2012 (11) TMI 383 - AT - Income Tax

Business income or short term capital gain sale of shares - company is having an investment portfolio and has held certain shares in stock-in-trade Held that - Company decided to convert trading portfolio into investments vide resolution of the Board in Annual General Meeting to convert the shares from stock in trade to investments - assessee has taken the market value on 31.3.2004 as the cost of the acquisition without taking the benefit of the indexation, the difference between the sales price and the cost of acquisition has been offered for taxation as short term capital gain in favor of assessee

Issues Involved:
1. Classification of income from the sale of shares as business income versus short-term capital gain.

Detailed Analysis:

Issue 1: Classification of Income from Sale of Shares
The primary issue in this appeal is whether the income generated from the sale of shares should be classified as business income or short-term capital gain. The Assessing Officer (AO) treated the income as business income, while the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) ruled it as short-term capital gain.

Arguments and Contentions:
- Revenue's Argument: The AO argued that the frequent transactions of purchase and sale of shares indicated a business activity, thus treating the gains as business income.
- Assessee's Argument: The assessee contended that the shares were held as investments and not as stock-in-trade, and thus the profits should be assessed under capital gains. The assessee referenced a previous favorable ruling for Assessment Year (AY) 2005-06, where similar facts were adjudicated by the Tribunal.

Tribunal's Findings:
1. Consistency with Previous Rulings: The Tribunal noted that the CIT(A) had followed its earlier decision for AY 2005-06, where the gains from the sale of shares were treated as short-term capital gains. This decision was upheld by the Tribunal in ITA No.666/Del/2010 dated 30th May 2011.

2. Nature of Transactions: The Tribunal examined the nature of the transactions and found that the assessee had converted shares from stock-in-trade to investment portfolio through a board resolution dated 22nd April 2004. The market value as of 31st March 2004 was taken as the cost of acquisition, and the difference between the sale price and this cost was offered as short-term capital gain.

3. Precedent and Judicial Principles: The Tribunal referred to its decision in the case of DCIT Vs. M/s Chaudhary Associates (ITA No. 1241/Del/2010), where similar facts led to the gains being treated as capital gains. The Tribunal emphasized that the revenue did not present any material differences in the facts for the current year compared to AY 2005-06.

4. Separate Books of Account: The Tribunal noted that the assessee maintained separate books for trading and investment portfolios, reinforcing the classification of shares as investments.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, directing the AO to assess the profits from the sale of shares under the head "Capital Gain" rather than as business income. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal.

Summary:
The ITAT Delhi ruled in favor of the assessee, confirming that the income from the sale of shares should be treated as short-term capital gain and not as business income. This decision was consistent with previous rulings for the assessee in similar circumstances, and the Tribunal found no new evidence from the revenue to alter this classification. The appeal by the revenue was dismissed.

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