2014 (1) TMI 1175 - AT - Income Tax

Activity of sale and purchase of shares - Business income or capital gain - Held that - Decision The Commissioner of Income Tax Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT followed - The assessee has shown certain income from share transactions as income from business and rest as income from short term capital gain - It is open to an assessee to maintain two separate portfolio, one relating to investment in shares and another relating to business activities involving dealing in shares. With regard to similar entries the department in the earlier as well as subsequent years has accepted the claim of the assessee that the shares shown as investment give rise to an income which is assessable under the head capital gain - In assessment years 2007-08, 2009-10 and 2010-11 similar transactions have been accepted as giving rise to income assessable under the head capital gain and only during the year under consideration a different view has been taken - There ought to be uniformity in treatment and consistency when the facts and circumstances are identical - It can be noted that the average period of holding does not vary much as for the year under consideration it is 99 days when they are compared to A.Ys 2009-10 and 2010-11 which is 91 days and 118 days respectively - The number of transactions and number of scrips dealt by the assessee is on higher side but that alone cannot be said to be a factor to deviate from the view taken in earlier and subsequent years - amount of short term capital gain shown by the assessee cannot be assessed as business income. - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of income from the sale and purchase of shares as either short-term capital gain or business income.
2. Application of the principle of consistency in tax treatment across different assessment years.
3. Consideration of borrowed funds in determining the nature of the transactions.
4. Impact of the volume and frequency of transactions on the classification of income.

Detailed Analysis:

1. Classification of Income:
The primary issue revolves around whether the income of Rs. 5,85,40,417/- from the sale and purchase of shares should be treated as short-term capital gain or business income. The assessee argued that the shares were shown as "investment" in the books of account, and similar transactions were treated as capital gains in previous years. The Assessing Officer (AO) contended that the differentiation between business income and capital gains was made for the convenience of the assessee and that the transactions indicated a business activity due to the short holding periods and frequent transactions.

2. Principle of Consistency:
The assessee highlighted that for assessment years 2007-08, 2009-10, and 2010-11, similar transactions were accepted as capital gains by the department. The AO's stance that the principle of res judicata does not apply to income tax proceedings was countered by the principle of consistency, which mandates uniform treatment when facts and circumstances remain identical. The Tribunal referenced the decision in CIT vs. Gopal Purohit, which emphasized the importance of consistency in tax treatment.

3. Borrowed Funds:
The AO argued that the assessee used borrowed funds for purchasing shares, thus indicating a business activity. The assessee refuted this by presenting a balance sheet showing that the loans and advances given and the bank balance were higher than the borrowed amounts, suggesting no direct nexus between borrowed funds and share investments. The Tribunal found no substantial evidence from the AO to prove the use of borrowed funds for share investments.

4. Volume and Frequency of Transactions:
The AO pointed to the high volume and frequency of transactions as indicative of a business activity. However, the Tribunal noted that the nature of transactions in the assessment year under consideration was not significantly different from other years where the income was classified as capital gains. The Tribunal referenced the decision in Mrs. Sejal Dalal vs. ACIT, which held that higher transaction volumes alone do not change the nature of transactions from investments to business activities.

Conclusion:
The Tribunal concluded that the income from the sale and purchase of shares should be classified as short-term capital gain, not business income. This conclusion was based on the principles of consistency, the nature of transactions, and the lack of substantial evidence showing the use of borrowed funds for share investments. The Tribunal directed that the amount of Rs. 5,85,40,417/- be assessed as short-term capital gain, maintaining uniformity in treatment across different assessment years. The appeal filed by the assessee was allowed.