2013 (5) TMI 552 - AT - Income Tax

Income from share transaction - capital gains v/s income from business - Assessee, an individual is a trader in yarn and dealing in Securities - Held that - The facts of the case are that assessee has shown the Capital Gains from the sale of shares in his return of income. While passing the order, AO has not discussed the reasons as why the income returned under the head Capital Gain should be treated as Business Income . He has not taken into consideration the criteria laid down by the CBDT. Not a single instance has been quoted by the AO about the frequency of shares, holding period of shares, entries in the Books of Accounts and other relevant factors. FAA has dealt issue at length and has deliberated upon all the relevant facts which are decisive for settling the issue. Shares can be held as trader and as an investor also. Similarly, Profit/loss arising from share activities can be assessed under the head Business Income or Income from Other Sources . CBDT vide its Circular No. 4/2007 has indicated a few parameters to be investigated before deciding the issue. Now, it is universally accepted that a single parameter cannot decide the nature of the shares sold and resultant sale proceeds. FAA has dealt in details about the STCG transactions as well as LTCG & has analysed the period of holding and intention of the assessee. He has also taken into consideration that no borrowed funds were utilised by the assessee for making investment in shares & had reached to a logical conclusion that transactions carried out by the assessee were not in the nature of business activity. In favour of assessee.

Summary

Issues:
1. Determination of income from share transactions as capital gains or business income.

Analysis:
The appellant, an individual trader in yarn and securities, filed an appeal against the order of the CIT(A) directing the Assessing Officer to assess income from share transactions under the head capital gains instead of income from business. The Assessing Officer treated the share trading activity as a business due to the consistent dealing in shares by the appellant over the years, the frequency of transactions, and the nature of the transactions in Futures and Options (F&O) segment. The AO considered the appellant's activities as part of 'crude' tax planning and classified the share trading as a business.

The First Appellate Authority (FAA) analyzed the appellant's intention at the time of purchase, the holding period, volume, and other relevant factors to determine whether the appellant was an investor or a trader. The FAA found that the appellant's conduct indicated an investor mindset, holding shares for significant periods, not using borrowed funds, and treating shares as investments in the books of accounts. The FAA concluded that the appellant was an investor, and the profits from share transactions were assessable under the head 'Capital Gains'.

During the appeal before the Appellate Tribunal, the Departmental Representative argued that the FAA did not consider factors like volume, holding period, and intention to determine the nature of transactions as business activities. The Authorized Representative contended that the appellant was an investor, supported by precedents from different ITAT cases. The Tribunal observed that the AO did not provide substantial reasoning to treat capital gains as business income and upheld the FAA's detailed analysis. The Tribunal emphasized that a single parameter cannot determine the nature of share transactions and supported the FAA's conclusion that the appellant's activities were not in the nature of a business.

In conclusion, the Tribunal dismissed the appeal filed by the AO, upholding the FAA's order that the appellant's share transactions should be assessed as capital gains and not business income. The decision was based on a comprehensive analysis of the appellant's conduct, intention, and relevant parameters as per CBDT guidelines and judicial precedents.

This judgment clarifies the distinction between share transactions as capital gains or business income based on various factors and provides guidance on assessing the nature of share activities for tax purposes.