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2014 (1) TMI 869 - AT - Income TaxNature of Income - Business income or Short term capital gain Held that - The AO has included the transactions carried out by the Portfolio Managers as the transactions entered into by the assessee The stand taken by the AO and confirmed by the FAA is factual incorrect - Transactions done by the Portfolio Managers cannot be treated as business activities as held in the case of Income Tax officer 19(2)(1), Versus Radha Birju Patel 2010 (11) TMI 145 - ITAT MUMBAI and ARA Trading & Investments (P.) Ltd. Versus Deputy Commissioner of Income-tax, Range 11(1), Pune 2009 (8) TMI 815 - ITAT PUNE . Assessee had not claimed the deduction of Rs. 14.74 lacs (Rs. 14,35,398-PMS Management fees and Rs. 39,303-PMS charges) while arriving at the capital gains in respect of shares dealt by the Portfolio Managers the assessee had transacted only in thirty scrips resulting in STCG were is only fourteen scrips were treating by her resulting in LTCG, assessee had not borrowed any funds for making investments in shares thus if frequency of the shares holding period of the shares availability of borrowed funds, payments of interest on borrowed funds, shares sold by the Portfolio Managers and other similar facts are considered, it becomes clear that assessee was an investor only - in the category of STCG there are many scrips where assessee had invested in the initial public offer and the same were not purchased from the Stock Exchanges - the income arising out of the sale of shares should not be assessed as business income Decided in favour of Assessee.
Issues:
1. Treatment of short term capital gain as business income. 2. Treatment of long term capital gain as business income. 3. Treatment of gain on sale of shares as business income without adjustments. 4. Recasting of Trading and Profit and Loss Account without rejecting books of accounts. Issue 1: Treatment of Short Term Capital Gain as Business Income The Assessing Officer (AO) determined the total income of the assessee, an individual, at Rs. 1.18 Crores, including Long Term Capital Gain (LTCG) of Rs. 62.7 lacs and Short Term Capital Gain (STCG) of Rs. 46.06 lacs. The AO considered various factors like treatment in books of account, dividend income, transactions with brokers, volume, and frequency of transactions, holding period of scrips, and the motive of the assessee. Referring to a circular by the CBDT, the AO treated LTCG and STCG as business income due to the nature of the transactions and the intent to earn profits in a short time span as a trader. Issue 2: Treatment of Long Term Capital Gain as Business Income The First Appellate Authority (FAA) upheld the AO's decision, emphasizing that the nature of transactions as trading or investment had to be determined based on the specific facts of each case. The FAA considered previous cases and concluded that the appellant's intention could be inferred from the facts of the case. The FAA confirmed the share transactions as business activity and the profits earned as business income, based on the appellant's conduct and the nature of the transactions. Issue 3: Treatment of Gain on Sale of Shares as Business Income without Adjustments Before the Appellate Tribunal, the Authorized Representative argued that the appellant had not borrowed funds for purchasing shares, the scrips were based on actual delivery, and the shares were shown as investments in the books of accounts. The Tribunal found that the appellant's conduct indicated an investor approach, as she had not dealt in more than 150 scrips resulting in STCG and LTCG. The Tribunal disagreed with the AO and FAA, stating that transactions by Portfolio Managers should not be considered as business activities. Considering various factors, the Tribunal held that the income from the sale of shares should not be assessed as business income, ruling in favor of the appellant. Issue 4: Recasting of Trading and Profit and Loss Account The Tribunal reversed the FAA's decision, highlighting that the appellant's conduct, lack of borrowed funds, and treatment of similar transactions in previous and subsequent assessment years as capital gains supported the conclusion that the appellant was an investor. The Tribunal considered various factors and reversed the order, holding that the income from the sale of shares should not be treated as business income. Consequently, the appeal filed by the appellant was allowed. In conclusion, the Appellate Tribunal ruled in favor of the appellant, determining that the income from the sale of shares should not be categorized as business income based on the specific facts and circumstances of the case, the appellant's conduct, and the nature of the transactions.
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