2013 (9) TMI 473 - AT - Income Tax

Exemption u/s 10(38) - Assessee received Long Term Capital Gains - Whether the assessee s share transactions are in capital assets , though of long term tenor, or of trading stock - Revenue assessed it as business income u/s. 28 - Held that - It is only the assessee, therefore, who needs to establish the basis of his considering some shares, though purchased in the regular course of its business of share trading, as not for acquisition of trading stock, but only as capital assets. All the shares have been bought by the assessee in the regular course of his business, employing common funds, depositing them in the same D-Mat account, and even through the same broker and infrastructure. New shares are purchased deploying funds realized on the sale of such shares. To contend, therefore, of some such shares as being capital assets on the premise that the same are sold beyond one year of their purchase, is, therefore, clearly untenable. The categorization as to whether the scrip acquired is as an investment or as a part of the assessee s trading stock is primarily one of intention with which the share is purchased/held and, accordingly, gets to be decided at the stage of or upon acquisition itself. That the scrip may eventually be sold, in whole or in part, within a period less than that envisaged earlier, or within a period less than a year, is, however, a different matter, as perceptions and, consequently, decisions, even qua capital acquisitions, may vary or change with time. This would, however, not make it any less an investment, where acquired as such in the first place, so that the gain or loss arising thus would be a short term capital gain or loss, as the case may be - Following decision of CIT vs. Sutlej Cotton Mills Supply Agency Limited 1975 (7) TMI 2 - SUPREME Court - Decided against assessee.

Issues Involved:
1. Classification of income from share transactions as Long Term Capital Gains (LTCG) or business income.
2. Eligibility for tax exemption under Section 10(38) of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Classification of Income from Share Transactions as LTCG or Business Income

The primary issue in this appeal is determining the head of income under which the assessee's income, declared as Long Term Capital Gains (LTCG) amounting to Rs. 356.60 lakhs, should be assessed. The Revenue contends that this income should be classified as business income under Section 28 of the Income Tax Act, 1961. The significance lies in the fact that business income is taxed as regular income, whereas LTCG is tax-exempt under Section 10(38).

The assessee disclosed various share trading activities for the year, including Futures and Options trading, short-term profit on the sale of shares, speculation profit, and long-term capital gain on the sale of shares. The Assessing Officer (A.O.) observed that the assessee was engaged in systematic share transactions over several years and maintained separate audited books of accounts for this business. The A.O. noted that the volume of shares sold, claimed as LTCG, constituted only 0.7% of the total volume traded. The low dividend income relative to the capital employed suggested that the primary motive was not capital appreciation but profit from trading. The A.O. concluded that the transactions did not indicate capital asset investments, and therefore, the gains should be treated as business income.

On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] examined the matter in detail. The CIT(A) noted that the transactions were carried out using common funds, the same D-Mat account, and the same broker, with no classification of shares as either trading stock or capital assets. The assessee's claim that shares sold after one year were capital assets was deemed untenable. The CIT(A) confirmed the A.O.'s order, treating the gains as business income.

Issue 2: Eligibility for Tax Exemption under Section 10(38)

The assessee argued that engaging in Futures and Options trading should not preclude them from being considered an investor entitled to the benefits of tax exemption under Section 10(38). The Revenue countered that there was no evidence to show that the shares sold after one year were purchased with the intent of holding them as investments. The assessee's classification of income from shares sold within a year as business income further weakened their claim.

The Tribunal observed that the primary facts were not in dispute, and both the assessing and appellate authorities had based their conclusions on the same set of facts. The Tribunal noted that the assessee's principal occupation was trading in shares, with negligible other income. The only dispute was regarding the classification of delivery-based transactions where the holding period exceeded one year.

The Tribunal emphasized that the onus was on the assessee to establish that certain shares were held as investments. The Tribunal found that all shares were bought in the regular course of business using common funds and infrastructure. There was no classification done by the assessee to demonstrate that the shares claimed as long-term capital assets were indeed purchased as investments. The Tribunal referred to several Supreme Court decisions clarifying that the intention with which shares are purchased determines their classification as capital assets or trading stock.

The Tribunal concluded that the assessee's business was a composite one of trading in shares, and there was no basis to treat some shares as capital assets merely because they were held for more than a year. The Tribunal upheld the CIT(A)'s order, confirming the treatment of gains as business income.

Conclusion:

The appeal was dismissed, with the Tribunal confirming that the gains from share transactions should be classified as business income and not LTCG. Consequently, the assessee was not entitled to the tax exemption under Section 10(38) of the Income Tax Act, 1961.

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