2019 (1) TMI 279 - AT - Income Tax

Income from sale of shares - Short Term Capital Gain and long-term capital gain OR business income - Held that - We hold that the frequency, magnitude of the transaction in systematic manner cannot be the criteria to hold that the assessee is engaged in business activity of shares. Therefore, we are inclined to set aside the order of Learned CIT(A) and direct the AO to treat the income from investment activity under the head capital gain. - Decided in favour of assessee.

Issues Involved:
1. Classification of income from the sale of shares as business income or capital gains.
2. Application of the principles laid down by the Gujarat High Court in determining the nature of income.
3. Adherence to CBDT Circulars for classification of income.
4. Consistency in the treatment of income from shares in previous and subsequent years.

Detailed Analysis:

1. Classification of Income from Sale of Shares as Business Income or Capital Gains:
The primary issue in the appeal was whether the short-term capital gain of ?9,61,606/- and long-term capital gain of ?25,471/- should be treated as business income. The assessee, engaged in the business of cloth merchant and share activities, declared these gains as capital gains. However, the AO considered the frequent and systematic transactions of shares as indicative of business activity and treated the income as business income.

2. Application of Principles Laid Down by the Gujarat High Court:
The CIT(A) confirmed the AO's decision by applying the tests from the Gujarat High Court judgment in CIT vs. Rewashankar A. Kothari. These tests include the intention at the time of acquisition, the purpose of the sale, treatment of shares in the books, the nature of income returned previously, and the volume, frequency, and regularity of transactions. The CIT(A) found that the volume and frequency of transactions, along with the regularity and high turnover, indicated a business activity rather than an investment.

3. Adherence to CBDT Circulars for Classification of Income:
The Tribunal referred to CBDT Circular No. 6/2016 and Circular No. 4/2007, which provide guidance on distinguishing between capital assets and trading assets. The Circulars allow for maintaining separate portfolios for trading and investment, emphasizing the need for clear demarcation in the books of accounts. The assessee had classified shares as investments in the balance sheet, which supported the claim of capital gains.

4. Consistency in the Treatment of Income from Shares in Previous and Subsequent Years:
The Tribunal noted that the Revenue had accepted the classification of shares as investments in previous and subsequent years. This consistent treatment supports the assessee's claim that the income should be treated as capital gains. The Tribunal emphasized the importance of consistency, referencing the Supreme Court judgment in Radhasaomi Satsang vs. CIT.

Tribunal's Conclusion:
The Tribunal concluded that the assessee's classification of shares as investments should be respected, and the income from the sale of shares should be treated as capital gains. The Tribunal relied on the CBDT Circulars and previous consistent treatment by the Revenue. The Tribunal set aside the CIT(A)'s order and directed the AO to treat the income under the head capital gain.

Final Judgment:
The appeal of the assessee was allowed, and the income from the sale of shares was directed to be treated as capital gains. The Tribunal emphasized adherence to CBDT Circulars and the importance of consistency in the treatment of income from shares.

Order Pronouncement:
The order was pronounced in the open court on 01/01/2019.

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