2013 (11) TMI 191 - AT - Income Tax

Business Income - Whether gains shown by the assessee under the short term capital gains can be treated under the head Business Income Held that - There was no reason to interfere with the order of the learned CIT(A) in holding the gains arising from sale and purchase of shares as capital gain - It was also to be noted that the AO treated only short term capital gains as business income where as long term capital gains on the same portfolio was accepted as such - The case clearly demonstrated that the intention of the assessee to hold the shares as investment and not stock in trade - The motive of the transaction of sale and purchase was not to realize the profit at the earliest possible occasion but to retain share for appreciation of the value - It was evident from the fact that the unrealized gain in respect of shares which were held by the assessee at the end of the financial year was more than the capital gain offered by the assessee - If the motive of the assessee was to realize the profit in the volatile conditions of the market, then the assessee would have sold the shares instead of retaining the same at the end of the year. No benefit of reduction in value of stock and payment of STT was obtained by the assessee in any of the years indicate that the assessee was only an investor and not a trader - The reason for offering the five transactions as business income was also properly explained as punching errors by broker and sale during non-delivery period of stock exchange which have been considered as speculative in nature. The transactions cannot be treated differently in the year under consideration - Even otherwise, if the investment in the earlier year is treated as stock in trade in this year then in view of the provisions of section 45(2), the difference in the market price and the cost as shown in the books of account would be treated as capital gain.

Summary

Issues Involved:
1. Whether the short-term capital gains shown by the assessee can be treated as "Business Income".
2. Consideration of cross objection by the assessee regarding the treatment of income as business income and related deductions.

Detailed Analysis:

Issue 1: Treatment of Short-Term Capital Gains as Business Income

Appellant's Position:
- The assessee, a senior citizen, declared income primarily from capital gains, including long-term and short-term capital gains from the sale of shares.
- The Assessing Officer (AO) reclassified short-term capital gains of Rs. 9,24,38,619/- as business income based on several factors, including the number of companies dealt with, holding periods of shares, frequency of transactions, speculative transactions, the assessee's role as a Director in a securities company, and the small dividend income relative to gains.

Assessee's Defense:
- The assessee provided detailed notes and past records, asserting that she has consistently treated shares as investments, not stock-in-trade.
- The CIT(A) considered various aspects, including the number of scrips dealt with, the frequency and volume of transactions, the holding period of shares, and the source of funds used for investments.
- The CIT(A) found that the assessee's activities aligned more with those of an investor rather than a trader. Key observations included:
- The assessee did not engage in frequent transactions and held shares for significant periods.
- A substantial portion of the short-term capital gains came from shares held for more than nine months.
- The average holding period of shares was reasonably long, indicating an investment intent.
- The assessee used her own surplus funds for investments and did not borrow money.
- The assessee earned a significant amount of long-term capital gains consistently over the years, which the AO had previously accepted as capital gains.

Tribunal's Decision:
- The Tribunal agreed with the CIT(A)'s findings, which were supported by detailed facts and legal positions.
- It was noted that the AO's arguments were countered effectively by the assessee, and no new material was brought by the AO to dispute the assessee's claims.
- The Tribunal highlighted the consistency in the assessee's treatment of shares as investments and the lack of speculative transactions.
- The Tribunal referenced a similar case (Jay Mahendra Shah) where the Revenue's appeal was dismissed, reinforcing the position that the assessee's transactions were investments, not business activities.

Issue 2: Cross Objection by the Assessee

Assessee's Alternate Contentions:
- The assessee raised alternate contentions in case the income was treated as business income:
- Application of section 45(2) for computing capital gains on shares treated as stock-in-trade.
- Allowance of business loss on valuation of shares held at the year-end as stock-in-trade.

Tribunal's Decision:
- Given the Tribunal's decision to uphold the CIT(A)'s order treating the gains as capital gains, the cross objection became infructuous and was dismissed.

Conclusion:
The Tribunal upheld the CIT(A)'s decision that the short-term capital gains should be treated as capital gains and not as business income. The cross objection by the assessee was dismissed as it became irrelevant following the primary decision. The Tribunal's decision was based on a thorough analysis of the assessee's transaction patterns, holding periods, and past treatment of similar gains, confirming the assessee's status as an investor.