2012 (11) TMI 309 - AT - Income Tax

Short term capital gain vs Business Income - Held that - Assessee had actually maintained distinct portfolios no assistance of the past results other then the results of the final accounts. Since factual aspects do indicate towards the assessee being an investor consistency aspect has also to be ascertained as well. Moreover, since the assessee is having income from day trading, speculation, derivatives, the correlation of transactions viz a viz the investments shown, has to be examined to verify the contentions - matter remitted back to the AO, who shall reexamine the modus operandi and the conduct of the assessee, in line with the preceding years and also apply the tests as prescribed by the Board, in Instruction No. 1827 dated 31-08-1989 (filed in the APB) to come to the correct conclusion Order of the CIT(A) is set aside and direct the AO to re-examine the issue afresh, after giving reasonable and adequate opportunity to the assessee - appeal is allowed for statistical purposes. Disallowance u/s 14A - Held that - As the issue whether Income is Business Income - Application of sec.14A has to be decided accordingly - Order of the CIT(A) is set aside and direct the AO to re-examine the issue afresh, after giving reasonable and adequate opportunity to the assessee and accordingly applicability - appeal is allowed for statistical purposes.

Summary

Issues:
1. Treatment of short term capital gain as business income.
2. Whether the assessee is devoting major part of time in share trading activities.
3. Confirmation of AO's conclusion by CIT(A).
4. Deletion of addition made by AO regarding short term capital gains.
5. Disallowance under section 14A.

Analysis:
1. The appeal before the ITAT stemmed from the order of the CIT(A) 6, Mumbai, concerning the treatment of short term capital gain as business income by the Assessing Officer (AO). The AO considered the activity of the assessee, an individual employed as an Executive Director, as business activity rather than investment, based on the volume, frequency, continuity, and regularity of share transactions. The AO concluded that the assessee was carrying on business activity and not investment, leading to the inclusion of the income under the head "Business Income" instead of capital gains.

2. The assessee contended that his main activity was attending to his business and not share trading, emphasizing that the capital gain arose due to the sale and purchase of capital assets as part of his investment strategy. The assessee highlighted the limited number of transactions, absence of borrowing funds, and the nature of securities dealt with, arguing against the characterization of being a trader. The ITAT considered the arguments and directed the AO to re-examine the issue, taking into account past results, consistency, and applying relevant tests to determine the correct classification.

3. The CIT(A) upheld the AO's decision, endorsing the view that the assessee was a trader in shares based on the conduct and nature of transactions. However, the ITAT found merit in the assessee's contentions regarding the limited nature of transactions, absence of certain trader attributes, and the possibility of being an investor rather than a trader. The ITAT set aside the CIT(A) order, directing a fresh examination by the AO to ensure a proper assessment based on the facts and circumstances, including the correlation of transactions with investments and adherence to relevant instructions.

4. The ITAT allowed the appeal for statistical purposes, indicating that the matter required further examination and clarification regarding the classification of income from share transactions. The decision highlighted the importance of considering all relevant factors, past results, and applying appropriate tests to determine whether the income should be treated as business income or capital gains, emphasizing the need for a comprehensive reassessment by the AO.