2014 (1) TMI 1441 - AT - Income Tax

Activity of share trading - Income from business or income from capital gains - Held that - Whether the assessee has earned capital gain or business profits on the shares sold by him depend on the facts and circumstances of each case - The intention of the assessee while purchasing the shares, as to whether the same was acquired for holding as investment or for doing business shall be considered - The treatment given by the assessee in its books of account is also one of the decisive factors to find out whether the shares were held as investment or stock in trade - If the shares are bought with the intention of earning capital gains thereon and also dividend income by keeping the same as investment, the gain arising there from is required to be treated as capital gains - If the shares are purchased with the intention to earn profit thereon and the same is treated as stock in trade in the books of account, the profit arising out of sale of such shares are liable to be treated as business income - The assessee made investment in shares with intention to earn dividend income on appreciation of price of shares - The assessee has been investing in shares since last 5-6 years and have been treating them as investment in its books of accounts - Following the Rule of consistency the income from shares shall be treated as capital gains and not business income - Decision in Commissioner of Income-Tax Versus NSS. Investments P. Ltd. 2005 (4) TMI 45 - MADRAS High Court followed - Decided against Revenue.

Issues Involved:
1. Treatment of income from sale of shares as business income or capital gains.
2. Consistency in the treatment of income in subsequent assessment years.
3. Intention behind the purchase of shares and its classification in the books of accounts.
4. Applicability of judicial precedents and principles of res judicata.
5. Impact of legislative changes, specifically the introduction of Securities Transaction Tax (STT).

Detailed Analysis:

1. Treatment of Income from Sale of Shares as Business Income or Capital Gains:
The primary issue in this case revolves around whether the income from the sale of shares should be treated as business income or capital gains. The Revenue argued that the assessee was engaged in trading shares involving a large volume of transactions within a short period, thus qualifying the income as business income. However, the assessee maintained two separate accounts for trading and investment in shares, treating the gains from the investment portfolio as capital gains.

The CIT(A) observed that the assessee had consistently shown income from the sale of shares held as investments as capital gains in the balance sheet and had been doing so since inception. The CIT(A) relied on the decision of the Hon'ble ITAT in the assessee's own case for the previous assessment year, which supported the classification of such gains as capital gains.

2. Consistency in the Treatment of Income in Subsequent Assessment Years:
The principle of consistency was emphasized, with the CIT(A) and the Tribunal noting that the assessee had consistently treated the income from the sale of shares held as investments as capital gains in previous years. The Tribunal cited the decision in the case of Gopal Purohit, which upheld the importance of consistency in tax treatment across different assessment years unless there is a significant change in facts.

3. Intention Behind the Purchase of Shares and Its Classification in the Books of Accounts:
The intention of the assessee at the time of purchasing shares was a crucial factor in determining whether the income should be classified as business income or capital gains. The Tribunal noted that the assessee had treated shares as investments in the books of accounts and had valued them at cost, indicating an intention to hold them as capital assets rather than stock-in-trade.

The Tribunal also referenced the Supreme Court's observation in CIT vs. Associated Industrial Development Co. (P.) Ltd., which stated that the assessee's intention and the treatment of shares in the books of accounts are decisive factors in classifying the income.

4. Applicability of Judicial Precedents and Principles of Res Judicata:
The Tribunal deliberated on various judicial precedents and the principle of res judicata, which, while not strictly applicable to income tax proceedings, supports maintaining consistency in judicial decisions under similar facts and circumstances. The Tribunal cited several cases, including the decision in S.M.K. Shares and Stock Broking Private Limited, which reinforced the importance of consistency in tax treatment.

5. Impact of Legislative Changes, Specifically the Introduction of Securities Transaction Tax (STT):
The Tribunal discussed the legislative intent behind the introduction of the Securities Transaction Tax (STT) and the subsequent amendments to the Income Tax Act, which aimed to simplify the tax regime on securities transactions. The Tribunal noted that the introduction of STT and the exemption of long-term capital gains from tax, along with the concessional tax rate on short-term capital gains, were intended to reduce litigation on the classification of income from the sale of shares.

The Tribunal concluded that the assessee's treatment of income from the sale of shares as capital gains was consistent with the legislative intent and judicial precedents. The Revenue's appeal was dismissed, and the order of the CIT(A) was upheld, directing the AO to treat the income as capital gains.

Conclusion:
The appeal filed by the Revenue was dismissed, and the Tribunal upheld the CIT(A)'s decision to treat the income from the sale of shares as capital gains. The Tribunal emphasized the importance of consistency in tax treatment, the intention of the assessee at the time of purchasing shares, and the legislative intent behind the introduction of STT. The Tribunal also relied on various judicial precedents to support its decision.

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