2019 (9) TMI 1090 - HC - Income Tax

Characterization of income - Benefit of exemption for long term capital gain - AO while passing an order accepted the assessed long term capital gain derived as a result of sale of shares but treated the short term capital gain derived from purchase and sale of shares as income from business only - HELD THAT - Tribunal, thus, keeping in view the number of frequency of transaction has rightly arrived at a conclusion that the Assessing Officer was justified in giving the benefit of exemption for long term capital gain and was also justified in treating the income as business income in respect of purchase / sale of shares No substantial question of law arises in the present appeal. The frequency of transaction carried out during the year shows that approximately 288 transactions took place for the purchase of equity shares through out the year and about 162 transactions of sale have been entered with various share brokers including Arihant Capital; JM Finance P. Ltd., etc., and, therefore, as the assessee has entered into multiple transactions for various listed Companies, it was a regular feature of the assessee to trade in shares to obtain short term gain and, therefore, the short term gain has rightly been included as business adventure and has rightly been included in the income of the assessee. It is purely a finding of fact arrived at by the Assessing Officer as well as by the Income Tax Appellate Tribunal. No substantial question of law arises in the present appeal.

Issues Involved:
1. Classification of short-term capital gains as business income.
2. Applicability of tax rates on short-term capital gains.
3. Consistency in tax treatment across different assessment years.
4. Frequency and nature of share transactions.

Detailed Analysis:

1. Classification of Short-Term Capital Gains as Business Income:
The core issue was whether the short-term capital gains derived from the purchase and sale of shares should be treated as business income. The Assessing Officer (AO) classified these gains as business income due to the high frequency and volume of transactions. The appellant argued that he was a regular investor and not a trader, citing previous favorable rulings by the Commissioner of Income Tax (Appeals) (CIT(A)) for earlier assessment years. The Income Tax Appellate Tribunal (ITAT) upheld the AO's decision, emphasizing the "number of frequency of transactions" and the "intention behind the gain and intention behind the sale."

2. Applicability of Tax Rates on Short-Term Capital Gains:
The AO levied a higher tax rate of 30% on the income classified as business income, as opposed to the 10% rate applicable to short-term capital gains. This resulted in an additional tax demand of ?37,33,743/-. The appellant contended that the consistent treatment of such gains in previous years should apply, warranting the lower tax rate. However, the ITAT maintained that the nature of transactions justified the higher rate.

3. Consistency in Tax Treatment Across Different Assessment Years:
The appellant argued that the CIT(A) had consistently ruled in his favor in previous years, treating similar transactions as short-term capital gains. The appellant cited several judgments to support the principle of consistency, including Commissioner of Income Tax Vs. Om Prakash Suri and Deepaben Amitbhai Shah Vs. Dy. Commissioner of Income Tax. However, the ITAT noted that the appellant's case had not been subject to scrutiny in previous years and that the volume of transactions had significantly increased, thus not fulfilling the "rule of consistency."

4. Frequency and Nature of Share Transactions:
The ITAT's decision heavily relied on the frequency and nature of the appellant's share transactions. The appellant had approximately 288 purchase transactions and 162 sale transactions within the assessment year, involving multiple brokers and substantial amounts. The ITAT observed that such frequent trading activity indicated a business motive rather than investment. The Tribunal stated, "There seems to be a consistent touch of assessee with the equity market as frequent transactions of purchase and sale of the same script are done during the year which normally is not a practice of an investor."

Conclusion:
The High Court upheld the ITAT's decision, agreeing that the AO was justified in treating the short-term capital gains as business income due to the high frequency and volume of transactions. The Court noted that the findings were factual and did not raise any substantial question of law. Consequently, the appeal was dismissed, and the higher tax rate on the reclassified income was deemed appropriate.

Significant Judgments Cited:
1. Commissioner of Income Tax Vs. Om Prakash Suri.
2. Deepaben Amitbhai Shah Vs. Dy. Commissioner of Income Tax.
3. Commissioner of Income Tax Vs. Gopal Purohit.
4. Principal Commissioner of Income Tax Vs. Hiren M. Shah.
5. Manoj Kumar Samdaria Vs. Commissioner of Income Tax-I.
6. P.V.S. Raju Vs. The Addl. Commissioner of Income Tax.
7. Commissioner of Income Tax (Central) Calcutta Vs. Associated Industrial Development Co. P. Ltd.
8. P. M. Mohammad Meerakhan Vs. Commissioner of Income Tax, Kerala.
9. Khan Bahadur Ahmed Alladin & Sons Vs. Commissioner of Income Tax, Andhra Pradesh.
10. G. Venkataswami Naidu & Co. Vs. The Commissioner of Income Tax.
11. Municipal Corporation of City of Thane Vs. Vidyut Metallics Ltd., and ors.
12. Premji Bhimji Vs. Commissioner of Income Tax.

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