2017 (1) TMI 504 - AT - Income Tax

Income from sale of shares - LTCG and STCG or business income - Held that - While the volume, frequency and magnitude of transactions are relevant factors for determinative of nature of transactions, no single test by itself is determination of the issue. The cumulative effect has to be weighed to determine as to whether the impugned transactions bear the trappings of adventure in the nature of trade or commerce etc. or otherwise. On the totality of the facts, we find no reason to draw adverse inference against the claim of the assessee as in the nature of capital gains . Therefore, the appeal of the Revenue is liable to be dismissed. As regards the grievance of the assessee, we find considerable merit therein. Mere fact that the assessee has also quickly sold shares in some instances within the short interval would not ipso facto lead to a conclusion that the assessee was a trader in the shares. The action of the CIT(A) in bifurcating the gains based on the period of holding of less than 30 days and more than 30 days is not supportable by the scheme of the Act. The STCGs as defined under section 2(42A) does not contemplate such bifurcation. Thus, the aforesaid action of the CIT(A) is a mere ipse dixit of the CIT(A) and is not sustainable in law. Hence, the plea on behalf of the assessee deserves acceptance. As a result, grievance of the assessee raised in ground No.1 is decided in favour of assessee.

Summary

Issues Involved:
1. Classification of gains from the sale of shares as "business income" versus "capital gains."
2. Disallowance under section 14A of the Income Tax Act.

Detailed Analysis:

1. Classification of Gains from the Sale of Shares:

The primary issue revolves around whether the gains from the sale of shares should be classified as "business income" or "capital gains." The Revenue challenged the CIT(A)'s decision to treat the income from share trading as Long Term Capital Gains (LTCGs) and Short Term Capital Gains (STCGs) instead of business income. Conversely, the assessee contested the CIT(A)'s decision to treat gains from shares held for less than one month as business income.

The assessee, engaged in the trading business of art silk cloth, reported STCGs and LTCGs on the sale of shares in their income tax return. The AO, considering the volume, frequency, and profit motive, reclassified these gains as business income. The CIT(A), referencing previous decisions in the assessee's own case, directed the AO to treat gains from shares held for more than one month as capital gains, while gains from shares held for less than one month were treated as business income.

The Tribunal noted that the assessee had consistently maintained shares as investments in their books and had not been primarily engaged in share trading. The Tribunal also observed that the majority of the gains were from shares held for more than 30 days, and the LTCGs were derived from transactions where the holding period varied from 365 to 1825 days. The Tribunal concluded that these facts did not support the AO's assumption of business income and upheld the CIT(A)'s decision for shares held for more than a month.

However, the Tribunal disagreed with the CIT(A)'s bifurcation of gains based on a 30-day holding period, stating that the Income Tax Act does not support such a distinction. The Tribunal emphasized that the mere quick sale of shares does not automatically classify the gains as business income. Thus, the Tribunal ruled in favor of the assessee, treating all gains as capital gains irrespective of the holding period.

2. Disallowance under Section 14A:

The second issue concerned the disallowance of ?1,75,069/- under section 14A of the Income Tax Act, which the assessee contested, arguing that the interest claimed was only ?60,576/-. However, this ground was not pressed by the assessee during the proceedings and was thus dismissed by the Tribunal.

Conclusion:

The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal. It concluded that the gains from the sale of shares should be treated as capital gains, not business income, regardless of the holding period. The disallowance under section 14A was not pursued further and was dismissed. The Tribunal's decision underscores the importance of consistent treatment of shares as investments and the inadequacy of holding period alone as a determinant of the nature of income.