2013 (8) TMI 533 - AT - Income Tax

Business income or Capital gains - Gain on realization of Shares and mutual funds - Held that - assessee has maintained two separate accounts and has classified his acquisition of share investments under two heads. It is very pertinent to note that in the case of the assessee, sale of shares under the head investment has always been considered as capital gain in the earlier years, which is evident from the fact that the same has been accepted by the Assessing Officer in scrutiny proceedings right from assessment year 2002-2003 to 2005-2006. Not only the assessee has followed this consistent approach with regard to the treatment of shares one as investments and other as stock in trade separately, but the same has also been consistently allowed by the Department - there is no bar for an assessee to maintain two separate portfolios i.e. one in relation to investment in shares and other relating to business activities involved in dealing of shares - It is also noticed that, in the case of assessee, under the head short term capital gains most of the shares have been held for a period of more than three months and six months and there are no intra-day transactions of shares under this head - on the shares held as investment by the assessee, the income arising on sale of such shares is assessable under the head long term capital gain and short term capital gain and not business income as held by AO and CIT(A) - Following decision of The Commissioner of Income Tax Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT - Decided in favour of assessee.

Summary

Issues:
Treatment of income from sale of shares and mutual funds as business income instead of Long Term Capital Gains and Short Term Capital Gains.

Analysis:
The appeal was filed against the order passed by the CIT, Mumbai-19 regarding the assessment year 2006-2007. The primary contention was the categorization of income from the sale of shares and mutual funds as business income by the Assessing Officer instead of Long Term Capital Gains and Short Term Capital Gains as declared by the assessee. The Assessing Officer based this decision on the high volume of share transactions conducted by the assessee within a short period. It was argued that the assessee's intention was to profit from market fluctuations rather than holding investments. The CIT (A) confirmed this assessment, emphasizing the substantial volume and short holding period of the transactions, indicating a trading pattern.

Before the CIT (A), the assessee presented separate accounts for investment and trading shares, supported by the Memorandum of Association's clauses. The balance sheet also distinguished between long-term investments and stock-in-trade. The assessee highlighted previous assessments where similar investments were treated as capital gains, not business income. Despite these arguments, the CIT (A) upheld the Assessing Officer's decision, focusing on the substantial short-term gains from share transactions and the intention behind the investments.

The ITAT reversed the CIT (A)'s decision, noting the consistent treatment of shares as capital gains in previous assessments. The tribunal emphasized the assessee's separate accounting for investments and trading shares, supported by the acceptance of this practice by the tax authorities in prior years. Referring to relevant case law, including the CIT vs. Gopal Purohit case, the ITAT ruled that the income from shares held as investments should be classified as Long Term Capital Gains and Short Term Capital Gains, not business income. The judgment highlighted the absence of intra-day transactions and the holding periods of the shares as key factors in determining the nature of income. Consequently, the appeal was allowed, overturning the CIT (A)'s decision and categorizing the income from share sales as capital gains.

In conclusion, the ITAT's judgment clarified the treatment of income from share transactions, emphasizing the importance of consistent accounting practices and the nature of investments in determining the appropriate tax categorization.