2016 (7) TMI 58 - AT - Income Tax

Sale of equity shares - short term gain OR business income - Held that - It is undisputed fact that the assessee had disclosed these transactions as investment in the return during the year under consideration. It is also a fact that the assessee was in investment in shares from 2000-01 to till date and in all the years, he has disclosed short term/long term capital gain on account of investment in shares which has been accepted by the department. AO as well as ld CIT(A) has considered the various decisions on which they came to conclusion that these transactions are business transactions but latest circular issued by the CBDT No. 6/2016 dated 29/2/2016 and F.No. 225/12/2016/ITA.II dated 02/5/2016 have set a guidelines to assess the share trading income under the head investment or trading. The assessee is a salaried person. He has income from interest and income from other sources. The share trading is not a main business of the assessee but he made investment in part time individually with his own fund without any assistance of the man power or office, which itself shows that the intention of the assessee was to invest in shares to get gain from it on the basis of period of holding. Accordingly, he has disclosed short term capital gain in the return. After considering both sides, we have considered view that the assessee was in investment of shares not share trading. - Decided in favour of assessee

Issues Involved:
1. Classification of income from the sale of equity shares as business income or short-term capital gain.
2. Determination of whether the investment in equity shares should be treated as business assets or investment assets.
3. Applicability of various legal precedents and CBDT circulars in determining the nature of income from share transactions.

Detailed Analysis:

Issue 1: Classification of Income from Sale of Equity Shares
The primary issue was whether the short-term gain of ?29,21,048 from the sale of equity shares should be classified as business income or short-term capital gain. The Assessing Officer (AO) treated this income as business income based on factors such as the holding period, frequency of transactions, and the intention of the assessee. The AO observed that the assessee had a significant volume of transactions and concluded that these were driven by market sentiments rather than an intention to hold the shares as investments. The AO relied on various case laws, including the Supreme Court decision in Karan Chand Thapar and Brothers (P) Ltd. Vs. CIT, to support this classification.

The CIT(A) upheld the AO's decision, noting that the magnitude and frequency of the transactions indicated a business activity rather than investment. The CIT(A) also referred to CBDT Circulars No. 1857 and 4/2007, which provide guidelines for determining the nature of share transactions.

Issue 2: Determination of Investment in Equity Shares
The second issue was whether the investment in equity shares should be treated as business assets or investment assets. The AO and CIT(A) both concluded that the investments were business assets, given the nature and frequency of transactions. The CIT(A) emphasized that the assessee's activities were not related to his regular source of income (salary) and that the transactions were substantial and frequent, indicating a business motive.

Issue 3: Applicability of Legal Precedents and CBDT Circulars
The assessee argued that the intention behind the transactions was to invest, not to trade, and cited various case laws and CBDT Circulars to support this claim. The assessee pointed to Circular No. 6/2016, which states that if an assessee treats shares as investments, the income should be treated as capital gains. The assessee also highlighted that he used his own funds, did not maintain an office or employ staff, and had consistently shown these transactions as investments in previous years, which were accepted by the department.

The Tribunal considered the latest CBDT Circulars, which provide that if shares are held for more than 12 months and treated as investments, the income should be considered as capital gains. The Tribunal noted that the assessee had disclosed these transactions as investments and had consistently shown short-term and long-term capital gains in previous years. The Tribunal concluded that the assessee's intention was to invest in shares, not to trade, and reversed the CIT(A)'s order, treating the income as short-term capital gain.

Conclusion:
The Tribunal allowed the appeal, holding that the income from the sale of equity shares should be treated as short-term capital gain, not business income. The decision was based on the assessee's consistent treatment of these transactions as investments, the use of own funds, and the latest CBDT Circulars providing guidelines for such classifications. The order of the CIT(A) was reversed, and the appeal was allowed in favor of the assessee.

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