2017 (11) TMI 2049 - AT - Income Tax

Correct head on income - income from share transactions - under the head short term capital gain or business income - dual portfolio - HELD THAT - It emerges out from the record that the assessee maintained two separate accounts i.e. one for investment, and other for trading in shares. This fact has not been disputed by the CIT(A). In the assessment year 2006-07, assessment was framed u/s 143(3). AO has accepted the status of the assessee as an investor. Similarly, in the AY 2007-08 and 2009-10, the Revenue did not disturb the status declared by the assessee and accepted returns u/s 143(1) of the Act. In the earlier year and in subsequent year, the status of the assessee as investor was not disputed. The assessee has not used borrowed funds. All these shares were purchased by the assessee were on delivery basis. He has transacted in 16 scrips, though the transactions are large in number, but mere volume of transactions is not a criteria to doubt the treatment given by an assessee about its investment in the books. Therefore, considering we allow the appeal of the assessee, and direct the AO to treat the investment made by the assessee as an investor and the assess the income resulted to the assessee on sale of such investment as short term capital gain. Appeal of the assessee is allowed.

Summary

Issues:
Assessment of short term capital gain as business income.

Detailed Analysis:
The appeal before the Tribunal revolves around the issue of the ld.CIT(A) treating the income disclosed by the assessee under "short term capital gain" as business income. The assessee maintained two sets of accounts - one as an investor and the other as a trader. The ld.AO was not satisfied with the short term capital gain declaration and treated the assessee as a trader, assessing the gain as business income.

On appeal, the ld.CIT(A) granted partial relief, accepting the gain from the opening or last year's investment as short term capital gain but treating the gain from purchases made during the year as business income. The Tribunal noted the highly debatable nature of assessing gain from share sales as business income or capital gain, requiring an understanding of the assessee's intention during the transactions. The Tribunal referred to principles from a previous ITAT Lucknow Bench case to determine if transactions are for trade or investment purposes.

The Tribunal also cited the Hon'ble Gujarat High Court's tests to ascertain if an assessee is engaged in business activities, focusing on factors like intention at the time of acquisition, treatment in books of account, frequency of transactions, and volume of transactions. In the present case, the assessee maintained separate accounts for investment and trading, with no use of borrowed funds and transactions on a delivery basis. Previous assessments also recognized the assessee as an investor, and the volume of transactions alone was not considered sufficient to doubt the investment treatment.

Consequently, the Tribunal allowed the appeal, directing the Assessing Officer to treat the assessee's investment as an investor and assess the income from the sale of such investments as short term capital gain. The judgment was pronounced in favor of the assessee on 3rd November 2017 at Rajkot.