2014 (5) TMI 997 - AT - Income Tax

Sale/purchase of shares under the head capital gains - Held that - Primarily the intention of assessee is of paramount importance in determining whether the shares were held by it as investment or as stock in trade - All the attendant circumstances have to be taken into consideration to find out the true intention of assessee - there is no dispute that in earlier years the assessee had treated all share holdings as its investment and never traded in shares - the intention of assessee in acquiring shares was always as investor and not as trader - In the current assessment year also the shares were acquired in respect of one company only but the number of shares was considerable due to which brokers note were running into several pages which probably triggered the entire controversy and in culminating into the observations of AO that assessee had entered into hundreds of transaction on day to day basis. The assessee has clearly demonstrated that the observations were not correct and nothing has been brought on record by the Department to controvert the finding of the CIT(A) - The magnitude of transaction does not alter the nature of transaction that does not decide the intention of assessee - The total number of purchase transactions were only six and the sale transactions were only eight - By no stretch of reasoning, this frequency can be said to be very frequent so as to lead to the conclusion that assessee was trading in shares. Merely because the assessment of speculation profit is as per the provision contained u/s 43(5) would not lead to ipso facto conclusion that assessee s intention was to trade in shares - Mere assessment under a particular head of income is no criteria for determining the overall intention of assessee - An investor also can enter into speculative transactions as there is no prohibition under the Act - Only the income is to be assessed as business income - this aspect cannot form the basis for deciding the intention of assessee in respect of those shares where assessee has taken delivery of shares and then sold them within a short gap of time there is no reason to interfere with the order of CIT(A) Decided against Revenue.

Issues Involved:

1. Classification of income from sale/purchase of shares as either "business income" or "capital gains".
2. Determination of the nature of transactions (investment vs. trading).
3. Applicability of CBDT Circular No. 4 of 2007.
4. Consistency in treatment of income in previous assessment years.
5. Relevance of speculative transactions in determining the nature of the primary transactions.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale/Purchase of Shares:

The primary issue was whether the income from the sale/purchase of shares should be classified as "business income" or "capital gains". The assessee had declared short-term capital gains from the sale of shares, supported by brokers' notes and statements. The Assessing Officer (AO) argued that the frequent and voluminous transactions indicated a business activity, thus classifying the income as business income. The AO emphasized that the transactions were regular and substantial, suggesting a business motive rather than an investment intent.

2. Determination of the Nature of Transactions:

The assessee contended that it was not engaged in any business activity and that the transactions were investments. The AO, however, noted that the assessee had traded in shares on a day-to-day basis and had substantial transactions, which indicated a business activity. The AO also pointed out that the assessee had declared speculative profit from trading in shares, further supporting the business activity argument.

3. Applicability of CBDT Circular No. 4 of 2007:

The assessee referred to CBDT Circular No. 4 of 2007, which outlines parameters to determine whether transactions are business activities. These parameters include the substantial nature of transactions, the magnitude of sale and purchase, and the ratio between purchase and sale. The assessee argued that it had made limited transactions in one script, which should not be considered a business activity. The AO, however, concluded that the substantial volume of transactions indicated a business activity.

4. Consistency in Treatment of Income in Previous Assessment Years:

The assessee highlighted that in previous years, the income from the sale of shares had been consistently declared as capital gains and accepted by the department. The assessee argued that there should be consistency in the approach if there were no changes in the facts. The AO did not accept this argument, emphasizing the nature and volume of transactions in the current assessment year.

5. Relevance of Speculative Transactions:

The AO pointed out that the assessee had declared speculative profit from trading in shares, which was assessed as business income under section 43(5) of the Income Tax Act. The AO argued that this speculative profit further supported the conclusion that the assessee was engaged in a business activity. The assessee, however, contended that speculative transactions should not determine the nature of the primary transactions, which were investments.

Judgment:

The CIT(A) deleted the addition made by the AO, concluding that the transactions were investments and not business activities. The CIT(A) considered the historical treatment of shares as investments, the limited number of transactions, and the assessee's intention to earn dividends. The Tribunal upheld the CIT(A)'s order, emphasizing that the intention of the assessee is paramount in determining the nature of transactions. The Tribunal noted that the shares were treated as investments in the books of account, and the frequency and magnitude of transactions did not indicate a business activity. The Tribunal also highlighted that speculative transactions do not necessarily imply a business activity.

Conclusion:

The Tribunal dismissed the Department's appeal, affirming that the income from the sale/purchase of shares should be classified as capital gains and not business income. The judgment emphasized the importance of the assessee's intention and the consistent treatment of transactions as investments in previous years. The Tribunal also clarified that speculative transactions alone do not determine the nature of the primary transactions.

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