2017 (2) TMI 459 - HC - Income Tax

Gains from the purchase and sale of shares and mutual funds - Long Term Capital Gains OR Business income - Held that - In view of the fact that the Revenue has been consistently taking a view that the income earned on investments is taxable under the head capital gains no difference in facts and /or in law has been pointed out to take a different view for the subject Assessment Year. Moreover, the entire question of the nature of activity carried out by the respondent-assessee i.e. business or investment is a question of fact. Both the CIT(A) as well as the Tribunal have concurrently come to a finding of fact that the income earned on the investment portfolio is chargeable under the head capital gains and not under the head profits from trading of shares which is not shown to be perverse. No substantial question of law.

Summary

Issues:
1. Interpretation of Income Tax Act, 1961 regarding treatment of gains from purchase and sale of shares and mutual funds.
2. Determination of whether gains are to be treated as Long Term Capital Gains or business income.
3. Consistency in treatment of income earned on investments under the head 'capital gains'.

Analysis:
The High Court of Bombay heard an appeal challenging the order of the Income Tax Appellate Tribunal regarding the treatment of gains from shares and mutual funds for Assessment Year 2005-06. The main issue raised was whether the gains should be considered as Long Term Capital Gains, despite the volume and frequency of transactions. The Tribunal upheld the Assessee's position that the income from shares and mutual funds should be taxed under 'capital gains' and not as business income. This decision was supported by the Commissioner of Income Tax (Appeals) and was based on the Assessee's consistent reporting of gains under the capital gains head from 2003-04 to 2009-2010. The Revenue's argument that borrowed funds in the subject year indicated trading gains was dismissed by the Tribunal due to lack of evidence linking borrowed funds to investments.

The Court noted that the Revenue failed to demonstrate any change in facts or circumstances for the subject year compared to previous years, where the income on investments was accepted as capital gains. The Court emphasized that the nature of the Assessee's activity, whether business or investment, is a factual determination. Both the CIT(A) and the Tribunal had found that income from the investment portfolio should be treated as capital gains, which was deemed reasonable. The Court concluded that the formulated question did not raise any substantial legal issue and dismissed the appeal without costs.

In summary, the judgment clarified the consistent treatment of income earned on investments as capital gains, emphasizing the importance of factual findings in determining the nature of the Assessee's activities. The Court upheld the Tribunal's decision, highlighting the lack of evidence linking borrowed funds to trading gains and the absence of significant changes in circumstances from previous years.