2012 (12) TMI 567 - AT - Income Tax

Share transactions in a particular case should be treated as investment activity or trading activity Assessee consider income from sale of shares as Capital Gain Held that - The shares which have been sold within three months constitute about 90% of transactions. The pattern of transactions clearly shows that the assessee is trading in shares and is not an investor. Therefore such income shall be treated as business income In so far as long term capital gain is concerned, those shares have been sold after one year and, therefore, considering the holding period, volume and frequency, the income declared by the assessee as long term capital gain is reasonable.

Summary

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

Analysis:
The appeal was against the CIT(A) order for the assessment year 2007-2008, specifically concerning the nature of income from share transactions. The Assessing Officer (AO) noted that the assessee declared income from business, short term capital gain, and long term capital gain from shares, except bank interest. The AO observed frequent buying and selling of shares by the assessee, mostly within a few days, and asked for justification for not treating the income as business income. The assessee claimed to be both a trader and investor, maintaining separate portfolios for trading and investment. However, the AO concluded that the assessee was engaged in a share trading business due to the volume, frequency, and holding period of transactions.

The CIT(A) accepted the assessee's explanation, noting the distinction between trading and investment shares maintained by the assessee. The CIT(A) highlighted the delivery-based transactions and accepted the claim of the income from shares held for investment as capital gains. The revenue, aggrieved by this decision, appealed before the Tribunal.

During the appeal, the revenue argued that the assessee's regular buying and selling of shares indicated trading activity, not investment. The assessee's representative countered, emphasizing the separate investment portfolio and citing transactions where shares were held for over three months and even more than a year. The Tribunal analyzed the facts and circumstances, noting the debate on whether share transactions constitute investment or trading activity. It emphasized that each case must be evaluated individually based on factors like frequency, volume, holding period, and actual conduct of the assessee.

The Tribunal examined the transaction details provided, revealing that most shares were sold within a short period, indicating trading activity. It dismissed the reliance on a previous case, clarifying that not all delivery-based transactions are necessarily investment activities. The Tribunal concluded that the short term capital gain was business income due to the trading nature of the transactions. However, it accepted the long term capital gain as reasonable considering the holding period, volume, and frequency. Therefore, the Tribunal partly allowed the appeal, upholding the AO's decision on short term capital gain but accepting the CIT(A)'s decision on long term capital gain.

In conclusion, the appeal of the revenue was partly allowed, highlighting the distinction between trading and investment activities in share transactions based on the specific facts and circumstances of the case.