2014 (3) TMI 766 - AT - Income Tax

Assessment of income under proper head Sale of shares - Whether the income declared by the assessee under the head Capital Gains is to be assessed as such or as Business Income Held that - Prima facie, the CIT(A) did not examine the facts correctly in arriving at the conclusions the CIT(A) order is based on certain wrong facts which are admittedly not correct, there is no option other than to reexamination - Purchase of shares during the year and selling them frequently in short period do indicate that the assessee has purchased the shares with a motive to earn profit in short period all the facts indicate that the intention of the assessee is to gain profits by dealing in short term period only - the AO also discussed about borrowing of funds, small amount of dividend when compared to the gain in sales and also the fact that assessee group companies are involved in share trading thus, the conclusion of the Revenue authorities that the income from sale of shares declared by the assessee during the year as short term gain is income from business activity is correct and calls for no interference. Relying upon PVS Raju and Others vs. Addl. CIT 2011 (7) TMI 818 - Andhra Pradesh High Court The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case - Ultimately, it is a matter of first impression with the Court whether a particular transaction is in the nature of trade or not the findings of the AO are approved that assessee has indulged in share trading during the year thus, the order of the CIT(A) set aside Decided in favour of Revenue.

Issues Involved:
1. Classification of income from sale of shares as "Capital Gains" or "Business Income."
2. Frequency and volume of share transactions.
3. Use of borrowed funds for share transactions.
4. Consistency with previous years' income classification.

Comprehensive, Issue-wise Detailed Analysis:

1. Classification of Income:
The primary issue in this appeal was whether the income declared by the assessee under the head "Capital Gains" should be assessed as such or as "Business Income." The Assessing Officer (A.O.) observed that the assessee had sold shares worth Rs.1.30 crores and offered short-term capital gains of Rs.42,69,108/-. However, upon analyzing the transactions, the A.O. concluded that the assessee was engaged in trading shares and thus prepared a trading account, resulting in a profit of Rs.42,76,674/- treated as business income. The CIT(A) disagreed, concluding that frequent sale and purchase of shares in high volumes should not be construed as business transactions, emphasizing that the appellant's intention was to hold shares as an investment.

2. Frequency and Volume of Transactions:
The A.O. noted a very high frequency of trading and volumes, with no significant opening stock and minimal closing stock compared to the turnover. The A.O. also highlighted that the entire amount earned was in short-term gains, and the dividend earned was nominal. The CIT(A) countered that frequent transactions do not necessarily indicate a business activity, especially when the intention was to invest. However, upon review, it was found that the CIT(A) did not correctly examine the facts, as the statement prepared by the A.O. was accurate, showing frequent purchases and sales within short periods, indicating trading activity.

3. Use of Borrowed Funds:
The A.O. observed that the assessee had borrowed funds and was paying interest, which suggested that the borrowed funds were used for purchasing shares. The CIT(A) dismissed this aspect, stating that the A.O. did not make a case regarding the borrowed funds. However, it was admitted that the assessee had borrowed funds from a sister concern and paid interest, which was set off against interest income from other sources. This indicated that borrowed funds were indeed utilized for share transactions, supporting the A.O.'s conclusion of trading activity.

4. Consistency with Previous Years' Income Classification:
The assessee argued that similar incomes in earlier years were treated as capital gains. However, upon examination, it was found that in earlier years, there were no significant share transactions, and the shares held were shown as investments. Only in the assessment year 2007-08 did the assessee start frequent transactions, with no opening balance of shares from previous years. This shift in activity supported the A.O.'s stance that the nature of transactions during the year in question was trading rather than investment.

Judgments and Legal Precedents:
The Tribunal referenced several legal precedents, including the case of PVS Raju vs. Addl. CIT, where it was held that the character of transactions must be determined based on all facts and circumstances, and frequent, high-volume transactions indicate trading activity. The Tribunal also distinguished this case from others cited by the assessee, such as Spectra Shares, where the facts were different.

Conclusion:
The Tribunal concluded that the CIT(A)'s order was based on incorrect facts and did not properly consider the nature of transactions and the use of borrowed funds. The findings of the A.O. were upheld, classifying the income from share transactions as "Business Income" rather than "Capital Gains." The appeal of the Revenue was allowed, and the A.O.'s order was restored.

Order Pronounced:
The judgment was pronounced in the open Court on 21.03.2014.

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