2013 (11) TMI 203 - AT - Income Tax

Nature of Income - CIT(A) treated the income as income earned from investment in STCG for the A.Y. 2006-07 reversing the order by the AO u/s. 143(3) of the Income Tax Act, 1961 treating the same income as business income Held that - The appeal of the Department was allowed, and the AO was directed to treat the impugned income in question as earned through transactions made directly through ICICI Online as business income and assess the assessee accordingly - Assesse was engaged in business and not in investment - It was not the number of transactions per scrip alone that is relevant - The number and volume of scrips; the number of transactions; and the intention of assessee as demonstrated by the conduct, that were also the relevant factors - it was clearly revealed that the conduct of assessee was not that of an investor; rather, it showed that she was engaged in business of purchasing and selling shares - The number of transactions; the whole time engagement of assessee in making transactions according to the ups and down of the market to reduce the loss and make profit are the relevant factors which shows that assessee has been engaged in business/vocation and not as an investor , so far the assessment year in question is concerned. Not only a large number of transactions have been made directly through the ICICI Online, but the assessee has also made voluminous transactions through PMS - These transactions of purchase and sale have been made continuously and regularly throughout the year without any interval, showing that assessee was keeping a constant vigil on the ups and downs of the market, and purchasing and/or selling the shares accordingly - This type of conduct, it may be appreciated, cannot be said to be that of an investor; rather, has the characteristics of a business - The word business is a word of large and indefinite import - it is something which occupies the attention and labour of a person for the purpose of profit - it is an activity carried on continuously in an organized manner with a set purpose and with a view to earn profit - these attributes were present in the instant case. M.M. Nissim & Co. Versus Assistant Commissioner of Income-tax 11(3) 2007 (9) TMI 437 - ITAT MUMBAI - The entirety of the transactions and the overall conduct of the assessee was to be taken, so that the same, being backed by delivery, were also considered as so, i.e., leading to STCG, and not business income, as claimed by the Revenue. The assessee s case was not a case of a solitary transaction; rather, the sole motive of the assessee in making regular transactions of purchase and sale of shares is to earn profit by selling them at a higher rate - What the assessee in the case at hand was doing was a business of sale and purchase of shares as commodity, taking conscious decisions all the time to either buy, hold or sell a scrip by keeping a constant vigil on the market as also the developments in the economy as well as in relation to the shares held or to be held - Decided in favour of Revenue.

Summary

Issues Involved:
1. Classification of income from share transactions as business income or short-term capital gains (STCG).
2. Evaluation of the nature of transactions through ICICI Online.
3. Consistency of treatment of similar transactions in previous assessment years.
4. Criteria for determining the nature of income from share transactions.
5. Consideration of the volume and frequency of transactions.
6. The role of the holding period in determining the nature of transactions.
7. Impact of previous judicial decisions and principles on the current case.

Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue revolves around whether the income of Rs. 25,40,974/- earned through ICICI Online should be classified as business income or STCG. The Assessing Officer (AO) initially treated this income as business income due to the volume and frequency of transactions, while the Commissioner of Income Tax (Appeals) [CIT(A)] reversed this decision, treating it as STCG.

2. Evaluation of the Nature of Transactions through ICICI Online:
The AO argued that the transactions through ICICI Online were voluminous and frequent, indicating trading activity rather than investment. The CIT(A) disagreed, noting that the taxpayer had consistently declared investments in shares and had earned significant dividends, suggesting an investor profile. The CIT(A) also highlighted that the majority of the gains were from shares held for more than 200 days, further supporting the investment nature.

3. Consistency of Treatment in Previous Assessment Years:
The taxpayer argued that similar transactions in previous years were treated as STCG, and thus, the same treatment should apply for the current year. The CIT(A) supported this view, noting that the AO had accepted STCG from Portfolio Management Services (PMS) transactions in the same assessment year. However, the tribunal emphasized that each assessment year is a separate unit, and the principle of res judicata does not apply to income tax proceedings.

4. Criteria for Determining the Nature of Income:
The tribunal noted that there is no fixed criterion for classifying income from share transactions. It emphasized the need to consider the overall facts and circumstances, including the intention behind the transactions, the volume and frequency of transactions, and the taxpayer's conduct. The tribunal observed that the taxpayer's continuous and regular transactions indicated a business activity rather than investment.

5. Volume and Frequency of Transactions:
The tribunal found that the taxpayer engaged in a large number of transactions throughout the year, both through PMS and ICICI Online, suggesting a business activity. The tribunal disagreed with the CIT(A)'s view that the number of transactions per scrip was low, noting that the overall volume and frequency of transactions were significant.

6. Holding Period:
The taxpayer argued that a significant portion of the gains was from shares held for more than 200 days, indicating investment. The tribunal, however, stated that the holding period alone is not determinative. It emphasized the need to consider the overall conduct and intention of the taxpayer, noting that the taxpayer engaged in transactions with varying holding periods, reflecting a business activity.

7. Impact of Previous Judicial Decisions:
The tribunal referred to several judicial decisions, highlighting that the determination of the nature of income depends on the totality of facts and circumstances. It noted that the taxpayer's conduct and the volume of transactions indicated a business activity. The tribunal distinguished the current case from previous decisions cited by the taxpayer, emphasizing the unique facts of the case at hand.

Conclusion:
The tribunal concluded that the income of Rs. 25,40,974/- earned through ICICI Online should be treated as business income. It directed the AO to assess the taxpayer accordingly, reversing the CIT(A)'s order. The appeal by the Revenue was allowed, and the order was pronounced in the open court on 8.3.2013.