2016 (5) TMI 1081 - AT - Income Tax

Sale of shares - Short Term Capital Gain or Business income - Held that - It is an admitted fact that around 90% of the total gains is from sale of the shares of FCS Softwares Solutions Ltd. It is also an undisputed fact that the assessee had applied in the shares of the IPO of the said company from borrowed capital. Merely because the shares were applied through borrowed capital cannot be a ground for treating the capital gains as business income. The IPO funding availed by the assessee was to get more allotment but the fact of the matter is that the assessee was an investor and the sole intention of applying in the shares through IPO was to get higher allotment of shares. We also find that there are no repetitive purchase and sale of the same script which means that there is no churning of shares. The total number of days utilized by the assessee for investment in shares is 32 days. Considering all these facts in totality, we do not find any reason to treat the assessee as a trader. We, therefore set aside the findings of the Ld. CIT(A) and direct the AO to treat the Short Term Capital Gain on sale of shares. - Decided in favour of the assessee

Summary

Issues:
1. Treatment of short term capital gain on sale of shares as business income.

Analysis:
The case involved a challenge to the order of the CIT (A) regarding the treatment of short term capital gain on the sale of shares as business income. The Assessing Officer (AO) determined the income of the assessee, an individual, at a certain amount, considering the nature of the share transactions. The AO found that most of the share transactions were squared up quickly, indicating a business activity rather than investment. The AO concluded that the income should be taxed under the head of business income, not short term capital gain. The First Appellate Authority (FAA) upheld the AO's decision, emphasizing the structured and organized business activity of the assessee.

During the hearing before the Appellate Tribunal, the authorized representative argued that the intention of the assessee was investment, not business, citing the utilization of borrowed funds and the average holding period of shares. The representative also referred to a similar case decided by the Tribunal involving the brother of the assessee. The Tribunal reviewed the facts of the brother's case, where the short term capital gain on shares was treated as business income by the AO and the CIT (A) but was overturned by the Tribunal. The Tribunal in that case emphasized that the intention of the assessee was as an investor, not a trader, despite utilizing borrowed funds for share transactions.

Based on the Tribunal's previous decision and the similarities in the facts of the two cases, the Tribunal in the present case decided in favor of the assessee. The Tribunal noted that the assessee's actions aligned more with an investor's behavior, considering factors such as the intention behind share transactions, absence of repetitive trading, and the duration of investment. Therefore, the Tribunal directed the AO to treat the short term capital gain on the sale of shares as declared by the assessee, allowing the appeal filed by the assessee.