2018 (2) TMI 58 - HC - Income Tax

Income from sale of shares - treatment of Long Term Capital Gains or busniss income - Held that - Tribunal is justified in confirming treatment of Long Term Capital Gains and Short Term Capital Gains as income from business Appeal is admitted on the substantial question of law at (b) - Whether in the facts and circumstances of the case and in law, the Tribunal was justified in holding that once an assessee trades in shares then, ipso facto even bonus shares received by the assessee are to be held as trading stocks ?

Summary

Issues:
1. Classification of Long Term and Short Term Capital Gains as income from business
2. Treatment of bonus shares received by the assessee as trading stocks

Analysis:

Issue 1: Classification of Long Term and Short Term Capital Gains as income from business
The appellant declared short term capital gain and long term capital gains as an investor in shares for the subject Assessment Year. However, the Assessing Officer noted that for the previous year, the appellant had treated share transactions as a business activity. The appellant claimed to be an investor, but the Assessing Officer found discrepancies in the trading and Profit & Loss Account, balance sheet, and source of funds. The Assessing Officer applied tests to determine the character of transactions and concluded that the appellant was a trader in shares. The CIT(A) and the Tribunal upheld this view, considering the consistency in the appellant's trading activities. The Tribunal observed numerous transactions of purchases and sales during the year, leading to the classification of the appellant as a trader in shares.

Issue 2: Treatment of bonus shares received by the assessee as trading stocks
The appellant contended that the entries in the books of account for the subject Assessment Year indicated investor status. Various circumstances were pointed out to support the change from trader to investor status, but the Tribunal did not find them convincing. The appellant's rectification application, seeking to address the issues raised, was dismissed by the Tribunal. The Court found that all authorities had consistently classified the appellant as a trader in shares for the subject Assessment Year. The Court held that the Tribunal's decision was reasonable, considering the application of the rule of consistency and absence of significant changes from the earlier Assessment Year. Therefore, the Court did not entertain the substantial question of law raised in this regard.

In conclusion, the Court admitted the appeal on the substantial question of law related to the treatment of bonus shares but upheld the classification of the appellant as a trader in shares for the subject Assessment Year based on the facts and findings presented.