2012 (9) TMI 686 - AT - Income Tax

Capital Gain - Assessee is a Dealer in shares - Whether the person is a Dealer in shares or an Investor - Whether the transaction of sale and purchase of shares is a trading transaction or whether it is in the nature of investment Held that - As it is not a case where the assessee is holding large number of shares or volume of transaction is high. Assessee is carrying on the sale and purchase of shares activity in an organized way to characterize it as a trading activity. Whereas holding period of the script pertains to major value in capital gain is eight months and there is not a repetitive transaction in the script. Therefore the profit thereon should be considered as short term capital gain. Decision in favour of assessee

Summary

Issues Involved:
1. Whether the short term capital gain shown by the assessee is assessable under the head "Business Income" or "Short Term Capital Gain".

Issue-wise Detailed Analysis:

1. Assessability of Short Term Capital Gain:

The Revenue's appeal challenges the decision of the Commissioner (Appeals) who held that the short term capital gain declared by the assessee should be assessed under the head "Short Term Capital Gain" and not as "Business Income".

Relevant Facts:
- The assessee, a public limited company engaged in trading machinery, declared a total income of Rs. 30,86,808 for the assessment year 2005-06, including a short term capital gain of Rs. 18,17,014 from the sale of shares.
- The Assessing Officer (AO) noted the high frequency and volume of share transactions and treated the income from these transactions as business income.

Contentions of the Assessee:
- The assessee argued that the share transactions were minimal and not indicative of business activity.
- The Memorandum of Article and Association allowed investments in shares, which were consistently shown as investments in the books of accounts and balance sheets.
- Historically, both short term and long term capital gains were assessed as capital gains in previous years.
- The transactions in shares were not related to the assessee's primary business of dealing in machinery.

Commissioner (Appeals) Findings:
- The Commissioner (Appeals) found that the assessee had purchased and sold shares of only 10 companies during the year, which does not indicate frequent trading.
- The shares were shown as investments in the balance sheet, supporting the assessee's claim of treating them as investments.
- Citing the ITAT Mumbai decision in Janak S. Raangwala v/s ACIT, it was held that the magnitude of transactions alone does not change the nature of transactions from investment to business.

Department's Argument:
- The Department contended that the assessee's continuous activity in dealing with shares throughout the year indicated that it was a dealer in shares.

Assessee's Rebuttal:
- The assessee highlighted that the AO himself treated certain transactions as investments, accepting short term capital loss and long term capital gain for transactions before 1st October 2004.
- Major short term capital gains were from shares held for substantial periods (e.g., Infosys Technology held for over eight months).
- The assessee's historical treatment of share transactions as investments was consistent and had been accepted in previous and subsequent years.

Tribunal's Analysis:
- The Tribunal agreed with the assessee, noting that the transactions involved only five scrips and were not indicative of high-frequency trading.
- The historical acceptance of the assessee's treatment of shares as investments was a significant factor.
- The Tribunal observed that the AO's analysis did not fit the facts of the case, as the transactions were not large in volume or organized in a manner typical of trading activity.

Conclusion:
- The Tribunal upheld the Commissioner (Appeals)' decision, confirming that the short term capital gain should be assessed as "Short Term Capital Gain" and not as "Business Income".
- The appeal by the Revenue was dismissed.

Result:
- Revenue's appeal is dismissed.