreed to assess it as business income. The AO concluded that the assessee was trading in shares due to the nature of transactions and short holding periods.

Upon appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee's activities were part of a larger scam and organized profit-maximizing efforts. The CIT(A) affirmed the income treatment as business income. The assessee then appealed to the Tribunal, reiterating that they were investors with limited transactions, although the quantum was significant. The assessee also sought a deduction for Security Transaction Tax (STT).

After considering the arguments, the Tribunal analyzed the transactions and the assessee's conduct. It noted the organized nature of share acquisitions and quick sales for profit, indicating a trading activity rather than investment. Referring to legal precedent, the Tribunal affirmed that the income should be treated as business income. However, it directed the AO to allow the STT deduction as per the law. The Tribunal dismissed the assessee's appeal, upholding the income classification as business income and ordering the STT deduction.

In conclusion, the Tribunal's decision confirmed the income from share transactions as business income due to the assessee's trading activities, despite the initial declaration as capital gains. The judgment emphasized evaluating the actual conduct of the assessee to determine the nature of transactions, in line with legal principles and previous assessments.