2013 (10) TMI 1128 - AT - Income Tax

Classification of heads of Income on sale of shares to be under head Capital Gains or Business Income Held that - There is thin line demarcation between the activities of such kind which can be considered purely for investment purpose or for trading purpose. The guiding parameters like volume and frequency of transactions, holding period of shares, intention of the assessee, treatment given in the books of account and host of other factors that are very relevant for such transactions whether they are for investment purpose or for trading purpose. However, these parameters may break down in certain cases and there cannot be all embracing formula or guideline to these kinds of transactions. In the instant case, assessee is mainly engaged in the business of partnership firm wherein, he is a whole time partner. For the purchase of shares, he has not borrowed any funds and has used his own fund from which is evident from the capital account. Further, right from the earlier years, he has shown these shares as investment in the balance sheet which have been accepted by the Department also. The gain from such investments has also been assessed as capital gain, even though such assessments have been completed under section 143(1) but the same have not been disturbed. From these facts, it can be gathered that the assessee s intention in the purchase of shares was mostly for investment purpose and to have maximum gain - It cannot be held that the assessee was engaged in organized and systematic activity of trading of shares - Learned Commissioner (Appeals) was not correct in holding that the assessee was carrying out the business of purchase and sale of shares for the motive of business profit. Even in case of purchase of shares for the purpose of investment, motive is only maximizing gain only From the facts and circumstances of the present case, income from purchase and sale of shares is to be assessed under the head capital gain and not under the head business income Decided in favor of Assessee.

Summary

Issues:
Assessment of short term capital gains as business income under the Income Tax Act, 1961 for the assessment year 2005-06.

Analysis:
1. The appeal was filed challenging the order passed by the Commissioner (Appeals)-XXII, Mumbai, regarding the treatment of short term capital gains as business income under section 143(3) of the Income Tax Act, 1961. The Assessing Officer treated the short term capital gains as business income due to the frequency of share transactions and the motive of earning quick profits. The Commissioner (Appeals) upheld this decision based on the analysis of the transactions and the repetitive nature of the activities. The appellant contended that the shares were purchased using personal funds, shown as investments in the balance sheet, and assessed as capital gains in previous years.

2. The appellant argued that the intention behind the share transactions was for investment purposes, not systematic trading. They presented details showing the holding periods of shares and the percentage of gains based on the duration of holding. The appellant emphasized that no borrowed funds were used for share purchases and that the gains were assessed as capital gains in previous assessments under section 143(1). The appellant referred to Tribunal decisions to support their claim that the transactions were for investment purposes.

3. The Tribunal analyzed the parameters for distinguishing between investment and trading activities in share transactions. Considering the appellant's main engagement in a partnership firm, the use of personal funds for share purchases, and the treatment of shares as investments in the balance sheet, the Tribunal concluded that the intention behind the share transactions was primarily for investment purposes. The Tribunal found that the gains from shares held for longer periods supported the investment motive. Therefore, the Tribunal held that the income from the purchase and sale of shares should be assessed under the head "capital gain" and not as "business income," overturning the decision of the Commissioner (Appeals).

4. The Tribunal's decision highlighted the importance of analyzing the facts and circumstances of each case to determine the nature of share transactions. It emphasized the need to consider the intention of the assessee, holding periods, treatment in books of account, and other relevant factors to differentiate between investment and trading activities. The Tribunal's ruling in favor of treating the income as capital gains aligned with the appellant's argument that the transactions were primarily for investment purposes, not systematic trading for business profit.

5. Ultimately, the Tribunal allowed the appeal, setting aside the Commissioner (Appeals)'s order and directing that the income from the purchase and sale of shares be assessed under the head "capital gain." The decision was based on the analysis of the appellant's intention, the nature of share transactions, and the treatment of shares as investments in previous assessments. The Tribunal's detailed examination of the facts led to the conclusion that the appellant's activities were geared towards investment rather than systematic trading for business profit.