2014 (5) TMI 936 - AT - Income Tax

Income from sale of shares treated as business income Held that - During the year assessee has done 71 transactions in 37 shares, which means 6 transactions per month - by any stretch of imagination it cannot be considered as high frequency transactions - The assessee has been showing bonds, debentures, fixed deposits, mutual funds and shares under the head investment Relying upon CIT v/s Madan Gopal Radhey Lal, 1968 (9) TMI 14 - SUPREME Court - the long term capital gain has been accepted by the AO - If the AO is of the firm belief that the assessee is engaged in trading activities in the shares, then it does not make any difference whether the shares are held for more than 12 months or less than 12 months - the AO has accepted that the assessee as an investor insofar as the long term capital gain is concerned there was reason as to why the profit should not be taxed under the head short term capital gain as returned by the assessee the order of the CIT(A) is set aside and the AO is directed to tax the gains arising from the share transactions under the head Short term capital gain as returned by the assessee Decided in favour of Assessee.

Summary

Issues: Determination of whether income from sale of shares should be treated as business income or short term capital gains.

Analysis:
1. The assessee, who is the Chairman of a company, derived salary income and also earned profits from investments in shares. The Assessing Officer (AO) treated the income from sale of shares as business income due to the volume and frequency of share transactions carried out by the assessee.

2. The assessee contended that he is an investor and not a trader in shares, emphasizing that his motive behind purchasing shares was for investment purposes. The assessee argued that the gains from share transactions should be taxed under the head "Short term capital gains" and not as business income.

3. The Tribunal observed that during the relevant year, the assessee conducted 71 transactions in 37 shares, averaging 6 transactions per month, which was not indicative of high-frequency trading. Additionally, the assessee had a substantial capital without any borrowings and had categorized various investments under the head "investment."

4. Referring to legal precedents, the Tribunal highlighted that the intention behind the acquisition of shares is crucial in determining whether the transactions are in the nature of trade or investment. The Tribunal noted that the Assessing Officer had accepted the long term capital gains as investment income, indicating inconsistency in treating short term gains differently.

5. Considering the facts and circumstances, the Tribunal concluded that the profit from share transactions should be taxed under the head "Short term capital gains" as declared by the assessee, overturning the decisions of the lower authorities. The Tribunal directed the Assessing Officer to tax the gains accordingly, allowing the appeal filed by the assessee.

6. The judgment emphasized the importance of assessing the intention behind share transactions to differentiate between investment and trading activities. It also highlighted the need for consistency in tax treatment based on the nature of gains realized.