2016 (8) TMI 805 - AT - Income Tax

Income earned by the assessee out of share transactions - treated as capital gains or business income - Held that - The assessee can hold both the portfolio i.e. that of the investor and that of the trader. Although, the assessee in this case had not kept separate accounts regarding its business activity but has treated all the purchases as its investment, however, the learned CIT (A) after going through the transactions in question and considering the explanation of the assessee has held that the intention of the assessee in respect of the transactions in which churning of portfolio was done within a period of less than a month was to earn quick profits. The order of the learned CIT (A) is thus well reasoned order and we do not find any infirmity in the same. Resultantly, both the cross appeals, one by the assessee and the other by the Revenue stand dismissed.

Summary

Issues Involved:
Whether income earned from share transactions should be treated as capital gains or business income.

Analysis:
The judgment involves two appeals, one by the assessee and the other by the Revenue, against the order of the Commissioner of Income Tax (Appeals) for the assessment year 2009-10. The main issue in both appeals is the classification of income from share transactions as either capital gains or business income. The assessee had shown short term capital gains, but the Assessing Officer (AO) considered the activities as business activities due to high transaction volume, low dividend income, short holding periods, and use of borrowed funds. The Commissioner of Income Tax (Appeals) noted that the assessee consistently treated the shares as investments, had substantial long-term capital gains, and conducted transactions on a delivery basis without speculative trading. The Commissioner relied on precedents to support treating the income as capital gains, except for transactions involving churning of portfolios, which were considered as business income.

The Tribunal observed that the AO's inconsistent treatment of the assessee, changing from investor to business income status based on positive income in the current year, was not justified. The Tribunal emphasized the importance of uniformity in approach when facts are identical, as inconsistency creates uncertainty for taxpayers. The assessee explained the need for funds due to previous losses, obtained internally without external borrowing. However, the Tribunal agreed with the Commissioner that transactions with portfolio churning within a short period indicated a profit-making intention, justifying the treatment of such income as business income. The Tribunal acknowledged the possibility for an assessee to hold both investor and trader portfolios, and upheld the Commissioner's decision regarding income from churning transactions.

In conclusion, both the assessee's and the Revenue's appeals were dismissed, affirming the Commissioner's order. The Tribunal found the Commissioner's decision well-reasoned and upheld the treatment of income based on the nature of transactions. The judgment was pronounced on 20 July 2016.