2012 (11) TMI 465 - AT - Income Tax

Income from the share transactions - Capital gain v/s business income - Held that - The assessee has made several transactions of purchase of shares during the relevant year under consideration, and if there high volume, frequency and regularity of the activity carried on by the assessee in a systematic manner, it would partake the character of business activities carried on by the assessee in shares, and it cannot be said that the assessee has merely made investments in shares. Matter remanded back to AO to redetermine the income relating to each category of shares as business income or income from capital gains as the case may be, in conformity with Circular No.4 of 2007 dated 15.6.2007.

Summary

Issues Involved:
1. Classification of income from share transactions as long-term capital gains or business income.
2. Determination of whether the assessee's activities constitute investment or business.
3. Application of CBDT Circular No. 4/2007 and relevant case law.
4. Consistency in treatment of shares in books of accounts.
5. Assessment of the actual intention behind share transactions.

Detailed Analysis:

Classification of Income from Share Transactions:
The primary issue revolves around whether the income from the assessee's share transactions should be classified as long-term capital gains or business income. The Revenue's appeal for the assessment year 2006-07 challenges the CIT(A)'s direction to treat the income as long-term capital gains. Conversely, the assessee's appeals for the assessment years 2007-08 and 2008-09 challenge the CIT(A)'s direction to treat the income as business income.

Determination of Investment vs. Business Activity:
The assessee argued that it treated shares as investments, not stock-in-trade, and thus the income should be considered capital gains. The assessee did not employ any personnel for business purposes, did not borrow funds for purchasing shares, and dealt only with shares carried forward from previous years. The Revenue, however, contended that the assessee engaged in systematic and regular buying and selling of shares, indicating a business activity.

Application of CBDT Circular No. 4/2007 and Relevant Case Law:
The CBDT Circular No. 4/2007 and various judicial decisions provide guidelines for distinguishing between capital assets and trading assets. The Circular emphasizes that the nature of income from share transactions depends on whether the shares are held as investments or stock-in-trade. The Supreme Court cases cited in the Circular highlight that the distinction is a mixed question of law and fact, and the assessee's records should reflect the nature of the holdings.

Consistency in Treatment of Shares in Books of Accounts:
The assessee consistently treated shares as investments in its books of accounts and disclosed income from these investments accordingly. The Tribunal referred to the Mumbai Bench's decision in Hitesh Satishchandra Doshi v. Jt. CIT, which held that the nature of income depends on the facts and circumstances of each case, supporting the assessee's position.

Assessment of Actual Intention Behind Share Transactions:
The Tribunal examined the assessee's transactions for the assessment year 2008-09, noting that the assessee engaged in frequent buying and selling of shares, including short-term transactions. The Tribunal emphasized that the real intention behind these transactions is crucial in determining whether they constitute business activities or investments. The Tribunal referred to the jurisdictional High Court's decision in PVS Raju v. Addl. CIT, which outlined criteria such as frequency of transactions, holding period, turnover, and the assessee's intention to make quick profits.

Conclusion:
The Tribunal concluded that the assessee engaged in both investment and business activities. It directed the assessee to furnish detailed data distinguishing between shares held as investments and those held as stock-in-trade. The Assessing Officer was instructed to re-determine the income based on this data, in line with CBDT Circular No. 4/2007.

Final Judgment:
The appeals of the assessee for the assessment years 2007-08 and 2008-09, and the Revenue's appeal for the assessment year 2006-07, were partly allowed for statistical purposes. The stay applications filed by the assessee were dismissed as they became infructuous following the disposal of the appeals.