2018 (11) TMI 587 - AT - Income Tax

Gain on sale of shares - character of income - capital gain or busniss income - Held that - When seen holistically the action of the assessee appears to resonate with the consistent position taken in past and in subsequent assessment years. While some circumstances do indicate the regularity in transactions and trapping of business, other overwhelming circumstances negate the same. Thus, benefit of doubt deserves to go to assessee. Therefore, the action of the Revenue to treat the gains arising on sale of shares (Rs.40.67 Lakhs) as business income cannot be approved as it denies the set off of loss of short term capital loss (Rs.39.27 Lakhs) arose from the similarity of transactions in the preceding assessment year. Thus, we are disposed to hold that the action of the CIT(A) in confirming the order of the AO is misplaced. We accordingly set aside the order of the CIT(A) and direct the AO to treat the income arising from delivery based transactions in shares under the heard capital gains as claimed by the assessee.

Summary

Issues involved:
Characterization of income from sale of shares as capital gains or business income, Set off of short term capital losses brought forward from previous assessment year.

Analysis:

Issue 1: Characterization of income from sale of shares
The assessee appealed against the re-characterization of short term capital gains from sale of shares as business income by the Assessing Officer (AO). The appellant argued that the transactions were in line with previous years and should be treated as capital gains. The Revenue contended that the volume and frequency of transactions indicated a business activity. The Tribunal noted the factual nature of the issue and observed consistency in treatment of similar transactions in previous years. The Tribunal held that the Revenue's attempt to treat the gains as business income was not justified and directed the AO to treat the income from share transactions as capital gains, maintaining consistency with previous assessments.

Issue 2: Set off of short term capital losses
In a related appeal, the assessee challenged the denial of set off of short term capital losses brought forward from the previous assessment year. Following the decision on the first issue, the Tribunal found the denial of set off no longer valid. The AO was directed to allow the set off of losses from the preceding year while computing the taxable income for the current assessment year.

The Tribunal allowed the appeal in ITA No.1072/Ahd/2014, setting aside the re-characterization of income from share transactions and directing treatment as capital gains. In ITA No.130/Ahd/2016, the appeal was dismissed as infructuous after resolving the issue of set off of short term capital losses. The judgments were pronounced on 01/11/2018.