2015 (5) TMI 828 - HC - Income Tax

Share transactions - Capital gain or business income - Held that - Keeping in view of the fact that the assessee has shown the shares which are declared by him either long term or short term capital gains in the investment portfolio and there is no dispute that the same are being valued at cost and on the share holding of the assessee which are stock-in-trade has been valued either at market rate or costs in trade. We find no justification of the Assessing Officer to treat the capital gains arising out of which are short term as well as long term investments portfolio to treat the same as business income. To begin with motive is something, which is locked in the mind of the person. No direct evidence as regards motive is possible. Motive can be inferred from the conduct of the person concerned but that is bound to remain an inference, which may or may not be correct. For the aforesaid reasons, we are of the opinion that the views expressed both by the CIT and the Tribunal for reasons expressed therein are a possible view. It is, therefore, not open to the revenue to contend that the view taken by the Tribunal is perverse - Decided against revenue.

Summary

Issues:
1. Proper claim of short-term and long-term capital gains by the assessee.
2. Treatment of capital gains as business income based on motive.
3. Interpretation of the judgment in Dalhousie Investment Trust Co. Ltd. vs. CIT (1968) ITR 486 (SC).

Analysis:

Issue 1: Proper claim of short-term and long-term capital gains
The Tribunal upheld the order of the Ld. CIT (A) regarding the treatment of capital gains arising from investments as either short-term or long-term, as per the accounting standards followed by the assessee. The Tribunal found no justification for the Assessing Officer to treat these capital gains as business income. The revenue could not fault the claim made by the assessee, leading to the dismissal of the appeal.

Issue 2: Treatment of capital gains as business income based on motive
The assessing officer contended that the shares were purchased and sold with the motive of earning a profit, not for investment purposes. The officer relied on the systematic, organized, and planned manner of transactions, volume, and frequency of transactions to support treating the capital gains as business income. However, the High Court emphasized that motive is subjective and inferred from conduct, which may not always be accurate. The Court referred to a previous judgment to highlight that the revenue failed to show that the finding on income being earned from investments was legally incorrect. The Court held that the judgment was not perverse, dismissing the appeal.

Issue 3: Interpretation of Dalhousie Investment Trust Co. Ltd. vs. CIT
The assessing officer cited the Dalhousie case to support treating the capital gains as business income. However, the High Court distinguished the case by noting that it involved shares dealt with as stock-in-trade from the outset, not initially purchased as investments. The Court found that the facts of the present case were not similar to those in the Dalhousie case. The Court concluded that the views of both the CIT and the Tribunal were reasonable, and the revenue could not argue that the Tribunal's view was perverse. The Court clarified that the question for consideration should focus on whether the views based on the facts were unreasonable, which was not the case here.

In conclusion, the High Court dismissed the appeal, affirming the Tribunal's decision regarding the treatment of capital gains and emphasizing the importance of motive and factual distinctions in determining the nature of income from investments.