2013 (5) TMI 717 - AT - Income Tax

Transaction in shares subject to STT - taxable under the head income from business or profession OR capital gain - Held that - Respectfully following the decision of Commissioner Of Income-Tax Versus V. A. Trivedi 1987 (1) TMI 12 - BOMBAY High Court CIT(A) was not justified in confirming the order of AO, who took the transaction as business transaction instead of treating the same as short term capital gain. CIT(A) has confirmed the order of AO by observing that the transactions are frequent transactions, however, the holding period cannot be taken into consideration because under the Act itself, it has been provided that where the holding period of shares are more than one year then the long term capital gain will be applicable and where the holding period is less than one year, then the short term capital gain will be applicable, subject to the transaction are shown under the head investment portfolio. Therefore, whether the transaction are frequent or holding period is less, they are shown under the head investment portfolio, therefore, the transaction which have been shown under the head investment portfolio and, hence, the short term capital gain or long term capital gain as the case may be, will be applicable. In view of these facts and circumstances, the grounds of the assessee for both of the years allowed and direct the AO to assess the profit under the head short term capital gain instead of under the head business profit. In favour of assessee.

Issues Involved:
1. Classification of income from share transactions as "income from business or profession" versus "capital gain."
2. Consistency in tax treatment across different assessment years.
3. Frequency and nature of share transactions.
4. Onus of proof regarding the nature of transactions.
5. Applicability of precedents and judicial decisions.
6. Disallowance under Section 14A of the Income-tax Act.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue in both appeals was whether the income earned from share transactions should be classified under "income from business or profession" or "capital gain." The assessee declared the income as short-term capital gain, but the Assessing Officer (AO) reclassified it as business income. The AO's decision was based on the frequency and volume of transactions, suggesting a profit-earning motive indicative of business activity. The AO cited Section 2(13) of the Income-tax Act to support this reclassification.

2. Consistency in Tax Treatment:
The assessee argued that for the assessment year 2006-07, similar transactions were accepted as short-term capital gains under Section 143(3). The Tribunal noted that the department had accepted the assessee's classification in previous and subsequent years (2006-07 and 2009-10), indicating inconsistency in the department's approach for the years under appeal (2007-08 and 2008-09).

3. Frequency and Nature of Transactions:
The AO highlighted the frequent and numerous transactions, including examples of shares purchased and sold within short periods. The AO argued that such frequency indicated trading activity rather than investment. The CIT(A) upheld this view, noting the high number of transactions (690) and the short holding periods, which suggested a business motive rather than investment.

4. Onus of Proof:
The CIT(A) emphasized that the onus was on the assessee to prove that the transactions were investments. The assessee failed to demonstrate that the transactions were not frequent and were made with an investment motive. The Tribunal, however, found that the department did not provide sufficient evidence to prove that the transactions were not investments, especially since the assessee had shown these under the investment portfolio in the balance sheet.

5. Applicability of Precedents and Judicial Decisions:
The Tribunal relied on several judicial precedents, including the decisions in Gopal Purohit vs. JCIT, Ashvinkumar K. Kapadia, and Sanjay Ishwarlal Ranka. These cases supported the assessee's position that frequent transactions do not necessarily indicate business activity if the shares are shown as investments. The Tribunal noted that the legislative framework itself differentiates between short-term and long-term capital gains based on holding periods, which should be respected.

6. Disallowance under Section 14A:
For the assessment year 2008-09, the assessee also contested the disallowance of Rs. 3,74,099 under Section 14A of the Income-tax Act. However, this ground was dismissed as not pressed by the assessee due to the smallness of the amount.

Conclusion:
The Tribunal concluded that the assessee's transactions should be treated as short-term capital gains rather than business income. It directed the AO to assess the profits under the head "short-term capital gain" instead of "business profit." The Tribunal emphasized the importance of consistency in tax treatment and the need to respect the classification of transactions as shown in the assessee's investment portfolio. The appeals were allowed in part, with the issue of disallowance under Section 14A dismissed as not pressed.

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