2013 (7) TMI 164 - AT - Income Tax

Assessment of income - investment activity or business activity - Short term capital gain v/s Long term capital gain - Held that - The assessee has made both purchases and sales, on a continuous basis, during the year. Even while the assessee was selling the shares, it continued to purchase them and again sold them. This is not the normal behaviour expected of an investor. While it is reasonable to expect that even an investor would seek to sell his shares if the conditions so warrant, the action of the Assessee in purchasing the shares even while he was engaged in selling them, speaks of a trading motive. Thus respectfully following the decision of ACIT Vs. Anil Kumar Jain (2013 (1) TMI 11 - ITAT HYDERABAD) order of the CIT(A) upheld in holding that the assessee as a trader in shares, not an investor and sustaining the taxability of gains arising out of purchase and sale of shares as being income from business as against income from capital gains as disclosed by the assessee. - Decided in favor of assessee.

Issues Involved:
1. Classification of income from sale of shares as business income or capital gains.
2. Applicability of the principle of res judicata.
3. Assessment of the taxpayer's intention and behavior in share transactions.

Detailed Analysis:

1. Classification of Income from Sale of Shares as Business Income or Capital Gains:

The core issue in this case was whether the income from the sale of shares should be classified as business income or capital gains. The Assessing Officer (AO) treated the short-term capital gains of Rs. 30,88,968/- as business income, citing several factors:
- The short holding period of shares.
- Frequent buying and selling of shares.
- The intention to make profits from sales rather than holding shares for dividends.

The AO relied on various judicial precedents and CBDT Circular 4 of 2007, which emphasizes the need to consider the magnitude of transactions, holding period, and the motive behind transactions.

The assessee argued that he was merely an investor, not engaged in trading or speculation, and pointed out that the department had consistently accepted his investments as capital gains in previous years. He also highlighted that only a small percentage (5.67%) of his transactions were intra-day, and the majority involved delivery of shares.

The CIT(A) upheld the AO's decision, noting that:
- The assessee did not maintain books of accounts or file a balance sheet.
- The transactions were funded by the assessee's own funds, not borrowed funds.
- The large number of transactions indicated a trading activity.
- Receipt of dividends was incidental and not conclusive evidence of investment activity.

The Tribunal, after reviewing the facts and judicial precedents, agreed with the CIT(A) and AO. It emphasized that the frequency, volume, and nature of transactions indicated a trading motive. The Tribunal referred to the decision in PVS Raju Vs. Addl. CIT, which held that voluminous and frequent transactions with an intention to resell for profit are indicative of business income.

2. Applicability of the Principle of Res Judicata:

The CIT(A) discussed the principle of res judicata, which suggests that a matter already judged cannot be pursued further by the same parties. However, the CIT(A) noted that each assessment year is a separate unit, and the principle of res judicata does not apply to income tax proceedings. The CIT(A) referenced the Supreme Court decision in Radhsoami Satsang Vs. CIT to support this view.

3. Assessment of the Taxpayer's Intention and Behavior in Share Transactions:

The CIT(A) and the Tribunal both emphasized the importance of the taxpayer's intention and behavior in determining the nature of income. The CIT(A) observed that the taxpayer engaged in continuous buying and selling of the same scrips, which is not typical behavior of an investor. This pattern suggested a trading motive.

The Tribunal referred to the jurisdictional High Court's decision in PVS Raju Vs. Addl. CIT, which outlined criteria for distinguishing between investment and trading activities, including:
- High frequency and volume of transactions.
- Short holding periods.
- Intention to make quick profits.
- Repeated transactions in the same scrips.

The Tribunal concluded that the taxpayer's activities were consistent with those of a trader, not an investor, and upheld the classification of income as business income.

Conclusion:

The Tribunal dismissed the appeal, affirming the CIT(A)'s decision that the gains from the sale of shares should be treated as business income. The Tribunal's judgment was based on the frequency, volume, and nature of the taxpayer's transactions, which indicated a trading motive rather than an investment intent. The principle of res judicata was deemed inapplicable in this context, and the taxpayer's intention and behavior were critical factors in the decision.

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