2012 (10) TMI 90 - AT - Income Tax

Income from sale and purchase of shares - business income or capital gains - assessee filed the return of income showing income from speculation profit, short term capital Gains (STCG) and long term capital gains (LTCG) and income from other sources - Held that - There are various factors such as frequency, volume, entry in the books of account, nature of funds used, holding period etc, which are relevant in deciding the true nature of transactions and no single factor is conclusive. Treatment in the books of an assessee will not be conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive then it becomes business profit and not capital gains. In present case, on perusal of records, we observe that there are repeated transactions of purchase and sales on a regular basis. Considering all these facts, it shows that assessee is a trader in shares and not an investor as the frequency and volume are not only quite high, but the period of holding also varies from a few days to a few months. The above factors clearly establish that the intention of the assessee that she was a trader in shares. In view of above, the order of ld CIT(A) accepting the claim of the assessee in respect of STCG cannot be sustained. However, on the basis of the facts and principles, as discussed herein-above, LTCG on sale of shares is accepted - Decided partly in favor of assessee

Issues Involved:
1. Nature of income from share transactions: business income or capital gains.

Detailed Analysis:

1. Nature of Income from Share Transactions: Business Income or Capital Gains

Facts and Contentions:
The assessee, a doctor and partner in a firm, filed a return of income showing speculation profit, short-term capital gains (STCG), long-term capital gains (LTCG), and income from other sources. The STCG was Rs. 70,18,217 and LTCG, claimed as exempt under section 10(38) of the Act, was Rs. 15,69,181. The Assessing Officer (AO) questioned the nature of the income from shares, suggesting it should be treated as business income due to the frequency and volume of transactions. The assessee argued that the transactions were investments, citing reasons such as being a doctor, intention to earn dividends, no change in activity scale, transactions not being continuous, purchases made from own funds, generally holding shares for a longer period, livelihood not depending on share trading, and shares shown as investments in books of account.

Assessing Officer's Findings:
The AO rejected the assessee's claim, stating:
- The assessee's primary occupation as a doctor was irrelevant.
- Consistency in showing income under "capital gains" was not binding due to the principle of res judicata not applying to income tax.
- The source of investment funds (own or borrowed) was irrelevant.
- Dividend income was not a determining factor.
- The intention behind transactions was indicated by the ratio of income earned from share transactions compared to dividends.
- The volume and frequency of transactions suggested trading activity.
- The assessee engaged in speculative transactions and frequently traded in numerous scrips, indicating a business motive.

CIT(A) Findings:
The Commissioner of Income Tax (Appeals) [CIT(A)] sided with the assessee, stating:
- The volume of transactions alone was not decisive.
- The assessee had been considered an investor in previous years.
- The treatment of shares as investments in books of account was significant.
- The decision in Gopal Purohit vs. JCIT supported the assessee's stance.

Tribunal's Analysis and Decision:
The Tribunal noted:
- The nature of income from share transactions depends on various factors such as frequency, volume, entry in books of account, nature of funds used, and holding period.
- The treatment in books of account is not conclusive; the actual conduct and intention at the time of purchase are crucial.
- The frequency and volume of transactions, short holding periods, and repeated transactions indicated a trading activity.
- The AO was justified in treating the STCG as business income due to the nature of transactions.
- The LTCG, arising from shares held for more than 365 days and involving only six transactions, was correctly treated as capital gains by the CIT(A).

Conclusion:
The Tribunal concluded:
- The STCG of Rs. 70,18,216 was to be treated as business income, overturning the CIT(A)'s decision.
- The LTCG of Rs. 15,69,181 was rightly considered as capital gains, upholding the CIT(A)'s decision.

Outcome:
The appeal by the department was allowed in part, affirming the AO's treatment of STCG as business income and the CIT(A)'s treatment of LTCG as capital gains. The decision was pronounced in open court on 13.7.2012.

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