2013 (3) TMI 464 - AT - Income Tax

Sale of Shares - investment v/s trading transaction - capital gains v/s business income - Held that - The assessee was engaged in the investment and trading of shares. Assessee was member of National Stock Exchange (NSE). However, the trading membership was surrendered by the assessee and the same has been accepted by the NSE. Thereafter, assessee is making investments in shares and also doing trading in shares out of the stock in trade carried forward from the earlier years. During the year assessee was also purchasing and selling shares through Portfolio Management Scheme also. Thus as most of the shares were from brought forward holding form preceding years which has been accepted as investment in earlier years & the assessee was maintaining separate account for investment as well as stock in trade of the shares. The investment in shares has been shown in financial year 2003-04 and the assessee has declared short term capital gain of such investments over the years. This has been duly accepted by the Revenue over the preceding years. Thus as there is no change in the facts and circumstances of the case in the present year with that of earlier years wherein long term capital gain and short term capital gain has been accepted by the department. All shares purchased are delivery basis. The holding period of the shares on which long term capital gain have been declared was more than 12 months and in the cases where short term capital gain has been declared, the holding period varies from few days to 7 to 8 months. Thus CIT(A) is correct in observing that the period of holding of shares and non-receipt of dividend income was not a decisive factor for treatment of particular transactions as investment or trading transaction. One has to see the intention of the person who is doing purchase and sale of shares. Also Circular No. 4 of 2007 dated 15.6.2007 issued by the CBDT mentions that a person can have two portfolios, one for investment purposes and another for trading purposes with no time limit prescribed for holding a share to determine whether the shares were held for investment or stock in trade. See Commissioner of Income Tax vs. Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT, Income tax Officer, Ward 33(4), New Delhi Versus Rohit Anand 2009 (7) TMI 901 - ITAT DELHI - CIT(A) was correct to held that assessee was making investments in shares and also doing trading in shares out of the stock in trade carried forward from the earlier years - in favour of assessee.

Summary

Issues Involved:
- Treatment of income from capital gains as business income for assessment years 2008-09 and 2009-10.

Detailed Analysis:

Issue 1: Treatment of income from capital gains as business income (A.Y. 2008-09)
The Revenue appealed against the order of the Ld. Commissioner of Income Tax (A) deleting the addition of Rs. 1,76,26,326 made on account of treating income from capital gains as business income. The Assessing Officer treated the transactions as trading activities and added the amount as business income instead of capital gains. The key points raised by the Assessing Officer included the lack of separate books of accounts, utilization of funds interchangeably, high turnover of shares, frequent trading in specific shares, and the total sources of funds exceeding investments. However, the Ld. Commissioner of Income Tax (A) noted that the assessee maintained separate accounts for investments and stock in trade, had a history of declaring capital gains, and the sale and purchase transactions were mostly delivery-based. The Ld. Commissioner also highlighted that the intention behind the transactions is crucial in determining whether they are investments or trading activities. The Ld. Commissioner referred to Circular NO. 4 of 2007 by CBDT, which allows for separate portfolios for investment and trading without specifying a time limit for holding shares. The Ld. Commissioner concluded that the shares were purchased for investment purposes, and the capital gains should be taxed accordingly. The order was supported by relevant case laws.

Issue 2: Treatment of capital loss as business loss (A.Y. 2009-10)
In the case for A.Y. 2009-10, the Revenue appealed against the deletion of Rs. 62,93,563 made on account of capital loss being treated as business loss. The Ld. Commissioner of Income Tax (A) noted that most transactions were from previous years' holdings accepted as investments, and the assessee maintained separate accounts for investments and stock in trade. The Ld. Commissioner observed that the holding periods and non-receipt of dividend income were not definitive factors in determining investment or trading transactions. Referring to Circular No. 4 of 2007 and relevant case laws, the Ld. Commissioner upheld that the shares were purchased for investment purposes, and the capital losses should not be treated as business losses. The order was reasoned and upheld by the Tribunal.

In conclusion, the Tribunal dismissed both Revenue appeals, upholding the Ld. Commissioner of Income Tax (A)'s orders in treating the capital gains as capital gains and not business income, and in treating capital losses as investment losses and not business losses.