2016 (10) TMI 1350 - AT - Income Tax

Correct head of income - short term gain v/s business income - whether the STCG on transaction of purchase and sale of units of mutual funds and shares undertaken by the assessee during the previous year is to be assessed under the head income from business as claimed by the revenue or income under the head capital gain as contended by the assessee? - HELD THAT - It is not in dispute that the shares and mutual funds that were sold during the previous year which resulted in the income in question were held by the Assessee as Investments and not as Stock-in-trade . The assessee during the previous year had entered into 490 transactions of purchase and 646 transactions of sale of shares units of mutual funds. Out of the above in respect of 207 transactions the sale was made within 30 days of purchase. The question is as to whether the volume and frequency can for the basis for drawing an inference that the Assessee was engaged in business. The Hon ble ITAT Mumbai Bench i In the case of Janak S.Rangwala Vs. ACIT 2006 (12) TMI 261 - ITAT MUMBAI has held that magnitude of the transaction does not alter the nature of the transaction. As we have already seen it is not in dispute that the Assessee had treated the shares and units as investments in its books of accounts. Similar transactions have been accepted by the revenue in assessments for AY 2005-06 as giving raise to capital gains and not as business income in the assessment completed u/s.143(3) of the Act after scrutiny. There was no borrowing by the Assessee out of which investment in shares and units were made. As we have already seen that the AO in AY 05-06 accepted similar income as capital gain. Even for AY 2006-07 the AO accepted the claim of the Assessee and it was only pursuant to the order u/s.263 of the Act the AO took a different view. It is not disputed by the revenue that the facts and circumstances in the AY 05-06 and the present AY 2006-07 are identical. Though the rule of res judicata is not applicable in income tax proceedings but the principle of consistency will definitely apply and on that basis the claim of the Assessee should be held to be proper. - Decided against revenue.

Summary

Issues Involved:
1. Whether the short-term capital gain from the purchase and sale of shares and mutual funds should be assessed under the head "Capital Gain" or "Income from Business."
2. Application of the principle of consistency in tax treatment across different assessment years.

Issue-wise Detailed Analysis:

1. Assessment of Short-term Capital Gain:
The central issue was whether the gain from the purchase and sale of shares and mutual funds by the assessee should be classified as "Capital Gain" or "Income from Business." The assessee, a company engaged in investments, had declared short-term capital gains of ?5,57,30,140/- for the assessment year 2006-07. Initially, the Assessing Officer (AO) accepted this declaration under Section 143(3) of the Income-tax Act, 1961. However, the Commissioner of Income Tax (CIT), exercising powers under Section 263, directed the AO to reassess whether the gains should be treated as business income, citing the frequency and volume of transactions as indicative of trading activity.

Upon reassessment, the AO concluded that the gains should be classified as "Income from Business," noting the regularity and volume of transactions, and the short holding periods of the securities, which suggested a profit motive rather than investment intent. The AO's decision was based on the principle that the treatment in the books is not conclusive if the transactions indicate systematic and organized activity with a profit motive.

2. Principle of Consistency:
The assessee appealed to the CIT(A), arguing that similar transactions in previous years had been accepted as capital gains, and a change in treatment would violate the principle of consistency. The CIT(A) agreed with the assessee, citing the decision in the case of Gopal Purohit (122 TTJ 87), which emphasized that the Revenue should maintain consistency in tax treatment across different assessment years unless there is a significant change in facts. The CIT(A) also referenced the jurisdictional High Court's decision in the case of Himalaya Finance & Investment Co., which supported the classification of such gains as capital gains.

The CIT(A) observed that the assessee had consistently shown investments in shares and mutual funds as "Investments" in the balance sheet, with no evidence of treating them as stock-in-trade. The CIT(A) also noted that in the subsequent assessment year 2007-08, the CIT had accepted the assessee's claim of capital gains, further supporting the principle of consistency.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s order, emphasizing that the classification of gains as capital gains was consistent with the assessee's treatment in previous years and supported by judicial precedents. The Tribunal reiterated that the principle of consistency should apply, especially when the facts and circumstances remain unchanged across assessment years. The Tribunal also referenced the CBDT Circular No. 6/2016, which allows the assessee to classify income from the sale of shares as either capital gains or business income, based on their treatment in the books of accounts.

The Tribunal concluded that the AO's reclassification of the gains as business income was unwarranted, given the consistent treatment of similar transactions in the past. The appeal by the Revenue was dismissed, and the gains were to be assessed as short-term capital gains.

Conclusion:
The Tribunal's judgment emphasized the importance of consistency in tax treatment and upheld the classification of the assessee's gains from the sale of shares and mutual funds as capital gains, dismissing the Revenue's appeal. The decision was based on the consistent treatment of such transactions in previous years and supported by relevant judicial precedents and CBDT circulars.