2012 (9) TMI 718 - AT - Income Tax

Income from purchase and sale of shares - Business Income as contended by Revenue or Short Term Capital Gains - Held that - It is seen that the AO has primarily relied upon the finding of the AO in the immediately preceding AY i.e. AY 2005-06. Such a finding of the AO has been reversed by the CIT(A), wherein, it has been categorically held that the sale of shares and securities in the case of the assessee, amounts to short term capital gain and not business income. Against this order, no second appeal has been filed by the Department, and, hence, it has attained finality. This aspect of the matter has also been accepted by the AO in the subsequent year as evident from the copy of computation of income and the assessment order dated 8-12-2009 passed u/s 143(3). Hence, no infirmity found in order of CIT(A) treating the same as short term capital gains on ground that intention of buying of shares was solely for the purpose of investment which is evident from the investment made in the shares during the year 2005-2006, most of the investments in securities was by way of mutual fund which cannot to be traded in the ordinary course, and assessee has earned a huge dividend income - Decided against Revenue.

Summary

Issues:
Whether the income from purchase and sale of shares is to be assessed as business income or as short term capital gains.

Analysis:
The only issue in this case is determining whether the income from the purchase and sale of shares should be classified as business income or short term capital gains. The appellant, the revenue, challenged the order passed by the CIT(A)-6, Mumbai, regarding the assessment year 2006-2007. The grounds of appeal included contentions that the CIT(A) erred in holding that the transactions involving the purchase and sale of shares resulting in income of Rs. 95.38 lacs do not constitute trading but are transactions on capital account. Additionally, it was argued that the income from the purchase and sale of shares should be assessable as business income under Section 28 of the Income Tax Act, rather than as short term capital gains.

The relevant facts of the case reveal that the assessee is a company engaged in the business of investment in shares and securities. The Assessing Officer treated the income from short term capital gain of Rs. 95,38,765/- as business income based on the treatment in the preceding assessment year. However, the assessee contended that its main object was plantation business, which could not be carried out, leading to the pursuit of investment in shares as an ancillary object. The company's substantial increase in funds, post a demerger scheme, was mostly applied in investments in shares and securities. The assessee argued that the intention behind buying shares was solely for investment purposes, supported by the composition of its investment portfolio and the absence of repetitive transactions on the same scripts.

During the appeal, the CIT(A) considered the contentions of the assessee and concluded that the Assessing Officer's decision to treat the income as business income was primarily based on the previous assessment order, which had been reversed. The CIT(A) noted that the assessee's intention, as evident from its investments, was that of an investor, not a trader. Emphasizing that the investments were made from the company's own funds and not through loans, and that there were no repetitive transactions, the CIT(A) relied on a decision by ITAT Mumbai Bench in a similar case to hold that the income from the sale of shares should be taxed as short term capital gains.

After considering the submissions from both parties, the Tribunal found that the CIT(A)'s reasoning was sound. The Tribunal noted that the Assessing Officer's reliance on the previous year's assessment had been reversed by the CIT(A) and accepted in subsequent years. As no appeal was filed against the CIT(A)'s decision, it had attained finality. Therefore, the Tribunal confirmed the CIT(A)'s finding that the income from the sale of shares should be taxed as short term capital gains, not business income. Consequently, the appeal filed by the revenue was dismissed.