2016 (7) TMI 690 - AT - Income Tax

Profit on sale and purchase of shares - Treatment of income under the head short-term capital gain OR business income - Held that - The details of the transactions of sale and purchase of shares and the resultant gains arising therefrom are placed in the paper book which we have given an anxious thought. Keeping in view the factual matrix and the peculiar facts and circumstances of the case we are of the considered view it will be just and appropriate in the interest of justice that the gains arising from sale of shares held for a period of up to 30 days should be treated as business income and brought to tax as income from business as there is reflected an indica of trade on the part of the assessee in selling the shares within such a short period of time of holding up to 30 days while gains arising from sale of shares held for a period of holding of shares of more than 30 days and not more than twelve months the resultant gain arising therefrom should be charged to tax as short-term capital gains as there is reflected an indica of investment where the period of holding is more than 30 days and not more than twelve months. The Assessing Officer is directed to compute the respective business income and short-term capital gain on sale of shares accordingly as indicated by us as above.

Issues Involved:
1. Treatment of income under the head short-term capital gain as business income.

Issue-wise Detailed Analysis:

1. Treatment of Income Under the Head Short-term Capital Gain as Business Income:

The primary issue in this case is whether the short-term capital gains earned by the assessee from the sale of shares should be classified as business income or as capital gains. The assessee argued that the income should be treated as short-term capital gains, citing that the shares were held as investments and not as stock-in-trade. The assessee highlighted that the investments were made using surplus funds, and no borrowed funds were used for these transactions. The assessee also pointed out that the shares were held for varying periods, with an average holding period of 98 days, and no intra-day trading or futures and options (F&O) transactions were undertaken.

During the scrutiny assessment, the Assessing Officer (AO) observed that the assessee had engaged in frequent transactions involving about 65 different scrips, indicating a trading intention rather than an investment intention. The AO concluded that the magnitude and frequency of transactions suggested that the primary motive was to earn profits from trading in shares, and thus, the income should be treated as business income.

The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the AO's decision, emphasizing that several factors, such as the intention of the taxpayer, frequency of transactions, period of holding, and the nature of transactions, need to be considered to determine whether the gains are from business or investments. The CIT(A) noted that the repetitive nature of transactions and the re-entry into the same scrips indicated a trading intention.

The assessee appealed to the Income-tax Appellate Tribunal (ITAT), arguing that the principle of consistency should be followed, as the Revenue had accepted the classification of similar gains as capital gains in previous assessment years. The assessee also highlighted that no business expenses were incurred for these transactions, and the investments were managed by a professional broker.

The ITAT considered the arguments and the factual matrix of the case. It acknowledged that the assessee had consistently declared gains from share transactions as capital gains in previous years, which were accepted by the Revenue. However, the ITAT also noted the high frequency and volume of transactions, as well as the re-entry into the same scrips, which indicated a trading intention.

In conclusion, the ITAT decided that the gains from shares held for a period of up to 30 days should be treated as business income, as the short holding period reflected a trading intention. For shares held for more than 30 days but not more than twelve months, the gains should be treated as short-term capital gains, reflecting an investment intention. The ITAT directed the AO to compute the respective business income and short-term capital gains accordingly.

Judgment:

The appeal filed by the assessee was partly allowed. The ITAT directed that gains from shares held for up to 30 days be treated as business income, while gains from shares held for more than 30 days but not more than twelve months be treated as short-term capital gains. This decision was pronounced in the open court on May 27, 2016.

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