2016 (5) TMI 21 - HC - Income Tax

Income earned from the shares - Short Term Capital Gains OR Income from Business and Profession - Held that - Merely because 41 shares/securities were bought and sold could not per se lead to the conclusion that the earnings therefrom were not Short Term Capital Gains but business income. The mere percentage of the investment from the available surplus funds of the Assessee could not be by itself be determinative of the issue. One important factor would be how frequently the Assessee was purchasing shares during the relevant AY. This crucial factor does not seem to have been addressed by the AO. Although Mr. Manchanda repeatedly stressed that the ITAT had gone only by the order passed by the AO for AY 2005-06 whereas the said assessment had been reopened subsequently under Section 153A of the Act, but in the considered view of the Court, independent of that fact, the finding of the ITAT that the earning of the Assessee was only a Short Term Capital Gains does not suffer from any legal infirmity - Decided against revenue

Summary

Issues:
1. Classification of income earned from shares as "Short Term Capital Gains" or "Income from Business and Profession"

Analysis:
The High Court of Delhi heard three appeals by the Revenue challenging the ITAT's order regarding the classification of income earned by the Assessee from shares. The main issue was whether the income should be treated as "Short Term Capital Gains" or "Income from Business and Profession."

The Assessee, a company incorporated in 2004, declared income from shares as "Short Term Capital Gains" in the initial assessment year. However, the main business activity in real estate had not commenced. The Revenue argued that the transactions were not occasional but continuous, indicating the intention to earn profits by trading shares rather than holding them as investments.

The CIT (A) held that gains from shares held for less than 30 days should be considered as business income, while gains from shares held for longer periods should be treated as Short Term Capital Gains. Both the Assessee and the Revenue appealed this decision to the ITAT.

The ITAT found that the shares were classified as investments in the balance sheet and were not purchased with borrowed funds. It noted that gains from share transactions were correctly taxed as capital gains, not business income. The ITAT also highlighted that similar gains in a previous assessment year were declared and accepted as capital gains.

The Revenue argued that a significant portion of the Assessee's funds were used for share transactions, and the company had increased its share capital without commencing its main business activity. However, the Court emphasized that the frequency of share purchases during the relevant assessment year was a crucial factor that the AO had not adequately considered.

The Court concluded that the ITAT's finding that the Assessee's earnings were Short Term Capital Gains was legally sound, irrespective of the past assessment reopening. It dismissed the appeals, stating that no substantial legal question arose for determination.