2013 (10) TMI 768 - AT - Income Tax

Classification of head of Income Income under the head Capital gain or as business income Shares and securities held as Investment or as Stock in trade - As per the assessee s own admission, during the year he has dealt with 95 number of scrips of different companies. The Assessing Officer in the assessment order has mentioned specific instances where the assessee has sold shares either on the same day or within a very short period of 7 to 15 days. It is also a fact on record that the volume of turnover was because of the frequency and regularity of transactions and not due to huge investment Held that - Reliance has been placed upon the judgment in the case of PVS Raju 2011 (7) TMI 818 - Andhra Pradesh High Court - Facts clearly show that the intention of the assessee in investing in shares is for the purpose of earning profit and not to earn dividend. It is also a fact on record that the dividend earned by the assessee during the relevant financial year is meager considering the quantum of turnover. If the intention of the assessee would have been to hold the shares as investment for the purpose of earning dividend, then the assessee would not have indulged in transactions of purchase and sale of shares in such frequency and regularity and in a systematic manner. This shows that the intention of the assessee is to earn profit. It is immaterial whether the assessee treats the shares as investments or stock in trade in its books of accounts. The assessee has not produced any material to prove that the finding of the Assessing Officer that the assessee has sold shares either on the same day or within very short period of purchase is not correct - activity of the assessee in purchase and sell of shares is in the nature of business and therefore the income derived from sale of shares has to be assessed as business income. The fact that the assessee has paid security transaction tax will not be determinative factor to hold that the income earned by the assessee is to be treated as short term capital gain Decided in favor of Revenue.

Summary

Issues Involved:
1. Treatment of income from the sale of shares as capital gains or business income.

Detailed Analysis:

Issue 1: Treatment of Income from Sale of Shares as Capital Gains or Business Income

The Revenue filed an appeal against the order dated 10-9-2009 of CIT (A)-VI, Hyderabad, for the assessment year 2005-06. The primary issue was the CIT (A)'s treatment of the income earned by the assessee from the sale of shares as capital gains.

The assessee, an individual, declared income of Rs. 48,01,020/- for the impugned assessment year, including total capital gains from the sale of shares amounting to Rs. 56,56,487/-. The breakdown was as follows: Long term capital gains of Rs. 13,57,512/-, short term capital gains before 30-9-04 of Rs. 2,97,547/-, and short term capital gains after 30-9-04 of Rs. 40,11,428/-.

The Assessing Officer (AO) accepted the assessee's claim of exemption under section 10(38) of the Act for long-term capital gains. However, for short-term capital gains, the AO found that the frequency of buying and selling shares was very high, with a short holding period and high turnover due to frequent transactions. The AO concluded that the assessee's intention was to make a profit from the sale of shares rather than earn dividends, thereby treating the income from the sale of shares as business income rather than capital gains.

The CIT (A), however, considered the submissions of the assessee and followed the decision of the Income-tax Appellate Tribunal, Mumbai Bench, in the case of Sri Kunvarji Nanjikernia V/s. Additional CIT. The CIT (A) noted that in previous years, the shares were declared as investments, and the gains were taxed accordingly as short-term or long-term capital gains. The CIT (A) directed the AO to treat the income derived from the sale of shares held for less than one year as short-term capital gains and allow the benefit under section 111A of the Act.

The Departmental Representative argued that the frequency of transactions and the short holding period indicated that the assessee was not holding shares as an investment but rather as a trader. The Departmental Representative cited several cases to support this view.

The assessee's representative argued that the assessee was primarily engaged in the transport business and invested surplus funds in shares. The shares were held as investments, not stock in trade, and no borrowed funds were used for purchasing shares. The representative cited various decisions to argue that the frequency and volume of transactions alone do not determine the nature of the income.

The Tribunal considered the submissions and materials on record. It noted that the intention behind the transactions was crucial in determining whether the income was from business or capital gains. The Tribunal referred to the jurisdictional High Court's decision in PVS Raju V/s. Additional CIT, which laid down certain tests/guidelines to determine the nature of such transactions. These included the frequency of transactions, holding period, quantum of turnover, intention to make quick profits, and whether the transactions were systematic and regular.

Applying these guidelines, the Tribunal found that the assessee's transactions in shares were frequent and systematic, with a short holding period and high turnover. The intention was to earn profits rather than dividends. Therefore, the Tribunal concluded that the assessee's activity was in the nature of business, and the income from the sale of shares should be treated as business income.

The Tribunal set aside the order of the CIT (A) and restored the order of the AO, thereby allowing the appeal filed by the department.

In conclusion, the Tribunal held that the income derived by the assessee from the sale of shares should be treated as profit from business, not capital gains.