2012 (8) TMI 306 - HC - Income Tax

Income earned from trading in shares - under the head LTCG/STCG OR Income From Business & Profession - Held that - Where number of transactions of sale and purchase of shares takes place the most important test is the volume frequency continuity and regularity of transactions of purchase and sale of the shares and where there is repetition and continuity coupled with magnitude of the transaction an inference can be drawn that activity is in the nature of business - as the transaction of sale of shares and volume were substantial in the case of assessee and revenue could not demonstrate that there were large number of transactions which had frequency volume continuity the income earned by the assessee from trading in the shares under the head LTCG/STCG was shown correctly - in favour of assessee.

Summary

Issues:
Challenging orders of Income Tax Appellate Tribunal and Commissioner of Income Tax (Appeals) regarding taxation of income earned from trading in shares under 'LTCG/STCG' instead of 'Income From Business & Profession.'

Analysis:
1. The case involved two Tax Appeals challenging orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) regarding the taxation of income earned from trading in shares. The primary issue was whether the income should be taxed under 'LTCG/STCG' as declared by the assessee or under 'Income From Business & Profession.'

2. The Assessing Officer issued a notice under Section 153C of the Income Tax Act based on information received from the DGIT, Ahmedabad, regarding the assessee's involvement in share dealings. The Assessing Officer treated the income as business income instead of capital gains, leading to additions in the total income. However, the Commissioner of Income Tax (Appeals) later deleted these additions.

3. The High Court considered previous judgments and tests laid down by the Apex Court and the Division Bench of the Court to determine whether the assessee's share transactions constituted business income or capital gains. The key tests included the intention behind the initial acquisition, purpose of subsequent sales, treatment in books of account, income reporting, and volume/frequency of transactions.

4. The Court emphasized the importance of volume, frequency, continuity, and regularity of share transactions in determining whether the activity amounted to a business. It was noted that if transactions showed repetition, continuity, and magnitude proportional to the holding strength, they could be considered business activities.

5. After analyzing the facts and legal principles, the Court concluded that the income earned from trading in shares by the assessee was correctly shown under 'LTCG/STCG.' The Court found no substantial irregularities in the transactions for the relevant assessment years and upheld the Tribunal's decision in favor of the assessee.

6. Ultimately, the Court dismissed both Tax Appeals, affirming the Tribunal's decision and answering the substantial question of law against the revenue. The judgment highlighted the importance of considering the nature of share transactions based on established legal tests and factual evidence to determine the appropriate tax treatment.