2013 (7) TMI 801 - AT - Income Tax

Income derived from sale of shares - capital gain v/s income from business or profession - Held that - As can be seen from the submission made by the assessee in earlier years i.e., till assessment year 2005-06, the assessee s income has been accepted as capital gain, further the assessee being an investor has not borrowed any fund to make investment in shares but has used his own funds. There is also no intra-day transaction. If these facts are correct and the assessee has used his own funds and carried on the activities as investor and is consistently showing the income under the head capital gain and the department was also accepting this position upto assessment year 2005-06 then the ratio laid down by the Hon ble jurisdictional High Court in case of M/s Spectra Shares and Scrips V/s. CIT (TMI ID 234348 2013 (6) TMI 173 - ANDHRA PRADESH HIGH COURT) would apply. CIT(A), though, in his order has mentioned specific instances of shares being held for a very short period while coming to his conclusion that the assessee is not an investor but is engaged in a trading activity. However, he has not properly examined the facts whether the assessee has used his own funds and not borrowed funds in the investment in shares, the department has been accepting the income from shares as capital gain upto assessment year 2005-06, there is no intra-day transactions. These facts definitely will have a bearing in coming to a conclusion as to whether the income from shares should be assessed as income from business or capital gain. Since neither the AO nor the CIT(A) have examined all these aspects, the entire issue of activity in shares is in the nature of investment or trading requires to be considered again considering ratio laid down in PVS Raju V/s. CIT ( 2011 (7) TMI 818 - Andhra Pradesh High Court) and M/s Spectra Shares and Scrips (supra) - appeal of assessee is allowed for statistical purposes.

Issues Involved:
1. Classification of income from the sale of shares as capital gains versus business income.
2. Determination of speculative transactions under section 43(5) of the Income Tax Act.
3. Verification of evidence and documentation related to share transactions.
4. Consistency in the treatment of income from shares in previous assessment years.

Issue-Wise Detailed Analysis:

1. Classification of Income from Sale of Shares as Capital Gains versus Business Income:
The primary issue revolves around whether the income derived from the sale of shares should be classified as capital gains or business income. The assessee claimed that the income should be treated as capital gains, arguing that the shares were held as investments, not as stock in trade. The assessee emphasized that the shares were purchased using personal funds, not borrowed money, and were held for a substantial period, deriving income from dividends. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the transactions as business income due to the frequency and nature of the transactions, suggesting an intention to earn profit rather than hold investments.

2. Determination of Speculative Transactions under Section 43(5) of the Income Tax Act:
The AO classified the transactions as speculative under section 43(5) of the Income Tax Act, noting that the shares were sold without actual delivery. The CIT(A) upheld this view, stating that the delivery of shares must be actual and not notional. The CIT(A) found that the shares were never delivered to the demat account of the assessee or his agent, and the evidence provided did not substantiate the claim of actual delivery.

3. Verification of Evidence and Documentation Related to Share Transactions:
The assessee provided contract notes and demat account statements to support the claim of actual delivery of shares. However, the CIT(A) dismissed these documents as they were not certified or signed, and did not explicitly state that delivery was taken by the assessee or his agent. The Tribunal noted that the revenue authorities should have conducted adequate inquiries to verify the authenticity of the evidence before rejecting it. The case was remanded back to the AO for a fresh examination of all materials and evidence, with instructions to consider whether the transactions were indeed speculative.

4. Consistency in the Treatment of Income from Shares in Previous Assessment Years:
The assessee argued that the income from the sale of shares had been consistently treated as capital gains in previous assessment years, and this treatment should continue. The Tribunal acknowledged this argument and noted that the revenue authorities should consider the rule of consistency as laid down in various judicial precedents, including the judgment of the Hon'ble Jurisdictional High Court in the case of PVS Raju and Another v. Additional CIT (340 ITR 75).

Conclusion:
The Tribunal remanded the cases back to the AO for a fresh examination, instructing the AO to consider all materials and evidence, including the intention behind holding the shares, the frequency and volume of transactions, and the period of holding. The AO was also directed to follow the parameters laid down by the Hon'ble Jurisdictional High Court in the cases of PVS Raju and Spectra Shares and Scrips Pvt. Ltd. The appeals were allowed for statistical purposes, and the AO was instructed to afford a reasonable opportunity of being heard to the assessee before finalizing the proceedings.

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