2013 (7) TMI 408 - AT - Income Tax

Assessment of income - gain on sale of shares - Short term capital gain v/s business income - assessee is a investor in equity stocks - Held that - Assessee had shown net long term capital gain from sale of shares, which has been claimed as exempt. This long term capital gain has been accepted by the AO. Around fifty percent of scrips have been held for a period ranging between six months to one year, the other scrips have been held for the period ranging mostly between 2 to 6 months. There are only few scrips which has been held up to the period of 30 days on which short term capital gain has been shown. The portfolio of the shares shows that the same have been held under the head investment in the balance sheet. In case of speculative transactions the assessee has dealt only in three scrips which has resulted into loss and in case of futures & options, the assessee has dealt only with one scrip of Allahabad Bank of 1500 shares on 31st October 2005, which was sold on 15th May 2006. Except for the transaction of these few scrips, the assessee has not carried out any non-delivery based transaction or future & options transaction. Thus CIT(A) that the assessee was actively involved mostly in intra-day speculative transaction and future options, appears not to be correct. Assessee has not borrowed any funds for making the investment in shares and separate portfolio has been maintained for the purpose of investment. Also in the earlier years similar nature of transaction and income from sale of shares was shown under the head short term capital gains and long term capital gains and the same has not been disturbed, though return of income has been accepted u/s 143(1). From these facts, it can definitely be gathered that the intention of the assessee in undertaking purchase and sale of shares were not for the purpose of trading but as an investor to get gain from the escalation of the share prices. Thus as per the material on record, it cannot be held that the assessee was doing trading in shares but has had held the shares for the purpose of investment - income earned from sale and purchase of shares in the case of the assessee can very well be held as income from short term capital gains - appeal of the assessee is allowed.

Summary

Issues Involved:
1. Classification of income from the sale of shares as business income or short-term capital gains.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The core issue in this appeal was whether the income of Rs. 11,25,860 from the sale of shares should be treated as business income under Section 28 of the Income Tax Act or as short-term capital gains.

Assessing Officer's Findings:
The Assessing Officer (AO) observed that the assessee was involved in the purchase and sale of shares, both from the secondary and primary markets, and was also engaged in speculative activities and trading in futures and options. The AO noted that the assessee's approach to the securities market indicated an intention for profit-making rather than long-term investment. The AO issued a detailed show cause notice to the assessee, questioning why the short-term capital gains should not be treated as business income. The AO concluded that the assessee was conducting a business of purchase and sale of shares for profit and treated the short-term capital gains as business income.

Assessee's Contentions:
The assessee argued that she was not a dealer in shares and did not have an organized setup for business, such as an office or staff. The assessee contended that the transactions were intended for investment purposes, not business. She relied on the decision of the Tribunal in the case of Gopal Purohit and other cases to support her claim. The assessee also highlighted that the shares were held for varying periods, with significant gains from shares held for longer durations, indicating an investment motive.

CIT(A)'s Observations:
The Commissioner of Income Tax (Appeals) [CIT(A)] analyzed the facts and concluded that the assessee was a trader in shares, not an investor. The CIT(A) listed several factors indicating that the assessee acted as a trader:
- Large scale transactions of purchase and sale of shares on a regular basis.
- Involvement in various business activities related to shares, including intraday speculative transactions and futures options.
- Lack of substantial dividend income.
- Short holding periods for many shares.
- Purchasing shares in bulk and selling them in smaller quantities, akin to a trader.
- High turnover.

Tribunal's Analysis and Conclusion:
The Tribunal carefully considered the submissions and the findings of the AO and CIT(A). It noted that the assessee had shown net long-term capital gains of Rs. 23,47,474, which were accepted by the AO. The assessee had also purchased and sold shares, resulting in short-term capital gains of Rs. 11,25,860. The Tribunal observed that the majority of the gains came from shares held for longer durations, and the assessee had not borrowed funds for investment in shares. The shares were held under the head 'investment' in the balance sheet.

The Tribunal disagreed with the CIT(A)'s findings that the assessee was actively involved in speculative transactions and futures options. It noted that the speculative transactions involved only three scrips, and the futures options transactions were limited to one scrip. The Tribunal emphasized that the intention of the assessee was to earn gains from the escalation of share prices, not to trade in shares. It also highlighted that similar transactions in earlier years were accepted as short-term capital gains.

Final Judgment:
The Tribunal concluded that the income from the sale of shares should be assessed as short-term capital gains, not business income. The appeal of the assessee was allowed, and the income of Rs. 11,25,860 was directed to be assessed under the head short-term capital gains.

Order Pronounced:
The order was pronounced on 8th May, 2013.