2018 (4) TMI 78 - AT - Income Tax

Treatment to gain on sale of shares - busniss income or capital gain - initial intention of the assessee to decide whether an activity amounts to trading activity or investment activity - conversion of investment into stock-in-trade - Held that - We note that the sources for acquisition of shares are from share capital, reserves and surplus funds. The assessee has been an investor and not a trader as seen from the intention of the assessee. The treatment given in the books under the head investment clearly shows that the assessee s intention to deal in shares as investment. The conversion of investment into stock-in-trade and continuing the trading under that head and again converting the closing stock under that head into investment , under consideration amounts to a clear change of intention depending on the circumstances. By converting the stock-in-trade into investment, it does not alter the character, nature and intention of that particular transaction especially in the context of capital gain versus business income. Subsequent conversion and treatment given in the books of accounts do not alter the character of commercial transaction. The profit that has been attributable to this trading activity corresponding to conversion of stock-in-trade into investment is to be treated as business income and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as capital gains and conversion of stock-in-trade to investment is to be taken as trading income , which is based on facts of the case and need no disturbance. - Decided against revenue.

Summary

Issues involved:
Assessment of income as business income or capital gains based on the nature of transactions and intentions of the assessee.

Detailed Analysis:

Issue 1: Assessment of income as business income or capital gains
The appeal filed by the Revenue challenged the order passed by the Commissioner of Income Tax (Appeals) regarding the treatment of income for assessment year 2007-08. The Revenue contended that the assessee changed stock-in-trade to investment and vice versa without adhering to a reasonable basis, leading to lower tax incidence. The Revenue argued that the assessee's motive was not bona fide and transactions were systematically organized to lower tax liabilities.

Analysis: The Assessing Officer treated the profits from share transactions as business income instead of capital gains, based on the high volume of transactions and systematic activity. The AO believed the primary motive was profit-making, not investment. However, the CIT(A) allowed the appeal, citing a previous ITAT ruling in favor of the assessee, emphasizing the intention to deal in shares as investments, not stock-in-trade.

Issue 2: Determination of intention and nature of transactions
The Revenue contended that the assessee's actions indicated a clear change of intention from investment to trading based on the conversion of stock-in-trade to investment. The Revenue argued that the profits attributable to this trading activity should be taxed as business income.

Analysis: The assessee maintained separate ledger accounts for the conversion of stock-in-trade into investment, indicating a change in intention based on circumstances. However, the ITAT Kolkata upheld the CIT(A) decision, emphasizing the initial intention of the assessee at the time of share purchase to hold them as investments, not for trading purposes.

Conclusion:
The ITAT Kolkata dismissed the Revenue's appeal, confirming the CIT(A) findings that the income from investments should be treated as capital gains and the conversion of stock-in-trade to investment should be considered trading income. The decision was based on the assessee's intention at the time of acquisition and the treatment in the books, supported by a previous ITAT ruling in favor of the assessee.