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2013 (10) TMI 554 - AT - Income TaxBusiness 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 M/s. Apollo Finvest (India) Limited, C/o. Shankarlal Jain & Associates Versus ITO, Ward-9(1), Mumbai 2013 (8) TMI 533 - ITAT MUMBAI and The Commissioner of Income Tax Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT - Decided in favour of assessee.
Issues Involved:
1. Classification of income from the sale of shares and mutual funds as either capital gains or business income. 2. Applicability of previous judgments and consistency in treatment of similar transactions in earlier assessment years. Detailed Analysis: Issue 1: Classification of Income from Sale of Shares and Mutual Funds The primary issue pertains to whether the income/loss or short-term capital gains on the sale of shares and securities held by the assessee should be treated as capital gains or business income. The assessee claimed a total of Rs. 2,09,37,029/- as capital gains, divided into long-term capital gains (LTCG) and short-term capital gains (STCG) on shares and mutual funds. The Assessing Officer (AO) rejected the assessee's classification, arguing that the nature of transactions indicated trading rather than investment. The AO cited Circular No. 4/2007 and judicial precedents, emphasizing the substantial nature of transactions, frequency, and volume of trades, which suggested a business motive rather than investment intent. The AO concluded that the assessee was a dealer in shares, not an investor, and reclassified the entire capital gains as business income. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting the high frequency and volume of transactions and the short holding periods for the majority of shares, which indicated a trading motive. The CIT(A) emphasized that the true nature of transactions should be understood from the intention at the time of purchase, considering factors like frequency of transactions, nature of entries in books, and profit motive. Issue 2: Applicability of Previous Judgments and Consistency in Treatment The assessee argued that similar transactions in the earlier assessment years (2006-07) were treated as capital gains and not business income. The Income Tax Appellate Tribunal (ITAT) in ITA No. 1314/Mum/2010 had ruled in favor of the assessee, recognizing the distinction between investment and trading portfolios and allowing the income from the sale of shares held as investments to be taxed as capital gains. The ITAT, considering the consistency in the assessee's approach and the Department's acceptance of this treatment in earlier years, found no reason to deviate from the previous decision. The Tribunal noted that the facts were identical to those in the earlier assessment year, and judicial propriety required adherence to the earlier ruling. Conclusion: The ITAT set aside the orders of the revenue authorities and directed the AO to allow the claim of capital gains, both LTCG and STCG, as claimed by the assessee. The appeals for both assessment years 2007-08 and 2008-09 were allowed in favor of the assessee, maintaining the classification of income from the sale of shares and mutual funds as capital gains. Order: The appeals filed by the assessee for assessment years 2007-08 and 2008-09 are allowed. The AO is directed to assess the income from the sale of shares and mutual funds as capital gains, in line with the previous judgments and consistent treatment in earlier years. The order was pronounced in the open Court on 12th June, 2013.
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