2012 (5) TMI 89 - HC - Income Tax

Gains from sale and purchase of securities should be treated as business income or capital gains - the assessee is an salaried employee had also made purchases and sold securities maintaining two separate portfolios i.e. investment portfolio and trading portfolio Held that - Quantum or total number shares/transactions subject matter of short term capital gains is substantial but the transactions in question are only seven in number and the period of holding cannot be treated as insignificant and small - period of holding may indicate intention to make investment - substantial dividend income of more than Rs.19 lakhs and Rs.27 lakhs in the assessment year 2005-06 and 2006-07 can happen even in case of investment portfolio because when investment is liquidated to earn gains and change their portfolio - no mention whether the assessee had indulged in frequent transactions in the previous period or subsequently - Merely because the assessee had sold the said shares in the relevant year and made substantial gains and could not show basically the objective for acquiring the shares was not as an investor but as a trade - in favour of the assessee.

Issues Involved:
1. Whether the gains from the sale and purchase of various securities should be treated as long-term capital gains or short-term capital gains and not business income.

Issue-wise Detailed Analysis:

1. Classification of Gains from Sale and Purchase of Securities:
The primary issue in this case was whether the gains from the sale and purchase of various securities should be classified as long-term capital gains or short-term capital gains rather than business income. The respondent, an individual, declared a total income of Rs.6,00,62,080/- for the assessment year 2007-08, which included long-term capital gains of Rs.2,59,52,165/- (claimed as exempt) and short-term capital gains of Rs.5,53,32,591/- from the sale and purchase of various securities.

2. Assessing Officer's Findings:
The Assessing Officer (AO) treated the gains as business income and made an addition of Rs.8,12,84,756/-. The AO's reasoning included:
- The sole motive of the assessee was to earn profit from the sale and purchase of securities, not to earn dividend/interest income.
- The assessee dealt mainly in shares with an element of risk, indicating a trade/adventure in the nature of trade.
- The holding period of most securities was very short.
- The ratio of sales to purchases was 1.77, indicating business activity.
- The scale of activity was substantial.

3. Tribunal's and CIT(A)'s Findings:
The first appellate authority and the Tribunal deleted the addition, affirming that the gains should be treated as capital gains. The Tribunal noted that the assessee maintained two separate portfolios: an investment portfolio and a trading portfolio. The shares in question were part of the investment portfolio, not the trading portfolio.

4. Legal Principles and Guidelines:
The court referred to various legal principles and guidelines to determine the nature of transactions:
- The intention of the assessee, gathered from conduct and surrounding circumstances, is crucial.
- The Central Board of Direct Taxes (CBDT) Instruction No.4/2007 outlines tests for distinguishing between shares held as stock-in-trade and shares held as investment.
- The Supreme Court's decisions in CIT v. Associated Industrial Development Co. (P) Ltd. and CIT v. H. Holck Larsen provide guidance on whether shares are held as investment or stock-in-trade.
- The Authority for Advance Rulings (AAR) and the Gujarat High Court in Commissioner of Income Tax v. Rewashanker A. Kothari formulated tests to ascertain the nature of transactions, including the intention at the time of acquisition, the purpose of sale, treatment in books of account, and the volume, frequency, continuity, and regularity of transactions.

5. Court's Observations:
The court observed that the assessee had substantial dividend income in previous years, indicating an investment motive. The period of holding for shares in question varied, with some held for more than 7 months and others for shorter periods. The Tribunal correctly applied the tests and criteria, concluding that the shares were part of the investment portfolio.

6. Conclusion:
The court answered the question of law in favor of the assessee and against the Revenue, affirming that the gains from the sale and purchase of securities should be treated as capital gains, not business income. The Tribunal's findings were upheld, and no costs were awarded.

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