2020 (12) TMI 112 - AT - Income Tax

Correct head of income - income of share transaction - business income OR capital income - Period of holding of shares - HELD THAT - CIT(A) taking into account all facts of assessee s case has directed the assessing officer to treat the 'Capital Gain from sale of shares held by the assessee for a period of one month or more, but less than one year should be treated as investment and profit earned from sale of the same should be assessed as Short Term Capital Gain ; while the shares held for less than a month should be treated as trading purchases of the assessee and profits from the same should be assessed under the head 'Business Income'. Having gone through the order of ld. CIT(A), we noticed that there is no any infirmity in the order and reasoning given by the ld. CIT(A). That being so, we decline to interfere with the order of Ld. CIT(A) in directing the assessing officer, his order therefore, upheld and the grounds of appeal of the assessee are dismissed.

Summary

Issues:
1. Treatment of short term capital gain as business income.
2. Appreciation of shares purchased as investments.
3. Consideration of CBDT circular and legal decisions.
4. Valuation of closing stock if capital gains are treated as business income.

Analysis:

Issue 1: Treatment of short term capital gain as business income
The appeal pertains to the Assessment Year 2010-11 challenging the order of the ld. Commissioner of Income Tax (Appeals)-II, Surat, which treated the short term capital gain (STCG) of ?30,57,137 as business income out of total STCG of ?41,55,817. The Assessing Officer observed that the assessee engaged in frequent trading of shares, maintained a separate trading and profit & loss account, and had a short holding period for shares. The AO concluded that the motive was profit-making, not investment, and thus treated the STCG as business income. The ld. CIT(A) partially allowed the appeal, directing the treatment of certain shares as investments and others as trading purchases. The Tribunal upheld the decision, noting the frequency of transactions and holding period as indicative of trading activity.

Issue 2: Appreciation of shares purchased as investments
The assessee argued that the shares were shown as investments in the balance sheet, and dividend income was earned, emphasizing consistency in treatment. However, the Assessing Officer relied on the motive of earning profit from share trading, considering the short holding period and substantial short term capital gain. The Tribunal noted the distinction between shares held for over a month and less than a month, categorizing them as investments and trading purchases, respectively.

Issue 3: Consideration of CBDT circular and legal decisions
The Assessing Officer referred to the CBDT circular, stating that profit motive in share transactions indicates trading activity. The ld. CIT(A) and the Tribunal analyzed the facts in light of legal precedents and circulars, concluding that the nature of transactions and motive for profit determine the characterization of income.

Issue 4: Valuation of closing stock if capital gains are treated as business income
The assessee contended that if capital gains are treated as business income, the closing stock should be valued at cost or market value, ensuring a true and fair view of accounts. However, the Tribunal upheld the ld. CIT(A)'s decision, categorizing the shares based on holding period and transaction frequency, leading to the dismissal of the appeal.

In conclusion, the Tribunal upheld the order directing the treatment of specific shares as investments and others as business income, based on the nature of transactions and holding periods, dismissing the appeal filed by the assessee.