2015 (5) TMI 675 - AT - Income Tax

Transaction in shares - short term and long term capital gains v/s business income - CIT(A) direct the A.O. to accept the claim of the appellant by accepting the long term and short term capital gain admitted by the appellant - Held that - From the record, we found that assessee was consistently investing in shares. She has neither traded in the investment securities nor she had any intention to convert her investment into stock-in-trade. Only the intention of the assessee was to earn capital gain on appreciation of value of shares and dividend income. In the assessee s own case for the A.Y.2006-07, the department has accepted assessee s claim of capital gain amounting to ₹ 24,79,925/- for the A.Y.2006-07. The assessee was consistently following the method of accounting shares as investment. A categorical finding has also been recorded by the CIT(A) to the effect that shares were shown as investment in the balance sheet which indicated the intention of the assessee to hold the same as investment. It is also not the case of the AO that assessee has valued the shares at the cost of market price at the end of the year. On the contrary, the shares were recorded in the balance sheet on the cost of acquisition only. The intention of assessee, period of holding, frequency of transactions are to be considered in totality while holding that profit arose on sale of shares is capital gain on business income. After applying various judicial pronouncements as well as CBDT Circular No.4/2007, dated 15th June, 2007, the CIT(A) has recorded a categorical finding that profit arose on sale of shares are liable to be taxed as short term and long term capital gains depending on the period of holdings. No reason to interfere in the findings recorded by the CIT(A), which resulted into treatment of profit on sale of shares as capital gains in place of AO s treatment of business income. - Decided against revenue.

Summary

Issues Involved:
1. Classification of income from share transactions as either capital gains or business income.

Detailed Analysis:

1. Classification of Income from Share Transactions:

The primary issue in this case is the classification of income earned by the assessee from share transactions, specifically whether such income should be treated as short-term and long-term capital gains or as business income.

The Revenue's grievance centers on the CIT(A)'s direction to accept the assessee's claim of short-term and long-term capital gains, contrary to the Assessing Officer's (AO) treatment of the same as business income.

Facts and Arguments:
- The assessee was involved in both delivery-based and non-delivery-based share transactions. The income from delivery-based transactions was claimed as capital gains, while the income from non-delivery-based transactions was offered as business income.
- The AO argued that due to the volume and frequency of transactions, the income should be treated as business income. However, the CIT(A) accepted the assessee's claim of capital gains, citing various judicial precedents and the principle of consistency.

CIT(A)'s Observations:
- The CIT(A) noted that the assessee had consistently treated delivery-based share transactions as investments in their books of accounts and paid Securities Transaction Tax (STT) at the rate applicable to investors.
- The CIT(A) referenced multiple tribunal decisions, including those of the Hon'ble Hyderabad Tribunal in Shah-La Investments and Financial Consultants Pvt. Ltd vs. Dy.CIT and the Hon'ble Mumbai Tribunal in J. M. Share & Stock Brokers Limited vs. JCIT, which supported the view that an individual could engage in both trading and investment activities in shares.
- The CIT(A) emphasized the principle of consistency, as upheld in cases like Gopal Purohit vs. JCIT, where it was held that the treatment of income in earlier years should not be changed in subsequent years without material changes in facts.

Tribunal's Analysis:
- The Tribunal reiterated that the classification of income depends on the intention of the assessee at the time of purchasing shares, the treatment in the books of accounts, and the overall conduct of the assessee.
- The Tribunal cited the Hon'ble Supreme Court in CIT vs. Associated Industrial Development Co. (P.) Ltd., which stated that the knowledge of whether shares are held as investments or stock-in-trade lies with the assessee.
- The Tribunal also referred to the CBDT Circular No.4/2007, which acknowledges the possibility of maintaining separate portfolios for investment and trading purposes.
- The Tribunal found that the assessee had consistently treated shares as investments, valued them at cost, and had not borrowed funds for these investments from external sources, indicating an intention to hold shares as investments rather than stock-in-trade.

Conclusion:
- The Tribunal concluded that the AO was not justified in treating the capital gains as business income, given the consistent treatment of shares as investments by the assessee.
- The Tribunal upheld the CIT(A)'s decision to treat the income from delivery-based share transactions as short-term and long-term capital gains, emphasizing the principle of consistency and the factual matrix of the case.

Final Judgment:
- The appeal of the Revenue was dismissed, and the order of the CIT(A) was upheld, confirming the treatment of income from delivery-based share transactions as capital gains.

Order Pronouncement:
- The order was pronounced in the open court on 20th February 2015.