2017 (2) TMI 787 - AT - Income Tax

Treatment to investment in shares - trading activity and taxing as short term capital gain or business income - Held that - In the preceding year also, we find, that the department has accepted the treatment of STCG on the investment division and profit from business in trading division and therefore the stand of the revenue is in variance to the principle of consistency in the in the pattern of assessment. Under these facts and circumstances,we are of the view that the finding of the lower authorities are not correct and cannot be sustained as the facts on records amply proved the fact of having earned short term capital gain out of investments held for a short period out of proceeds from the units of Birla Sun Life which were also held as investments. We are, therefore, inclined to set aside the orders of lower authorities and direct the AO to treat the income of ₹ 21,10,696/- as STCG and not as business income. - Decided in favour of assessee

Summary

Issues:
1. Treatment of investment in shares as trading activity and taxing as short term capital gain of ?21,10,696/- as business income.

Analysis:
The appeal arose from the order of the ld.CIT(A) upholding the AO's decision to treat the investment in shares as trading activity and taxing it as short term capital gain of ?21,10,696/- as business income. The assessee maintained two portfolios for shares - one for trading business and the other for investment purposes. The AO, after scrutiny, treated the short term capital gain as business income, disregarding the assessee's explanation that shares were purchased for both trading and investment purposes. The First Appellate Authority dismissed the appeal, emphasizing the importance of the intention at the time of purchase in determining whether the shares were held as an investor or trader.

The First Appellate Authority considered various parameters to differentiate between trading and investment activities, such as intention at the time of purchase, frequency of transactions, holding period, treatment in books of account, use of funds, and time devoted to the activity. The Authority noted that the assessee was engaged in share dealings and had devoted substantial time to these activities, indicating a trading pattern. The Authority highlighted that the entries in the balance sheet alone were not determinative of the nature of transactions. It was crucial to analyze how the assessee dealt with the shares after purchase to ascertain the nature of income.

The Appellate Tribunal analyzed the details of sales and purchases of shares, observing that the assessee dealt with the shares as a trader based on the overall impression gathered. The Tribunal noted that the short term capital gain was predominantly earned from shares held for less than six months, further supporting the trading activity argument. The Tribunal also considered the source of funds used for share investments, emphasizing the short period within which significant gains were made. The Tribunal concluded that the lower authorities' findings were incorrect, directing the AO to treat the income of ?21,10,696/- as short term capital gain and not as business income.

In conclusion, the Appellate Tribunal allowed the appeal, setting aside the lower authorities' decision and ruling in favor of treating the income as short term capital gain.