2014 (12) TMI 138 - AT - Income Tax

Treatment of STCG on shares - business income or not Nature of assessee investor or trader - Held that - The AO in re-assessment proceedings has treated the income from short term capital gains as business income mainly on the ground that the volume of transactions of shares is more, there is frequency in transactions and therefore, the motive is earning of profit - the main source of income is from investment activity - the assessee s normal activity is not buying and selling of shares but his purchase and sale of shares were in the nature of investment of her own surplus money and therefore, the excess amounts received by sales were capital receipts being merely surplus and not profits - in case the assessee is earning large income from his normal business activity and it was his surplus income which he was interesting in buying the shares - whenever he found it profitable he converted his holding that the very nature of investment was such that they had to be constantly charged so that the monies invested may be used to the best advantage of the investor and that the sales were really for the purpose of employing the monies that he had invested to his best advantage. Volume of frequency, continuity and regularity of transaction of purchase and sales are found in character and however what is more important is the intention of the assessee - the sale of shares held for more than one month would be charged capital gain and surplus of shares held for less than one month will be treated as profit from business - all share transactions undertaken by the assessee would be charged to capital gain irrespective of their holding, the AO was directed to compute the capital gain - the order of the CIT(A) is upheld and the AO is directed to treat the income from sale of shares as assessable under the head capital gain and not as business income Decided in favour of assessee.

Issues Involved:
1. Whether the CIT (Appeals), Pune erred in confirming the addition made by the AO.
2. Whether the CIT (Appeals), Pune erred in treating short-term capital gain on shares as business income.
3. Whether the CIT (Appeals), Pune erred in not appreciating the appellant as an investor and not a trader.
4. Applicability of the decision in CIT vs. Gopal Purohit to the appellant's case.
5. Consideration of various factors by CIT (Appeals), Pune regarding the appellant's treatment of shares as investments.

Issue-Wise Detailed Analysis:

1. Confirmation of Addition by AO:
The CIT (Appeals), Pune confirmed the addition made by the AO, who treated the short-term capital gains declared by the assessee as business income. The AO's decision was based on the volume and frequency of transactions, suggesting a profit motive. The CIT(A) upheld this decision, reasoning that the transactions bore the attributes of trade.

2. Treatment of Short-Term Capital Gain as Business Income:
The AO classified the short-term capital gains as business income due to the high volume and frequency of transactions. This classification was opposed by the assessee, who argued that the transactions were investments, not trades. The assessee cited several factors to support this claim, including the use of personal funds, consistent treatment of shares as investments, regular earning of dividends, and holding periods ranging from 30 to 245 days.

3. Appellant as an Investor vs. Trader:
The appellant argued that they were an investor, not a trader, and cited the following points:
- Transactions were recorded as investments in the books of accounts.
- Shares were purchased using personal funds.
- Consistent treatment of shares as investments.
- Regular earning of dividend income.
- Shares were held for periods ranging from 30 to 245 days.

4. Applicability of CIT vs. Gopal Purohit:
The CIT (Appeals), Pune held that the decision in CIT vs. Gopal Purohit was not applicable to the appellant's case. However, the appellant argued that this decision supported their claim of treating the income from the sale of shares as capital gains rather than business income.

5. Consideration of Factors by CIT (Appeals), Pune:
The CIT (Appeals), Pune did not adequately consider several important factors presented by the appellant, such as:
- The treatment of transactions as investments in the books of accounts.
- The use of personal funds for purchasing shares.
- Consistent treatment of shares as investments.
- Regular earning of dividend income.
- Holding periods of the shares.

Tribunal's Findings:
The Tribunal found that the AO's decision to treat the short-term capital gains as business income was primarily based on the volume and frequency of transactions. However, the Tribunal noted several key points in favor of the assessee:
- The transactions were treated as investments in the books of accounts.
- Personal funds were used for purchasing shares.
- The shares were consistently treated as investments.
- Regular dividend income was earned.
- Shares were held for periods ranging from 37 to 236 days.
- The assessee valued the shares at cost, not at market price or realizable value.
- The primary source of income was from investment activities, not trading.

Legal Precedents:
The Tribunal referred to several legal precedents, including:
- JCIT vs. Shri Chhatarmal Gokulchand Chhajer: The Tribunal held that all share transactions should be charged to capital gains irrespective of their holding period.
- Mr. Bothara Pemraj Manakchand vs. DCIT: The Tribunal emphasized that the intention behind the transactions, rather than the volume, should determine whether the income is classified as capital gains or business income.

Conclusion:
The Tribunal concluded that the assessee's transactions were investments and not trades. Therefore, the income from the sale of shares should be assessed under the head 'capital gains' and not as business income. The appeals filed by the assessees were allowed, and the AO was directed to treat the impugned income from the sale of shares as assessable under the head 'capital gains'.

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