2014 (4) TMI 866 - HC - Income Tax

Dismissal of claim of LTCG Held that - The Tribunal was of the view that the income or profits gained were business income, having regard to the normal business activities of the assessee and given the pattern of sale and purchase transactions, especially since no books were separately maintained for the purpose - the purchases were shown as investments in the balance sheets for several years before their sale and claim for long term capital gains - There is nothing on the record to show that these were purchased with borrowed funds - the findings of the ITAT with respect to the amount claimed as long term capital gains are sound and do not call for interference Decided against Revenue. Allowability of claim of STCG Held that - Having regard to the short duration of holding of the shares, and the lack of clarity in the account books, the overall effect would be to reveal that the sale and purchase of shares in respect short term capital gain cannot be sustained thus, the order of the ITAT is set aside to the that extent - the amount shall be treated as business income and not capital gains Decided in favour of Revenue.

Issues Involved:
1. Classification of income as short term capital gain or business income.
2. Classification of income as long term capital gain or business income.

Detailed Analysis:

1. Classification of income as short term capital gain or business income:

The primary issue in these appeals is whether the amounts claimed by the assessee as short term capital gains should be treated as such or as business income. The Assessing Officer (AO) scrutinized the accounts and concluded that the short term capital gains of Rs. 26,82,115.35/- should be classified as business income due to the nature and frequency of transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld this decision, stating that the frequent buying and selling of shares indicated an intention to earn income rather than invest. The CIT(A) highlighted that the shares were not held for a significant period, which is inconsistent with investment behavior. The ITAT, however, disagreed with the CIT(A) and AO, finding that the assessee's classification of the transactions as short term capital gains was justified. The ITAT noted that the shares were shown as investments in the books and balance sheets, and the assessee did not use borrowed funds for these transactions. Despite the frequency of transactions, the ITAT concluded that the overall circumstances supported the assessee's claim.

The Revenue argued that the ITAT erred by not giving adequate weight to the frequency and volume of transactions, which indicated a trading intention. The Revenue also emphasized the failure of the assessee to maintain separate books for investments and business operations, complicating the distinction between business income and capital gains.

The court held that the short duration of holding shares and the lack of clarity in the account books supported the AO and CIT(A)'s view that the transactions were business income. Consequently, the ITAT's decision to treat Rs. 26,82,115/- as short term capital gains was set aside, and the amount was classified as business income.

2. Classification of income as long term capital gain or business income:

The second issue was whether the long term capital gains of Rs. 31,13,006.51/- claimed by the assessee should be treated as such or as business income. The CIT(A) accepted the assessee's claim for long term capital gains, noting that the transactions were few in number and the shares were shown as investments in the balance sheets for several years. The ITAT upheld this view, finding that the assessee's classification was consistent with the evidence presented.

The Revenue's appeal against this classification was dismissed by the court. The court found no reason to interfere with the CIT(A) and ITAT's concurrent findings, as the transactions were limited and did not involve borrowed funds. The court affirmed that the long term capital gains claim was valid and should be upheld.

Conclusion:

The court concluded that the short term capital gains of Rs. 26,82,115/- should be treated as business income, setting aside the ITAT's order to that extent. However, the long term capital gains of Rs. 31,13,006.51/- were upheld as such, dismissing the Revenue's appeal on this issue. The judgment emphasized the importance of the nature and frequency of transactions and the clarity of account books in determining the classification of income.

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