2009 (7) TMI 901 - AT - Income Tax

Income from speculation business - Treatment of profit on sale of shares - capital gain - HELD THAT - The assessee in his individual capacity carries on business of jewellery. Apart from said business, the assessee invested in shares and treats shares as investment in his books of account. This itself manifests the intention of the assessee as to whether he proposed into dealing in shares or earn dividend and profit out of such investment. Here the assessee has been holding the shares by taking delivery and making full payment for such investment. In such circumstances, the transactions are to be treated as giving rise to the capital gain and cannot be branded as trading in shares. What is relevant is the intention of the assessee himself at the time of making investment so as to determine whether the transaction was for dealing in shares or making investment for earning dividend and appreciation from such investment. The total number of shares dealt in respect of long-term portfolio is only 5. This cannot be considered as voluminous transaction. Therefore, this transaction in shares cannot be said to be with intention to deal in such shares. Rather the transactions were with intention of earning appreciation from such shares. Therefore, the same are assessable as capital gain and not as profits and gains of business. We, therefore, uphold the orders of the learned CIT(A). In the result, both the appeals are dismissed.

Summary

Issues:
Treatment of profit on sale of shares as capital gain or business income.

Analysis:
1. The appeals were against the treatment of profit on sale of shares by the assessee as capital gain, while the Assessing Officer assessed it as business income under section 143(3) of the Income-tax Act, 1961.

2. For an individual assessee engaged in trading gold, gold ornaments, and shares, the Assessing Officer argued that the volume and frequency of share transactions indicated a business activity, not investment. The assessee countered, stating the shares were treated as capital assets, not stock-in-trade, and were held for long-term appreciation and dividend income.

3. The Commissioner of Income-tax (Appeals) found that the assessee's dividend income, holding periods, source of funds, and lack of trading pattern supported the capital gain treatment. The assessee's limited share transactions, holding strategy, and lack of frequent rotation of stock indicated an investment motive, not trading.

4. In the case of Hindu Undivided Family (HUF), similar arguments were presented, with the CIT(A) emphasizing the investment nature of shares based on holding periods, source of funds, and lack of trading characteristics.

5. The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's conduct, intention, and treatment of shares as investments were crucial. The volume of transactions alone did not determine the nature of income. Holding shares for long periods, earning dividends, and the lack of trading patterns supported the capital gain treatment.

6. The Tribunal highlighted that the Income-tax Act considers shares held for over a year as long-term capital assets, indicating the legislative intent to differentiate between investments and trading stock. The assessee's conduct and intention, not just transaction volume, were pivotal in determining the nature of income.

7. Ultimately, the Tribunal dismissed the appeals, affirming the capital gain treatment for the profits on the sale of shares, based on the assessee's investment intent, holding patterns, and lack of trading characteristics.

This detailed analysis showcases the arguments, findings, and rationale behind the decision to treat the profit on the sale of shares as capital gain rather than business income, emphasizing the importance of the assessee's intention, conduct, and treatment of shares as investments.