2013 (2) TMI 96 - AT - Income Tax

Sale of shares - treatment of Long Term Capital Gains & Short Term Capital Gains as business income - Held that - Assessee had held the majority of shares for a very long time, varying from more than 1 year to 10 years. The income is mostly from long term holding of shares. In some cases, shares have also been sold at short intervals of less than 1 year, resulting into Short Term Capital Gain and even in such cases, mostly the shares were held for more than 90 days. It is possible for an investor to sell shares after holding for less than a year in order to reshuffle portfolio, etc. In a similar situation, the Tribunal in Assessment Year 2005-06 accepted the claim of the assessee as an investor. In that year, the assessee had shown Long Term Capital Gain of Rs.1,60,23,772/- and Short Term Capital Gain of Rs.26,36,004/-. The assessee had also shown small income from trading, for which separate accounts had been maintained. Further, in the AY 2002-03 and 2004-05, the AO himself accepted the similar income declared by the assessee as capital gain. The capital gain declared by the assessee was again accepted by the AO for the AY 2007-08 u/s.143(3). Considering the facts and circumstances of the case, it will not be appropriate to assess the income declared by the assessee from sale and purchase of shares as business income - in favour of assessee.

Summary

Issues Involved:
1. Treatment of Long Term Capital Gains (LTCG) on the sale of shares as business income.
2. Treatment of Short Term Capital Gains (STCG) on the sale of shares as business income.

Detailed Analysis:

1. Treatment of Long Term Capital Gains (LTCG) on the Sale of Shares as Business Income:

The assessee challenged the correctness of the order by the CIT(A), which treated LTCG on the sale of shares amounting to Rs. 2,71,04,678/- as business income. The Assessing Officer (AO) observed that the assessee engaged in regular buying and selling of shares, including intraday trading and FNO, and classified these shares as investments in the balance sheet. The AO rejected the assessee's claim that the shares were investments, citing that mere entries in the books of accounts are not determinative of the transaction's real nature. The AO referenced several judicial decisions and CBDT Instruction No. 1827 dated 31.8.1989 to support this stance, ultimately treating both LTCG and STCG as business income.

The CIT(A) upheld the AO's findings, noting the volume and frequency of transactions, the short holding period, and the systematic nature of the transactions, concluding that the purchase and sale of shares were the assessee's only activities.

However, the Tribunal found that in the assessee's past assessments (A.Y. 2005-06 and 2006-07), similar transactions were treated as capital gains. For example, in A.Y. 2005-06, the Tribunal reversed the CIT(A)'s findings and directed the AO to treat STCG as such. In A.Y. 2006-07, the Tribunal upheld the CIT(A)'s decision to treat both LTCG and STCG as capital gains. Given the consistent treatment in previous years and the lack of new facts, the Tribunal directed the AO to treat the LTCG on the sale of shares as capital gains for the year under consideration.

2. Treatment of Short Term Capital Gains (STCG) on the Sale of Shares as Business Income:

The assessee also contested the treatment of STCG on the sale of shares amounting to Rs. 60,40,698/- as business income. The AO's rationale for treating STCG as business income was similar to that for LTCG, emphasizing the regularity and nature of the transactions.

The CIT(A) supported the AO's view, highlighting the large number of transactions and the short holding periods.

The Tribunal, however, compared the transactions in the current assessment year with those in A.Y. 2005-06 and 2006-07. It noted that the number of scrips transacted in the current year was lower than in the previous years, contradicting the CIT(A)'s observation of numerous transactions. The Tribunal referenced its earlier decisions, where it had treated similar transactions as capital gains, and found no significant differences in the current year's facts. Consequently, the Tribunal directed the AO to treat the STCG on the sale of shares as capital gains.

Conclusion:

The Tribunal, considering the factual matrix and past assessments, directed the AO to treat both LTCG and STCG on the sale of shares as capital gains for the assessment year 2008-09. The findings of the CIT(A) were reversed, and the appeal filed by the assessee was allowed.