2012 (4) TMI 270 - AT - Income Tax

Determination of the appropriate head of income for taxing the surplus realized on sale of shares - business income or capital gain Held that - AY 2006-07 - an investor would not enter into purchase and sale transactions of shares of 52 companies and units of 10 mutual funds in a single year. The transactions are numerous and period of holding is small - undertakes such large number of transactions keeping the market conditions in view would obviously assume the character of a dealer and not investor - surplus arising from the transactions fall in head profits and gains of business - against assessee. AY 2007-08 and 2008-09 Assessee stated that the LTCG was claimed to be not includible in the total income by dint of provision contained in section 10(36), lower rate of tax was claimed to be applicable in respect of STCG - assessee has also shown STCG in respect of 74,000 bonus and the assessee also sold sub-divided shares and earned profit on it Held that - bonus shares would normally be deemed to be distributed by the company as capital and the shareholders receive the shares as capital - profit on sale of bonus shares would be in the nature of capital gain to profit which has to be classified as STCG - bonus shares of Kotak Bank Ltd. and Unitech Ltd. are held to be on capital account and all other transactions are held to be on business account.

Summary

Issues Involved:
1. Determination of the appropriate head of income for taxing the surplus realized on the sale of shares and redemption of mutual fund units.
2. Classification of gains as business income or capital gains (short-term and long-term).
3. Treatment of bonus shares in the determination of capital gains.

Analysis of the Judgment:

Issue 1: Determination of the Appropriate Head of Income
The primary issue in these appeals is the determination of the appropriate head of income for taxing the surplus realized on the sale of shares and redemption of mutual fund units. The CIT(Appeals)-XXIV, New Delhi, decided these matters in favor of the revenue for assessment years 2006-07 and 2007-08 by holding that the surplus represents profits and gains of business. However, for assessment year 2008-09, the successor CIT(A) decided against the revenue.

Issue 2: Classification of Gains as Business Income or Capital Gains
Assessment Year 2006-07:
The assessee claimed that the gain of Rs. 10,54,870/- is short-term capital gain (STCG). The AO and CIT(A) held that the gain is business income. The Tribunal noted that the assessee had undertaken numerous transactions in shares and mutual funds, with a short holding period, indicating a business motive rather than investment. Therefore, the Tribunal upheld the AO's decision to classify the surplus as business income.

Assessment Year 2007-08:
The assessee reported STCG of Rs. 3,90,21,672/-, LTCG of Rs. 19,99,360/-, and gains from mutual funds. The Tribunal observed that the transactions in shares and mutual funds were frequent and systematic, indicating a business activity. However, the sale of 74,000 bonus shares of Unitech Ltd. was treated differently, as bonus shares are typically considered capital assets. Thus, the Tribunal held that the transactions, except for the sale of bonus shares, should be treated as business income.

Assessment Year 2008-09:
The revenue appealed against the CIT(A)'s decision to treat the surplus as capital gains. The Tribunal noted that the volume of transactions had reduced, but the nature of the transactions was consistent with business activity. Therefore, the Tribunal held that the transactions in bonus shares of Kotak Bank Ltd. and Unitech Ltd. should be treated as capital gains, while other transactions should be treated as business income.

Issue 3: Treatment of Bonus Shares
The Tribunal relied on the Supreme Court's decision in the case of Madan Gopal Radhey Lal, which held that bonus shares are ordinarily treated as capital assets. The Tribunal concluded that the sale of bonus shares of Unitech Ltd. should be treated as capital gains, as there was no evidence to suggest that the bonus shares were converted into stock-in-trade.

Conclusion:
1. Assessment Year 2006-07: The appeal of the assessee was dismissed, and the surplus was classified as business income.
2. Assessment Year 2007-08: The appeal of the assessee was partly allowed, with the sale of bonus shares treated as capital gains and other transactions as business income.
3. Assessment Year 2008-09: The appeal of the revenue was partly allowed, with the sale of bonus shares treated as capital gains and other transactions as business income.