2016 (12) TMI 490 - AT - Income Tax

Income from sale of shares - capital gain of business income - Held that - Interest of justice will be best served if the gain arising from the sale/purchase of shares which are held for a period of up-to 30 days from the date of purchase is to be treated as business income, while wherein the period of holding of shares is more than 30 days, the gains arising there-from would be treated as short term capital gain/long capital gain depending upon the period of holding as stipulated in the Act.

Issues Involved:
1. Classification of short-term capital gains as business income.
2. Intention behind purchase of shares.
3. Magnitude and frequency of transactions.
4. Allowance of expenditure related to trading in shares.

Issue-wise Detailed Analysis:

1. Classification of Short-term Capital Gains as Business Income:
The primary issue in this case was whether the short-term capital gains amounting to INR 2,47,33,233 should be classified as business income. The Assessing Officer (AO) observed that the assessee engaged in a high volume of transactions, purchasing shares worth INR 32,67,31,843 and selling shares worth INR 35,14,65,076. The AO concluded that the assessee's activities indicated a business motive rather than investment, treating the gains as business income. The CIT(A) upheld this view, noting the magnitude and frequency of transactions and the short holding period, indicating a business activity. The Tribunal, however, partially allowed the appeal, directing 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 be treated as capital gains.

2. Intention Behind Purchase of Shares:
The AO argued that the intention behind the purchases was to resell at a profit, as evidenced by the high frequency of transactions and the short holding periods. The assessee contended that the shares were purchased for investment purposes, aiming for dividend income and capital appreciation. The AO relied on the Supreme Court's decision in G. Venkataswami Naidu & Co. v. CIT, which held that an intention to resell at a profit indicates a trading activity. The Tribunal acknowledged the assessee's argument but noted that the repeated buying and selling within short periods suggested a trading intention for shares held up to 30 days.

3. Magnitude and Frequency of Transactions:
The AO and CIT(A) both emphasized the high volume and frequency of transactions as indicative of a business activity. The AO noted 341 transactions involving over 5,12,399 shares, with many shares being bought and sold within 1 to 30 days. The Tribunal agreed that the frequency and volume of transactions for shares held up to 30 days suggested a trading activity, thus supporting the AO's classification of these gains as business income.

4. Allowance of Expenditure Related to Trading in Shares:
The assessee argued that if the gains were to be treated as business income, the AO should allow the deduction of expenses incurred wholly and exclusively for trading in shares. The Tribunal did not explicitly address this issue in the judgment, focusing instead on the classification of gains based on the holding period of shares.

Conclusion:
The Tribunal partially allowed the appeal, concluding that:
- Gains from shares held for up to 30 days should be treated as business income.
- Gains from shares held for more than 30 days should be treated as short-term or long-term capital gains, depending on the holding period.
This decision balanced the AO's findings with the principle of consistency, considering the assessee's past tax assessments and the nature of transactions. The judgment emphasized the importance of the holding period in determining the nature of income from share transactions.

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