2012 (12) TMI 780 - AT - Income Tax

Sale and Purchase of Shares Business Income vs Capital Gain - Held that - Appellant has earned business income on non delivery based transactions for A.Y.2004-2005 but that does not mean that income earned on sale of shares held as investment can be taxed as business income in the subsequent years. The appellant has made clear distinction between delivery based and non delivery based transactions and admitted income accordingly and except for A.Y.2004-2005, the appellant did not indulge in any non delivery based share transactions. Thus even shares purchased as investment had to be sold within a short time depending on the market conditions. Thus, the sale of shares was only with a view to protect the amount invested by the appellant which would not convert the investment into stock-in trade. It is found from the balance sheet filed that the appellant held shares as investment and after transferring the shares in the name of the appellant the shares were sold as evidenced by the demat account and the STT was paid at a higher rate application to the investor and stand of the A.O. is no longer valid in the light of the decision of CIT Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT - in favour of assessee.

Summary

Issues:
1. Classification of income from share trading as business income or capital gains.

Analysis:
The appeal involved a dispute regarding the classification of income from share trading as business income or capital gains for the assessment year 2007-08. The Assessing Officer (A.O.) noted that the assessee had shown capital gains and income from dividends as exempted. The A.O. observed that the assessee bifurcated credit entries and offered profits/loss on the sale of shares as short-term/long-term capital gains. The A.O. concluded that the expenses were debited to the capital account to reduce tax liability. The A.O. assessed the short-term and long-term capital gains as income from business due to the organized nature of share transactions and profit motive.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] directed the A.O. to accept the assessee's claim of short-term/long-term capital gains based on factual findings and precedents. The Revenue challenged this decision, arguing that the assessee was engaged in the business of share trading due to the large volume of transactions and profit motive. The Revenue contended that the nature of transactions did not change based on the holding period of shares.

During the hearing, the Departmental Representative (D.R.) supported the A.O.'s order, while the assessee's counsel cited previous tribunal decisions and High Court judgments favoring the assessee's position. The Tribunal analyzed the facts and held that the transactions were investments in shares, not trading activities. The Tribunal noted that previous decisions supported the assessee's claim and dismissed the Revenue's appeal. The Tribunal emphasized that the consistent view upheld by the High Court established that the share transactions were in the nature of investments, not business activities.

In conclusion, the Tribunal upheld the CIT(A)'s decision to accept the assessee's claim of capital gains over business income, dismissing the Revenue's appeal.

This detailed analysis illustrates the key issues and the reasoning behind the Tribunal's decision in the case regarding the classification of income from share trading as capital gains instead of business income for the assessment year 2007-08.