2014 (4) TMI 681 - HC - Income Tax

Nature of income Sale of shares - Whether the income is business income or STCG - The shares were shown as investments by the assessee, and not as stock in trade - This is an important (though not conclusive) factor - The frequency of transactions speaks greatly to whether the shares were traded - the shares were traded irregularly is a strong pointer that they were held as investment, lest there be a new category of static trading or business - there was a limited dividend drawn from the shares - the fluctuation in the number of shares held, and also the companies in which shares are held, is minimal. Just as aggressive and constant behavior as regards the portfolio suggests business activity, its absence suggests that the shareholding was as an investment - to hold that the portfolio is to be treated as business would deny the possibility of selling an investment based on a market factors, or dealing in them it at all - the assessee has transacted in shares does not necessarily mean that it is a trading activity - shares held as investment may also be sold and purchased, the crucial factor being the frequency and volume of the trades to determine the true intention for which they are held - Considering the limited activity surrounding the shareholding of the assessee in relation to the 13 scrips, the order of the CIT(A) and the ITAT is upheld - the amount reported by the assesse is to be treated as STCG Decided against Revenue.

Summary

Issues:
Determining whether income from the sale of shares should be classified as business income or Short Term Capital Gain (STCG).

Analysis:
1. The Revenue challenged the findings of the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal, which reversed the Assessing Officer's decision to treat the assessee's income from the sale of shares as business income instead of STCG. The primary issue was whether the ITAT erred in upholding the assessee's claim of earning STCG from the sale of shares.

2. The Assessing Officer initially considered the income from the sale of shares as business income based on various factors, including the frequency of trades, time gap between buying and selling, volume of transactions, and absence of dividend income. The AO concluded that the assessee was not an investor but a trader, engaging in continuous and aggressive stock dealings.

3. The CIT (A) overturned the AO's decision, emphasizing that the assessee consistently treated the shares as investments in its accounts. The volume of transactions alone cannot determine the nature of income, and the absence of dividend income does not conclusively indicate business income. The CIT (A) highlighted that the shares were held as investments despite market volatility.

4. The ITAT upheld the assessee's claim of STCG, considering the limited number of transactions and insufficient dividend income. The ITAT emphasized that the frequency and volume of transactions supported the classification of income as STCG.

5. The Revenue contended that the aggressive trading pattern and low dividend income suggested that the shares were dealt with as a business rather than investments. The manner in which the shares were transacted indicated a business motive, irrespective of being listed as investments.

6. The Court analyzed the accounts related to the 13 scrips for which STCG was claimed. It considered legal standards to distinguish between business income and STCG, focusing on various factors like nature of shares, volume of transactions, duration of holding, and dividend income.

7. After reviewing the accounts and transactions, the Court agreed with the ITAT and CIT (A) that the shares were held as investments, not stock in trade. The irregular frequency of transactions and limited dividend income supported the conclusion that the income should be treated as STCG.

8. The Court observed minimal fluctuations in the number of shares held and companies invested in, indicating an investment motive. The behavior surrounding the portfolio suggested investment activity rather than business trading, further supported by bonus issues received on some shareholdings.

9. The Court emphasized that selling shares does not automatically imply trading activity; the intention behind holding shares determines their classification. Considering the limited activity and nature of transactions, the Court upheld the decision that the income should be treated as STCG.

10. In conclusion, the Court dismissed the appeal, ruling in favor of the assessee and affirming that the income from the sale of shares should be classified as Short Term Capital Gain. The Court found no merit in the Revenue's arguments and declined to interfere with the concurrent findings of the lower authorities.