2015 (4) TMI 753 - AT - Income Tax

Treatment of income from trading in shares - Business income or Capital gain - Principle of res judicata - Held that - The AO has not brought out anything to controvert this fact that the sale and purchase of shares by the assessee was not a regular business activity and therefore profit derived by the assessee from the same cannot be treated to be business income from profit. From Paper book page no. 13 to 15, we note that the assessee has shown investment in shares as in AY 2005-06, 2006- 07 and 2007-08 and the same has been shown at cost and not as stock-intrade which is valued at cost or market price whichever is lower. From balance sheet page no. 13, we also note that in AY 2007-08, the capital brought forward by the assessee was ₹ 1,19,66,247 whereas investment in shares was of ₹ 59,94,734. At the same time from Paper book page no. 3 to 6, we also observe that short term capital gain of ₹ 79 lakh was earned from 25 scrips only and the profit declared as capital gain was earned from delivery based purchase and sale of shares and delivery was taken after making full payment for such transaction. We also note that as per Paper Book page no. 3 and 5 of the assessee, short term capital gain was earned out of 3 scrips which only comes to 93.62% of the total profit from purchase and sale of shares and major part of the capital gain was earned from the shares held by the assessee for more than 30 days. The AO has not brought out any fact or material to controvert or to demolish above facts supporting the case of the assessee. We are in agreement with this legal contention of the ld. DR that principle of res judicata does not apply to the taxation proceedings but at the same time, we cannot ignore this legal proposition that the rule of consistency has to be followed in good conscience and bona fide until and unless changed facts and circumstances are found in the subsequent assessment yeas. As we have noted earlier that the assessee has shown shares in its balance sheet during the preceding assessment years as an investment and the same has been valued at cost of purchase. We are inclined to hold that the AO was not justified in treating the income from purchase and sale of shares as business income ignoring the treatment given by the assessee in his books of accounts and financial statement filed along with the return of income and in the light of above noted facts, the CIT(A) was right in following the principle of consistency and reach to a logical conclusion that the income accrued to the assessee from purchase and sale of shares was capital gains. We are unable to see any ambiguity, perversity or any other valid reason to interfere with the impugned order and we uphold the same. Accordingly, sole ground in both the appeals of the revenue being devoid of merits is dismissed. - Decided against the revenue.

Summary

Issues Involved:
1. Whether the CIT(A) was justified in rejecting the AO's contention of treating the trading in shares as business income instead of capital gains.

Issue-wise Detailed Analysis:

1. Justification of Treating Trading in Shares as Business Income or Capital Gains:

The revenue contested the CIT(A)'s decision to treat the income from trading in shares as capital gains rather than business income. The revenue argued that the nature, frequency, and volume of transactions indicated that the shares were held as stock-in-trade, thus qualifying the income as business income. The revenue referred to CBDT Circular No. 4/2010 and Instruction No. 1827, emphasizing the distinction between shares held as investment and those held as stock-in-trade. They also cited the Supreme Court's decision in CIT vs Associated Industrial Development Company (P) Ltd. to support their position that the assessee should provide evidence distinguishing between investment and stock-in-trade shares.

The assessee countered by highlighting several factors demonstrating that the shares were held as investments. These included the classification of shares as investments in the balance sheet, valuation at cost, lack of infrastructure for trading, use of own funds, and the nature of transactions being delivery-based. The assessee also pointed out that the Department had accepted similar classifications in preceding and succeeding assessment years.

The CIT(A) concluded that the assessee's activities did not amount to a regular business activity, as evidenced by the limited number of trading days and transactions. The CIT(A) directed the AO to treat the profits from share sales as capital gains, not business income, and to tax the short-term capital gains at 10% under section 111A and exempt the long-term capital gains.

Upon review, it was noted that the AO did not provide sufficient evidence to counter the assessee's claim that the shares were held as investments. The assessee consistently showed investments in shares in previous years and valued them at cost, not as stock-in-trade. The majority of the capital gains were derived from shares held for more than 30 days, and the Department had accepted similar classifications in previous years under section 143(1) and in the succeeding year under section 143(3).

The principle of consistency was emphasized, stating that unless there are substantially changed facts and circumstances, the same treatment should be applied. The AO's decision to treat the income as business income was deemed unjustified, and the CIT(A)'s order was upheld, dismissing the revenue's appeals.

Conclusion:

The appeals of the revenue were dismissed, affirming the CIT(A)'s decision to treat the income from the sale of shares as capital gains rather than business income. The principle of consistency and the lack of evidence to support the AO's contention were key factors in this decision. The judgment was pronounced in the open court on 02.03.2015.