2017 (1) TMI 680 - AT - Income Tax

Transaction of shares - capital gain or business income - Held that - AO has not established whether the transactions were continuous and regular besides being systematic as found out in Jaysree Pradip Shah (2010 (2) TMI 695 - ITAT, MUMBAI )wherein it was held that high frequency of transaction of purchase and sale of shares shall be considered a business activity of the assessee if transactions are continuous, regular and systematic and use of borrowed funds for purchase of such shares with short period of holding. We observe that the AO has made scrutiny assessment of the assessee u/s 143(3) of the Act for the A.Y. 2012-13 and 2013-14. The treatment given by the assessee to its capital gains has not been disturbed by the AO for the above two assessment years. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in- trade, each essentially a fact specific determination. The AO has not come to finding whether the assessee has carried out repetitive transactions of same share. The AO has also not established whether the transactions were continuous and regular besides being systematic. We follow the decision in CIT vs. Amit Jain (2015 (3) TMI 720 - DELHI HIGH COURT ), CIT vs. Datta Mahendra Shah (2015 (9) TMI 970 - BOMBAY HIGH COURT ) and confirm the order passed by the ld. CIT(A).

Summary

Issues:
1. Whether transactions in shares should be treated as business activity or capital gains.
2. Whether the income earned from trading in shares should be classified as business income or capital gains.

Issue 1:
The main issue in this case is whether the transactions in shares conducted by the assessee should be treated as a business activity or capital gains. The Revenue contended that the assessee's motive was to earn quick profits through trading activities rather than earning dividends from share investments. The Assessing Officer (AO) found that a significant percentage of shares were sold within a short period after purchase, indicating a trading motive. The AO also noted the use of borrowed funds for share purchases and the involvement in intra-day and future and option trading activities. Consequently, the AO treated a portion of the income as business income.

Analysis: The AO's decision was based on the high frequency of transactions, short holding periods, and the use of borrowed funds for share purchases. The Revenue argued that these factors indicated a trading motive rather than an investment intent. The AO's findings were supported by the Revenue's assertion that the volume of profits and the nature of transactions suggested a trading activity. The AO's decision to tax a portion of the income as business income was upheld based on these considerations.

Issue 2:
The second issue revolves around whether the income earned from trading in shares should be classified as business income or capital gains. The ld. CIT(A) relied on precedents and the assessee's consistent treatment of share trading income as capital gains. The ld. CIT(A) considered the assessee's income from other sources over the years and the past acceptance of share trading gains and losses as capital gains by the department. As a result, the ld. CIT(A) classified the activity of dealing in shares as capital gains.

Analysis: The ld. CIT(A) based the decision on the consistent treatment of share trading income as capital gains by the assessee and the department's past acceptance of such treatment. The ld. CIT(A) emphasized that the assessee's income from other sources and the historical treatment of share trading gains and losses supported the classification of the activity as capital gains. The ld. CIT(A) upheld the classification as capital gains, considering the assessee's past treatment and the department's acceptance of the same.

Final Decision:
The Tribunal considered the arguments presented by both the Revenue and the assessee. The Tribunal distinguished the present case from previous cases cited by both parties. The Tribunal emphasized the need for a fact-specific determination regarding the character of investments in shares. The Tribunal followed precedents and confirmed the ld. CIT(A)'s order, classifying the income from share trading as capital gains. Consequently, the appeal filed by the Revenue was dismissed, upholding the classification of the income as capital gains.

This detailed analysis highlights the key issues, arguments, and decisions made in the legal judgment, providing a comprehensive understanding of the case.