2016 (5) TMI 153 - AT - Income Tax

Short term capital gains OR business income - Held that - The assessee has always valued its investments at cost price and not market price. Its short term capital gains read the impugned sums of ₹ 2,59,43,473/- comprising a sum of ₹ 2,95,48,114/- from a single scrip namely M/s. Reliance Natural Resources Ltd. purchased on 5th April, 10th May, 23rd May and 2nd July 2007 (this last day involves three transactions). This followed sale of the scrip involving all shares on 04-03-2008. The same makes it clear that the assessee s holding period of these shares ranging from 8 to 11 months during which not even a single share was sold. If we exclude this scrip, what is left is net result of loss of ₹ 36 lacs approximately. We confronted the Revenue with all this factual evidence. It fails to controvert the lower appellate authorities findings that the assessee has always been treating its shares and mutual funds in question as investments by maintaining a separate account accepted for the last many years. This is not the Revenue s case that assessee has been engaged in any intra-day sale/purchase transactions. We repeat that assessee has carried out 85 purchase transactions and 67 sale transactions during the relevant previous year. Meaning thereby that there is no transaction carried out in more than of the relevant previous year. We conclude in these peculiar facts and circumstances that the CIT(A) has rightly treated assessee s profits of ₹ 2,59,43,473/- a short term capital gain and not business income. - Decided against revenue

Summary

Issues Involved:
1. Treatment of assessee’s share profit as short-term capital gains or business income.
2. Legality of section 153C proceedings.

Detailed Analysis:

1. Treatment of Assessee’s Share Profit as Short-term Capital Gains or Business Income:
The primary issue in both assessment years 2008-09 and 2009-10 was whether the assessee's profits from share transactions should be classified as short-term capital gains or as business income. The Revenue argued that the assessee’s share transactions were frequent and substantial, indicating a trading motive. The Assessing Officer noted that the holding periods ranged from one month to three months, suggesting a profit motive typical of trading activities. Consequently, he treated the profits from these transactions as business income.

The assessee countered this by asserting that the transactions were investments, not trading activities. The assessee maintained separate books for business and investment activities, valuing investments at cost price rather than market price. The partnership deed explicitly stated that the business would not include trading in equity shares and mutual funds, only investments.

The CIT(A) sided with the assessee, emphasizing that the intention at the time of purchase was to invest, not trade. The CIT(A) noted that the assessee incurred losses in some transactions and held shares for extended periods, which contradicted the trading motive. Additionally, the CIT(A) highlighted that the assessee had consistently treated such transactions as investments in previous years, which had been accepted by the Revenue.

The Tribunal upheld the CIT(A)’s decision, noting that the assessee had always been treated as an investor, not a trader. The Tribunal observed that the assessee did not use borrowed funds for these transactions and maintained a consistent accounting method. The Tribunal concluded that the profits from these transactions should be treated as short-term capital gains, not business income.

2. Legality of Section 153C Proceedings:
The assessee challenged the legality of the section 153C proceedings, arguing that the notice issued under section 153C was not justified. However, this issue became moot as the Tribunal's findings on the primary issue rendered the cross-objection infructuous.

Conclusion:
The Tribunal dismissed the Revenue’s appeals for both assessment years, affirming the CIT(A)’s decision that the assessee’s profits from share transactions should be treated as short-term capital gains. The assessee’s cross-objection regarding the legality of section 153C proceedings was dismissed as infructuous. The Tribunal's order was pronounced on 22-03-2016.