2015 (11) TMI 73 - HC - Income Tax

Treatment of the purchase and sale of shares - Determination of income - short term capital gains and long term capital gains or business income - Held that - The Court finds merit in the contention of learned Senior counsel for Assessee that the ITAT appears to have prejudged the issue whether the Assessee was also a trader in shares apart from being an investor. That conclusion was required to be arrived at by the CIT (A) after re-examining the matter in the light of the issues highlighted by the ITAT. The CIT (A) should have been given a free hand to arrive at an independent decision uninfluenced by the observations of the ITAT on merits. Accordingly, the impugned order of ITAT is modified by directing that the CIT (A) will undertake the exercise of examining the materials de novo and arriving at a decision uninfluenced by the observations and/or conclusions of the ITAT including whether the Assessee was both a trader and an investor.

Summary

Issues:
Common issue of treating income as short term capital gains or business income.

Analysis:
The appellant, engaged in the business of exporting hand knitted carpets and handicrafts, also invested in shares and mutual funds for capital appreciation and dividends. The Assessing Officer considered the income from the sale of shares and mutual funds as business income due to the large number of transactions. The Commissioner of Income Tax (Appeals) accepted that some transactions could be viewed as a business activity despite heavy volumes. However, the ITAT observed that the question of whether income from portfolio management schemes (PMS) was capital gains or business income was not addressed. The ITAT concluded that the appellant was both a trader and investor based on the number of transactions and changes in scrips. The ITAT remanded the case back to the CIT (A) to re-examine independently for each assessment year.

The High Court found merit in the appellant's contention that the ITAT prejudged whether the appellant was also a trader in shares. The Court held that the CIT (A) should have been given a free hand to make an independent decision without being influenced by the ITAT's observations. The High Court modified the ITAT's order, directing the CIT (A) to re-examine the materials and decide whether the appellant was both a trader and an investor without being influenced by the ITAT's conclusions. The High Court clarified that it did not express any opinion on this issue.

In conclusion, the High Court disposed of the appeals by modifying the ITAT's order and directing the CIT (A) to conduct a fresh examination of the materials to determine whether the appellant was both a trader and an investor, independently and without being influenced by the ITAT's observations.