2013 (5) TMI 445 - AT - Income Tax

Gain on shares and mutual funds - short term capital gains v.s business income - assessability of income - assessee is a private limited company in business of consultancy relating to tours and travels and allied service - Held that - On a perusal of the transaction, it is seen that the assessee has shown gain on sale of equity shares at ₹ 91,32,471, and gain on sale of mutual fund of ₹ 92,23,053. For short term capital gains, the number of scrip entered into are 74, however, in most of the cases, the average holding period is far more than 100 days. The over all average of period of holding is around 184 days. Insofar as the allegation of the Revenue is concerned that the number of transactions have been undertaken in the sale of 74 scrips, the same cannot be taken as primary parameter to hold that it should be treated as business activity because it is a known phenomenon in Stock Exchange that a single transaction is split into many smaller transactions while trading in the Stock Exchange through computers. As the assessee has, all throughout, been showing purchase of shares as investment in the books of account and the same has been classified in the balance sheet under the head Investment & has been treated to be capital gain in the assessment years 2004-05 and 2005-06 by the AO under scrutiny proceedings wherein the order has been passed u/s 143(3). In the assessment year 2008-09, the Commissioner (Appeals) has accepted the gain from transactions of shares to be assessable under the head Short term Capital Gain . Thus, if the same facts are permeating through all the assessment years, it cannot be held that on similar nature of transactions, the income from shares has to be assessed as Income From Business as also all the transactions undertaken are delivery based and the assessee has not undertaken any speculative or derivative trading of shares showing that intention was never to indulge in trading of shares and as no interest bearing borrowed funds or loans have been diverted for purchase of shares rather they have been purchased from the surplus funds available with the assessee & most of the gain has come from sale of mutual funds, which cannot be traded in Stock Exchange. This also goes to prove that the assessee is mainly an investor & the assessee s intention was to purchase the shares for holding it as investment. In view of above gain arising from sale of shares is assessable under the head Short Term Capital Gain and not under the head Income From Business - In favour of assessee.

Issues Involved:
1. Whether the income from short-term capital gains on shares and mutual funds should be treated as business income or capital gains.

Issue-Wise Detailed Analysis:

1. Classification of Income from Shares and Mutual Funds:
The primary issue in these appeals is the classification of income from short-term capital gains on shares and mutual funds as business income or capital gains. The Assessing Officer (AO) treated the short-term capital gains as business income based on various observations, including the frequency and volume of transactions, the nature of the assessee's activities, and the manner in which expenses were claimed. The AO's findings were summarized as follows:
- Regular and numerous transactions in shares.
- Major activity of the assessee being share dealing.
- Expenses primarily related to share trading activities.
- Despite showing shares as investments in the balance sheet, the substance indicated trading activity.
- The intention inferred from the transactions was to trade rather than invest.
- Reference to judicial precedents supporting the view that the assessee's activities were in the nature of business.

2. Assessee's Contentions:
The assessee contended that the gains from shares and mutual funds were capital gains, not business income. Key arguments included:
- The primary intention was to earn dividends and benefit from price appreciation.
- All transactions were delivery-based, reflecting an investor's intention.
- In previous assessment years, similar gains were treated as capital gains.
- No interest-bearing loans were used for share purchases; funds were from interest-free loans from directors.
- The average holding period of shares was substantial, indicating investment intent.

3. Commissioner (Appeals) Decision:
The Commissioner (Appeals) upheld the AO's decision, emphasizing:
- The principle of estoppel does not apply in income tax proceedings.
- The volume and frequency of transactions indicated a profit motive.
- The manner of entry in the books is not decisive; substance over form is critical.
- The transactions showed characteristics of business activities, such as continuous and systematic activity and profit motive.

4. Tribunal's Analysis and Decision:
The Tribunal considered the facts and circumstances, including:
- The assessee consistently showed shares as investments in the balance sheet.
- Similar transactions were treated as capital gains in earlier years under scrutiny assessments.
- All transactions were delivery-based, with no speculative or derivative trading.
- No interest-bearing funds were used for share purchases.
- The majority of gains came from mutual funds, which are not traded on the stock exchange.

The Tribunal concluded that the assessee's intention was to hold shares as investments, not for trading. The remark by the auditor in the financial statement was deemed a standard note as per ICAI guidelines and not indicative of trading activity. The principle laid down by the Hon'ble Jurisdictional High Court in Gopal Purohit's case, where similar transactions were accepted as capital gains, was also applied.

Conclusion:
The Tribunal held that the gains from the sale of shares and mutual funds should be assessed under the head "Short Term Capital Gain" and not "Income From Business." The orders of the Commissioner (Appeals) were set aside, and the appeals by the assessee were allowed. The decision was pronounced in the open court on 5th April 2013.

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