2018 (12) TMI 221 - HC - Income Tax

Nature of income - Gain made on sale of shares - short term capital gain OR business income - classification of income on sale of shares as business income or as short term capital gains is to be decided the facts of each case - Held that - We note that the Tribunal kept in mind the tests as provided in the above Circular in the context of the facts and found is that these investments were out of its own funds and not borrowed funds, further it maintained a distinction between trading in shares and investments. Thus two portfolios one for Investment and other for Trading . Besides for the earlier years the Revenue accepted the claim of short term capital gain. Thus the income has to be taxed as short term capital gain. We are of the view that respondent holding the shares for a short period, will not convert the capital gain into business income. This would be contrary to be legislative mandate which itself provides that when the investment is held for less than 12 months, it is to be termed as short term capital gain. Moreover, the impugned order of the Tribunal also in the present facts correctly placed reliance upon the decision of this Court in the case of CIT Vs. Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT .

Summary

Issues:
Classification of gain on sale of shares as short term capital gain or business income.

Analysis:
The appeal challenges the order passed by the Income Tax Appellate Tribunal regarding the classification of gain on the sale of shares for the Assessment Year 2008-09. The main question of law raised is whether the gain made on the sale of shares should be classified as short term capital gain or as business income. The respondent claimed short term capital gain of ?9.42 crores in its return of income for that year. The Assessing Officer disputed this classification, arguing that since all the shares were held for a very short period and were purchased and sold within the same year, the gain should be treated as business income instead of short term capital gain.

The respondent, however, contended that its primary business activity is trading in engineering goods, metal, and other commodities, and the investments in shares were made using its own funds accumulated over 10 to 15 years without any external borrowings. Despite presenting this argument, the Commissioner of Income Tax (Appeal) upheld the Assessing Officer's decision. On further appeal to the Tribunal, the order dated 8th July, 2015 allowed the appeal after considering the separate classification of trading in shares, long term capital gains, and business profits in the respondent's financial statements. The Tribunal also noted that the gains from short term capital gain were due to prudent investment practices and market monitoring, which align with the legislative provision that short term gains arise when shares are held for less than 12 months. Additionally, the Tribunal referred to a previous decision of the Court to support its reasoning.

The Revenue's counsel argued that due to the significant amounts involved and the nature of the profit claimed under short term capital gain, the appeal should be admitted. However, the Court emphasized that the classification of income from the sale of shares as business income or short term capital gain depends on the specific circumstances of each case. The Court highlighted the tests provided in CBDT Circular No.4 of 2007 for such determinations and noted that the respondent's investments were made using internal funds without borrowing, maintaining a clear distinction between trading and investment portfolios. Moreover, the Court pointed out that the legislative mandate categorizes investments held for less than 12 months as short term capital gains. Ultimately, the Court found that the Tribunal's decision was reasonable based on the facts presented and dismissed the appeal, stating that it did not raise any substantial question of law.