2012 (10) TMI 402 - AT - Income Tax

Capital Gains v/s Income from Business - Held that - Through out the assessee s intention was to maintain two separate portfolios one for the investment purpose and the second for the trading purpose and has segregated his transactions. The assessee has also been consistent in this approach right from earlier years which has been accepted by the Department after full scrutiny and examination. The shares which were held for a period of less than sixty days, the assessee has incurred net loss and maximum gain has come from the shares which were held for a period of nine months or so. Thus, the theory of the AO as well as the CIT(Appeals) gets demolished from the above facts that the assessee has gained a lot and has entered into several transactions. It is a known phenomenon in Stock Exchange that a single transaction is split by the computers trading in the Stock Exchange into many smaller transactions but that does not mean the assessee has carried out several transactions. Thus, the findings of the CIT (Appeals) as well as the AO that the short term capital gain is to be assessed under the head Income From Business solely on account of frequency of transactions cannot be sustained. As decided in The Commissioner of Income Tax Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT if the assessee has maintained two separate books of account, separate portfolios i.e., one in relation to investment in shares and other relating to business activities involving dealing in shares and such an approach has been consistently being followed by the assessee and allowed by the Department, the sale of shares shown under the head Investment cannot be treated and taxed under the head Income From Business . Thus the shares held as investment by the assessee and the income arising on sale of such shares is assessable under the heads Short Term Capital Gains & Long Term Capital Gains and not under the head Income From Business - in favour of assessee.

Summary

Issues Involved:
1. Classification of income from sale of shares as either "Capital Gains" or "Income From Business".

Issue-wise Detailed Analysis:

1. Classification of Long Term Capital Gain as Business Income:
The assessee reported a long-term capital gain of Rs. 28,64,97,522 from the sale of shares, which the Assessing Officer (AO) reclassified under "Income From Business". The AO's rationale was based on the volume and frequency of transactions, the short holding period of shares, and the substantial turnover involved. The AO argued that the transactions were systematic and organized with a profit motive, indicating business activity rather than investment.

The assessee contended that he maintained two separate sets of books-one for personal investments and another for business transactions through a proprietorship firm. This practice had been consistently followed since 1998 and accepted by the Department in previous years. The assessee also highlighted that the investments were made using personal surplus funds without any borrowings and cited the jurisdictional High Court judgment in CIT v/s Gopal Purohit to support his case.

The Tribunal noted that the assessee's intention to maintain separate portfolios for investment and business was evident from the separate books, demat accounts, and bank accounts. The long-term capital gains arose from two scrips with holding periods between 375 and 577 days, indicating an investment purpose. The Tribunal concluded that the long-term capital gains should be assessed under "Capital Gains" and not as "Income From Business".

2. Classification of Short Term Capital Gain as Business Income:
The assessee reported short-term capital gains of Rs. 8,66,41,282, which the AO also reclassified under "Income From Business". The AO's reasoning included the high volume and frequency of transactions, the short holding periods of the shares, and the significant turnover.

The assessee reiterated the arguments made for long-term capital gains, emphasizing the maintenance of separate accounts and the consistent treatment of such transactions in previous years. The assessee provided a detailed analysis showing that most gains came from shares held for 90 days to 9 months, and the net margin from trading was only 1.3%, compared to a higher margin from investments.

The Tribunal observed that the short-term capital gains primarily arose from shares held for more than 90 days, with losses incurred on shares held for less than 60 days. The Tribunal noted that the AO's assessment of transaction frequency was inflated due to the splitting of single transactions by computerized trading systems. Citing the jurisdictional High Court judgments in Gopal Purohit and Suresh R. Shah, the Tribunal held that the short-term capital gains should also be assessed under "Capital Gains" and not as "Income From Business".

Conclusion:
The Tribunal concluded that the income from the sale of shares held as investments should be classified under "Capital Gains" rather than "Income From Business". The impugned order by the Commissioner (Appeals) was reversed, and the grounds of appeal raised by the assessee were allowed. The assessee's appeal was thus allowed.