2013 (9) TMI 151 - AT - Income Tax

Business income or Capital gain - Trader in shares - Held that - Section 28 of the Income-tax Act brings the profits and gains of any business or profession carried on by the assessee at any time during the previous year to the charge of income tax. Sub-section (13) of section 2 defines business as including any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is therefore quite evident that the subject matter of charge u/s.28 is not only the profit from any trade, commerce or manufacture but also profit from any adventure or concern in the nature of trade, commerce or manufacture. The subject matter of charge u/s.45 of the Income-tax Act, on the other hand, is capital gains, i.e., any profit or gain arising from the transfer of capital receipt effected in the previous year. Capital asset is defined in sub-section (14) of section 2 as property of any kind held by assessee, whether or not connected with his business or profession, but does not include, inter-alia, any stock-in-trade - A broker in shares/securities in one who brokers a deal between purchaser and seller of shares/securities and in that process gets his brokerage. He does not himself purchase or sell the shares in his own right. A dealer/trader, on the other hand, purchases and sells the shares in his own right in order to quickly realize the profits for which purpose he frequently turns over the stock. Therefore, the mere fact that the assessee is not a broker in shares does not mean that he is also not a dealer/trader in shares - Held as business income - Decided in favour of Revenue.

Issues Involved:
1. Whether the income from the purchase and sale of shares should be treated as Short Term Capital Gain or Business Income.
2. The criteria for determining the nature of income based on the holding period of shares.
3. The correctness of the CIT(A)'s decision in light of the facts and legal principles.

Issue-wise Detailed Analysis:

1. Treatment of Income from Purchase and Sale of Shares:
The primary issue was whether the income from the purchase and sale of shares should be treated as Short Term Capital Gain or Business Income. The Assessing Officer (AO) treated the income as business income under Section 28 of the Income-tax Act, arguing that the assessee was engaged in the business of "trading of shares" as evidenced by the Tax Audit Report. The AO noted that the assessee had maintained various books of accounts and showed profits from trading in Futures and Options as business income, while profits from shares purchased and sold on a delivery basis were shown as capital gains.

2. Criteria for Determining the Nature of Income:
The CIT(A) accepted the assessee's claim, treating the profits as short-term capital gains based on the judgment in Sugamchand C. Shah v. ACIT. The CIT(A) observed that if shares were held for less than a month, the transactions should be treated as business activities, and if held for more than a month, they should be treated as investments. This distinction was based on the holding period, intending to differentiate between trading and investment activities.

3. Correctness of CIT(A)'s Decision:
The Tribunal examined the CIT(A)'s decision and the submissions from both parties. The Departmental Representative argued that the assessee's activities indicated trading rather than investment, citing the high stock-turnover ratio and the nature of the business as "trading of shares." The Tribunal noted that the assessee had no other business and treated the profits from shares as gross profit in the books of account. The Tribunal emphasized that the intention behind purchasing and selling shares, frequency of transactions, and the nature of the business were crucial factors.

The Tribunal referred to several legal precedents, including the Supreme Court's decisions in Sardar Indra Singh & Sons Ltd. v. CIT and G. Venkataswami Naidu & Co. v. CIT, which distinguished between business income and capital gains based on the nature and intention of transactions. The Tribunal concluded that the high stock-turnover ratio, the treatment of profits as gross profit, and the assessee's full-time engagement in trading indicated that the income should be treated as business income.

Conclusion:
The Tribunal set aside the CIT(A)'s order and restored the AO's decision, treating the income from the purchase and sale of shares as business income under Section 28 of the Income-tax Act. The appeal filed by the Department was allowed, and the order was pronounced on 08/02/2013.

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