2021 (4) TMI 679 - AT - Income Tax

Correct head of income - Gain on sale of shares - short term capital gain or business income - as submitted that there were only 10 scrips in which the investment had been made during the year and the deliveries of all the shares purchased were taken in the depository account of the company and shares had been shown as investment in the Balance Sheet as per Schedule VI of the Companies Act, 1956 and not as stock-in- trade - as per AO assessee is not maintaining separate books of accounts for the alleged investments and regular business and No separate bank account is maintained for diffracting the alleged investment made and for business activity HELD THAT - When assessee itself has classified its shares into investment portfolio, and had sold the shares in the relevant year itself after making substantial gain, then it cannot be held that assessee was not an investor but a share trader. Here, the assessee s business as clarified by the ld. counsel was not dealing in purchase and sale of shares but for providing financial consultancy and all allied and auxiliary services. As pointed out before us, there were many months where assessee had undertaken no transaction and in other several months assessee had transacted only in one scrip. Thus, such a pattern cannot be reckoned that there was a huge frequency of purchase and sale of shares. As stated above, the assessee has made investment and disinvestment in shares of 10 scrips which are all delivery based transactions and the main gain is only from one particular scrip i.e., DLF Ltd. If detail of date-wise transaction is taken into consideration of various scrips which are as under, then it can be seen that transaction are not huge which has been the allegation of the Assessing Officer. If we analyze given chart, then it can be clearly seen that out of above scripts, the gain/profit is mainly from one scrip, that is, DLF Ltd. Hence, it cannot be held the transaction is in the nature of business or profession. - Decided against revenue.

Summary

Issues Involved:
1. Whether the profit earned by the assessee on the sale of shares should be classified as short-term capital gain or business income.

Issue-wise Detailed Analysis:

1. Classification of Profit on Sale of Shares:

Background:
The primary issue in this case is whether the profit of ?35,14,66,127/- earned by the assessee on the sale of shares should be treated as short-term capital gain (STCG) or business income. The Revenue contended that the profit should be treated as business income due to the nature and frequency of transactions, while the assessee argued that it should be classified as STCG.

Assessee's Argument:
The assessee is engaged in providing financial consultancy and allied services. According to the Memorandum of Association (MOA), the business includes buying, selling, and dealing in securities. The assessee declared an income of ?1,41,84,797/- from business and profession and ?35,14,66,127/- from STCG. The assessee invested in the scrips of 10 companies, taking delivery of all shares in its depository account and showing them as 'investment' in the balance sheet, valued at cost, and not as stock-in-trade. The frequency of transactions was low, and the gains were shown as capital profit, not trading profit.

Revenue's Argument:
The Assessing Officer (AO) observed that the assessee did not maintain separate books of accounts or bank accounts for investments and business activities. The turnover of shares was ?69,06,09,30,892/-, indicating trading activity. The AO treated the income from the sale of shares as business income, citing the assessee's earlier treatment of similar income as business income in the previous assessment year (2007-08).

CIT(A)'s Findings:
The CIT(A) accepted the assessee's contention, relying on the judgment of the Hon’ble Bombay High Court in CIT vs. Gopal Purohit. The CIT(A) noted that the assessee did not engage in frequent transactions throughout the year, made investments in only 10 companies, and held shares as investments in the balance sheet. The transactions were delivery-based, and the shares were valued at cost. The CIT(A) concluded that the shares were purchased for investment purposes, and the profit from their sale should be treated as STCG.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s decision, noting that the assessee's business was not dealing in shares but providing financial consultancy. The frequency of transactions was low, and the major gain was from one scrip (DLF Ltd.). The assessee maintained separate portfolios for investment and trading, and the shares in question were treated as investments. The Tribunal cited the Hon’ble Bombay High Court's ruling in Gopal Purohit, which allows an assessee to maintain two portfolios. The Tribunal also referenced the Hon’ble Delhi High Court's decision in CIT vs. Vinay Mittal, emphasizing that short-term gains from investments do not automatically imply trading activity.

Conclusion:
The Tribunal concluded that the assessee's transactions were for investment purposes, and the profit from the sale of shares should be taxed as STCG. The Revenue's appeal was dismissed, and the CIT(A)'s findings were upheld.

Order:
The appeal of the Revenue is dismissed. The order was pronounced in the Open Court on 8th April 2021.