2013 (12) TMI 68 - AT - Income Tax

Sale of shares - Capital gains or business income - Held that - Following CIT v. Niraj Amidhar Surti 2010 (10) TMI 15 - GUJARAT HIGH COURT - The assessee had held the shares in question for a long period for the purpose of long-term capital gain, the intention of the assessee had always been that of making investment in shares and not dealing in shares, which was also apparent from the fact that the shares had not been treated as stock in trade by the assesse - Decided against Revenue.

Summary

Issues Involved:
1. Classification of surplus from the sale of shares as 'capital gains' or 'business income'.

Detailed Analysis:

Issue 1: Classification of Surplus from Sale of Shares
The primary issue in both appeals by the Revenue is whether the surplus of Rs.1,72,29,025/- for the assessment year 2006-07 and Rs.82,82,927/- for the assessment year 2008-09 should be treated as short-term or long-term capital gains instead of 'business income'.

Background:
The assessee company, engaged in finance and film business, claimed the surplus from the sale of shares as 'capital gains'. The Assessing Officer (AO) treated this surplus as 'business income'. The CIT (A) ruled in favor of the assessee, treating the surplus as 'capital gains'. The Revenue appealed against this decision.

CIT (A)'s Reasoning:
1. Volume of Transactions: The Bombay High Court in Gopal Purohit's case held that the volume and number of transactions are not decisive in determining the nature of the transaction. Despite the high volume of transactions, this alone does not classify the surplus as 'business income'.

2. Treatment in Books of Account: The shares were consistently shown as 'investments' in the balance sheet, indicating the intention to hold them as investments.

3. Valuation of Shares: The shares were valued at cost, further supporting the claim of investment rather than trading.

4. Modus Operandi/Business Infrastructure: The transactions were carried out through Kotak Securities Ltd under a Portfolio Management Scheme (PMS), and the assessee did not have a separate business infrastructure for trading shares.

5. Main Activity: The primary business activities were finance and film, with substantial income from these sectors. The share transactions were secondary and done through a broker.

6. Source of Funds: Borrowed funds were used for purchasing shares, which is permissible under the IT Act. Interest on borrowed funds is allowed as part of the cost of acquisition while computing capital gains.

7. Consistency: The method of showing transactions as investments was consistently followed and accepted by the Department in previous years.

8. Income from Derivatives: The AO's argument that derivative transactions were treated as business income was addressed by noting that such transactions are inherently different from share transactions and are treated as business transactions by law.

9. Intention: The overall intention and conduct of the assessee indicated that the transactions were carried out as an investor, not as a trader.

For Assessment Year 2008-09:
The CIT (A) found that the facts were similar to those of the assessment year 2006-07 and ruled similarly, treating the income from the sale of shares as 'capital gains'.

Tribunal's Findings:
The Tribunal upheld the CIT (A)'s decision, agreeing that the assessee's intention was to hold shares as investments and not for trading. The Tribunal noted that the Revenue did not provide any contradictory evidence. The reliance on judicial precedents like ITO v. Radha Birju Patel, Mahendra C Shah v. ADIT, and CIT v. Niraj Amidhar Surti supported the assessee's position.

Conclusion:
The Tribunal found that the CIT (A) was justified in treating the surplus from the sale of shares as short-term or long-term capital gains, depending on the period of holding, and not as 'business income'. The appeals by the Revenue were dismissed.

Order Pronouncement:
The order was pronounced in the Open Court on 29th November, 2013.