2014 (12) TMI 1350 - HC - Income Tax

Profit offered on sale of assets being STT paid on listed shares - income from business OR income from short term capital gains u/s 111 (1) (I) on which tax is leviable at flat rate of 10% - HELD THAT - In the present appeal we note that the assessee made investment in shares with intention to earn dividend income on appreciation of price shares. Therefore it cannot be said that the assessee was doing business. More specifically when the assessee either utilized his own funds / family funds or did not pay any interest and depicted the transactions in shares under investment portfolio. During hearing it was also explained by the learned counsel for the assessee that accounts were maintained by the assessee in two separate capacities i.e. trader and investment and never treated the same as holdings of shares as stock in trade which clarifies the intention of the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Classification of profit from the sale of assets as income from business or short term capital gains under the Income Tax Act, 1961.

Analysis:
The case involved multiple appeals filed against the order passed by the Income Tax Appellate Tribunal, Indore. The main issue was the classification of profit offered on the sale of assets, specifically listed shares, as either "income from business" or "income from short term capital gains" under Section 111 (1) (I) of the Income Tax Act, 1961, which is leviable at a flat rate of 10%.

The Assessing Officer treated the profit derived from the sale of shares as "Business Profit" instead of "Short Term Capital Gain" due to the volume and frequency of transactions by the assessee. The Assessing Officer also referred to Circular No.4/2007 of the CBDT to support this classification.

The Commissioner of Income Tax (Appeals) upheld the Assessing Officer's decision, emphasizing that the assessee was engaged in the trading of shares as a business, using borrowed funds for investment and not savings. The retention time of shares before sale was short, indicating a trading activity rather than investment.

However, the Income Tax Appellate Tribunal, after considering the facts of the case, allowed the appeal and deleted the addition. The Tribunal noted that the assessee held shares as an investor, not having an office or administrative setup, and did not pay interest on borrowed funds. The Tribunal emphasized the possibility of a taxpayer having two portfolios: an "Investment Portfolio" and a "Trading Portfolio," with the gain from delivery-based transactions being treated as capital gains.

The Tribunal's decision was based on the intention of the assessee to earn dividend income on share appreciation, using own or family funds for investments. The Tribunal referenced the decision of the Hon'ble Jurisdictional High Court in a similar case to support its conclusion.

The Senior Counsel for the appellant argued that the Tribunal erred in treating the sale of shares as short term capital gains instead of business income, citing the CBDT Circular. However, the Tribunal's decision was upheld, stating that the issue was squarely covered by previous decisions of the Court, and no substantial question of law arose in the appeals.

Ultimately, the High Court dismissed the Income Tax Appeals, concluding that the issue was covered by previous decisions, and there was no infirmity in the Tribunal's order.

In summary, the judgment revolved around the proper classification of profit from the sale of assets under the Income Tax Act, with the Tribunal ruling in favor of treating the gains as capital gains based on the assessee's intention and the nature of transactions.