2018 (1) TMI 1419 - AT - Income Tax

Treatment to purchase/ sale of shares completed within 30 days - business income or capital gain - Held that - Revenue has accepted the activity of investment in the shares in earlier years as well as subsequent years which was also not disturbed by the Revenue. Therefore, the principles of consistency need to be followed without any deviation when there is no change in the facts and circumstances of the case from the earlier years. We hold that the frequency, magnitude of the transaction in a systematic manner cannot be the criteria to hold that the assessee is engaged in a business activity of shares. Therefore, we are inclined to set aside the order of the Ld. CIT(A) and direct the AO to treat the income from investment activity under the head capital gain. Hence, the ground of appeal of the assessee is allowed.

Summary

Issues involved:

1. Classification of income from the purchase and sale of shares within 30 days as business income or short-term capital gain.
2. Treatment of income from investment activity and trading activity in shares.
3. Consistency in the treatment of income from shares by the Revenue.

Issue-wise detailed analysis:

1. Classification of income from the purchase and sale of shares within 30 days as business income or short-term capital gain:

The primary issue was whether the income from the purchase and sale of shares within 30 days should be classified as business income or short-term capital gain. The assessee argued that the transactions were investments and should be treated as short-term capital gains. However, the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] classified the income as business income, citing the frequency and magnitude of transactions and the short holding period as indicators of trading activity. The CIT(A) relied on the ITAT Ahmedabad 'D' Bench judgment in Sugamchand C. Shah vs. ACIT, which held that shares held for less than 30 days should be treated as business income.

2. Treatment of income from investment activity and trading activity in shares:

The assessee maintained two separate portfolios: one for trading in shares without taking delivery and another for investment in shares with delivery. The assessee argued that the shares held for investment were always valued at cost, and the method was consistently accepted by the Revenue in previous years. The assessee also referred to CBDT Circular No. 4/2007, which allows maintaining separate portfolios for trading and investment activities. The CIT(A) did not accept this argument, and the AO treated the income from shares held for less than 30 days as business income.

3. Consistency in the treatment of income from shares by the Revenue:

The assessee pointed out that the Revenue had accepted the classification of shares as investments in previous and subsequent years. The principle of consistency, as upheld by the Hon’ble Supreme Court in Radhasaomi Satsang vs. CIT, was cited to argue that the Revenue should not change its stance without any material change in facts. The Tribunal agreed with the assessee, emphasizing the need for consistency in the treatment of similar income across different assessment years.

Tribunal's Decision:

The Tribunal referred to CBDT Circular No. 6/2016 and Circular No. 4/2007, which provide guidelines for distinguishing between shares held as stock-in-trade and shares held as investments. The Tribunal noted that the assessee had clearly demarcated its shares as investments in its books of accounts and balance sheet. The Tribunal also considered the principle of consistency and the fact that the Revenue had accepted the assessee's method in previous years.

The Tribunal held that the frequency and magnitude of transactions alone could not determine the nature of income. The intention of the assessee at the time of purchase, as evidenced by the classification in the books of accounts, was paramount. The Tribunal set aside the order of the CIT(A) and directed the AO to treat the income from the sale and purchase of shares as capital gains, not business income.

Conclusion:

The appeal of the assessee was allowed, and the income from the sale and purchase of shares was directed to be treated under the head capital gain. The Tribunal emphasized the importance of the assessee's intention, consistent treatment by the Revenue, and adherence to CBDT circulars in determining the nature of income from shares.