2016 (12) TMI 174 - AT - Income Tax

Sale of shares - business income OR short term capital gains - Held that - Where the assessee has repeatedly invested in shares, may be, the quantity was higher or the periodicity of transactions were more, does not decide the nature of activity to be a business. Where the intention of assessee was to make investment, wherein the delivery of shares were taken by the assessee and was then on appreciation sold in the open market, then gain arising on such investments is to be assessed as Income from short term capital gains and not as Income from business . Accordingly, the order of CIT(A) is reversed in this regard. Further, in respect of shares of I Bulls and Astramic, the income is assessable as speculation business since the assessee had not taken the delivery of shares. Accordingly, the Assessing Officer is directed to re-compute the income in the hands of assessee. However, in respect of balance shares, the same are directed to be assessed as Income from short term capital gains . - Decided in favour of assessee.

Summary

Issues Involved:
Assessability of gain arising on sale of shares as 'Income from short term capital gains' or 'Income from business'.

Analysis:
1. Assessability of Gain: The primary issue in the appeal was the assessability of the gain arising from the sale of shares. The assessee contended that it should be treated as 'Income from short term capital gains', while the Revenue authorities taxed it as 'Income from business'. The Assessing Officer noted the regular and recurring nature of the transactions, high profits, and frequency of activity, leading to the conclusion that it constituted a business activity. The CIT(A) upheld this decision, considering the volume and frequency of shares traded. However, the assessee argued that the shares were primarily held as investments, not for trading purposes, and that the borrowed funds were not utilized for the investments.

2. Judicial Precedents and Arguments: The Authorized Representative for the assessee referred to specific transactions involving shares of Cipla Ltd. and other companies, emphasizing that major shares were treated as investments in the preceding year. The assessee also acknowledged speculative profits in certain transactions. The Authorized Representative highlighted judicial decisions and argued that the gain from the sale of shares held as investments should be treated as 'Income from short term capital gains'. The Revenue, on the other hand, relied on the CIT(A)'s order and contended that the systematic trading activity constituted a business, justifying the assessment as 'Income from business'.

3. Decision and Rationale: After reviewing the details of the shares dealt with and the intention behind the transactions, the Tribunal concluded that where shares were treated as investments in the preceding year and subsequently sold, the gain should be assessed as 'Income from short term capital gains'. The Tribunal differentiated between shares held for investment purposes and those involved in systematic trading activities. It directed the Assessing Officer to re-compute the income, treating certain transactions as speculative business income and others as short term capital gains. The Tribunal disagreed with the CIT(A)'s reliance on specific judicial decisions and reversed the order, allowing the grounds of appeal raised by the assessee.

4. Final Decision: The Tribunal allowed the appeal of the assessee, overturning the CIT(A)'s order and directing the re-computation of income based on the nature of the shares transactions. The decision highlighted the importance of the intention behind the share dealings and differentiated between investments and business activities in determining the tax treatment of gains arising from the sale of shares.