2014 (9) TMI 359 - AT - Income Tax

Nature of transaction - STCG on transaction in shares Assessee trader in shares or an investor STCG treated as business income Held that - Following the decision in Spectra Shares and Scrips Pvt. Ltd. vs. CIT 2013 (6) TMI 173 - ANDHRA PRADESH HIGH COURT - the closing stock was valued in its books of account consistently at cost and not at cost or market price whichever is lower - all the transactions of purchase and sale were delivery basis except the some instance of Reliance Industries Ltd. - Merely because of large frequency and volume of transactions, a conclusion that an assessee is a trader cannot be drawn - The fact that the assessee is monitoring the stock markets and buying at dips and selling at highs with an intention to make profit from these transactions is not conclusive of the fact that the assessee is a trader because even an investor would not buy or sell blindly and take the risk of suffering losses - assessee changes the shares contained in the investment portfolio so that the capital is preserved - The fact that the assessee is making repetitive purchases and sales of the same shares is a factor in favour of holding that the assessee is an investor - Revenue had accepted that the assessee was an investor whose income is chargeable under the head capital gains for a number of years thus, the assessee is an investor and not a trader Decided in favour of assessee.

Issues Involved:
1. Classification of income from share transactions as either 'short term capital gains' or 'business income'.
2. Validity of notice under section 143(2) of the Income Tax Act.
3. Determination of the cost price of stock for tax purposes.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue revolves around whether the income from the sale of shares should be classified as 'short term capital gains' or 'business income'. The assessee argued that he is an investor, not a trader, and thus the income should be classified as capital gains. The Assessing Officer (AO) proposed treating the income as business income due to the high volume and frequency of transactions, continuous trading activity, and the substantial turnover of Rs. 5.38 crores involving more than 100 scrips. The AO applied principles from CBDT guidelines and various court decisions to conclude that the assessee's activities were in the nature of trade.

The CIT(A) upheld the AO's view, emphasizing the substantial turnover, frequent transactions, and the minimal closing stock, indicating a profit motive rather than an investment intention. The CIT(A) also noted that the assessee's conduct, such as not maintaining books of accounts and the meager dividend income, supported the classification as business income.

However, the ITAT considered precedents like the case of Gopal Purohit vs. JCIT and others, which emphasized the intention behind the transactions, the treatment of shares in the books of accounts, and the consistency in declaring income as capital gains in previous years. The ITAT found that the assessee's activities were consistent with those of an investor, noting that the shares were purchased with personal funds, held in a Demat account, and shown as investments in the balance sheet. The Tribunal also highlighted that the AO accepted the long-term capital gains as investment income, which contradicted the treatment of short-term gains as business income.

2. Validity of Notice under Section 143(2):
The assessee raised an additional ground questioning the validity of the notice under section 143(2) of the Income Tax Act, arguing that it was not served within the stipulated time. However, the learned counsel for the assessee did not press this ground, and it was dismissed by the Tribunal.

3. Determination of Cost Price of Stock:
The assessee suggested that if the income were to be treated as business income, the cost price of the stock should be determined by adopting the market value as of 1.4.2007. This point was raised as an alternate submission, but since the primary issue was resolved in favor of the assessee, this aspect did not require further deliberation.

Conclusion:
The ITAT concluded that the assessee's transactions were in the nature of investments and not business activities. The Tribunal allowed the appeal, classifying the income from the sale of shares as 'short term capital gains' rather than 'business income'. The decision was based on factors such as the assessee's intention, the treatment of shares in the books of accounts, and the consistency in declaring income as capital gains in previous years. The appeal was thus allowed, and the order was pronounced in the open court on 5th September 2014.

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