2014 (3) TMI 688 - AT - Income Tax

Profit from trading of shares LTCG OR STCG Held that - There are various factors which has to be taken into consideration for determining the nature of transaction of purchase and sale of shares - no single criteria can be a decisive factor to determine the nature of transaction but a number of parameters and criteria has to be taken into account - The assessee has used his own funds and funds of his family members thus, no interest was paid on the funds used by the assessee for the purchase of shares and securities - keeping in view the total number of transactions and the number of transactions in which the holding period is less than 10 days, it will not change the character of transaction if the assessee has treated the shares as investment in the books of accounts and has not claimed the benefit of STT paid on the purchase and sale of shares of the transactions. When there is no instance of repetitive transaction in the same scrips then there is no justification in treating the investment as trading activity - when no change has been pointed out or brought on record in the facts and circumstances for the year under consideration in comparison to the facts and circumstances of the earlier years as well as in the subsequent year - the AO is not permitted to take a different view on a particular issue in the absence of any change in the facts and circumstances - when the claim of the assessee was accepted in the earlier years as well as in the subsequent year then to maintain the principle of consistency the claim of the assessee cannot be denied until and unless there is a material change in the facts and circumstances in the year under consideration - the surplus arising from purchase and sale of shares in the case of the assessee cannot be treated as business income - the claim of the assessee is allowed - the order of CIT(A) to the extent of treating the capital gain as business income is set aside Decided in favour of Assessee.

Summary

Issues:
1. Classification of short term capital gain on sale of shares as business income or short term capital gain.

Analysis:
The case involved cross-appeals against the order for the assessment year 2008-09. The assessee, an individual, declared total income inclusive of short term capital gain. The Assessing Officer (AO) treated the entire short term capital gain on sale of shares as profit from trading in shares, disregarding the assessee's explanation. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] held that gains from shares held for less than 10 days should be considered as business income, while the rest as short term capital gain. The assessee challenged this decision, arguing that once classified as an investor, transactions cannot be bifurcated based on holding period. The Revenue also appealed, contending that the income from share sales with holding periods over 10 days should be treated as business income.

The assessee's representative argued that the assessee, a partner in a partnership firm, primarily devoted time to the firm's activities and not share trading. The assessee's transactions were infrequent, delivery-based, and funded by personal and family funds without interest payments. The representative highlighted that the AO had accepted similar claims in prior and subsequent years. The Revenue's representative, however, emphasized the assessee's active trading pattern, use of borrowed capital, and systematic share dealings within short periods, indicating a profit motive.

The Tribunal considered various factors like holding period, frequency of transactions, motive of purchase, and source of funds. It noted the limited number of transactions and the assessee's partnership involvement. The Tribunal found that the holding period, even if short in some cases, did not alter the investment nature if treated as such in accounts. It emphasized that under the Act, shares held for less than a year are short term capital assets, and bifurcation based on holding period is not provided. Consistency in accepting the assessee's claims in prior and subsequent years was crucial, and no material change justified a different view. Thus, the Tribunal held that the surplus from share transactions should not be treated as business income, allowing the assessee's appeal and dismissing the Revenue's appeal.

In conclusion, the Tribunal's decision clarified the treatment of short term capital gains on share sales, emphasizing the importance of considering various factors and maintaining consistency in tax assessments.