2014 (4) TMI 682 - HC - Income Tax

Nature of income STCG or business income - What factors are to be given weight while examining whether a taxpayer is a dealer in shares or having regard to the nature of investment, it is to be construed that the income bears the character of sale of a capital asset so as to attract capital gains tax either STCG or LTCG Held that - Tribunal rightly held that the substantial nature of transactions has been laid bare by the assessee before the Department right from the word go , as deliberated upon - The holding of shares was by way of investment - The activity was in accordance with the main objective of the assessee company - It was duly authorized by the Memorandum and Articles of Association of the assessee company - The shares were purchased out of the assessees own funds and not borrowed funds - The decision of investment of the assessee s shareholder s funds in share/units and Mutual Funds was taken by the management of the assessee company from time to time with the objective of capital appreciation in the long term and in case the target price was achieved in the short run, the shares were to be sold in the market - It was depending on the funds available, that the management of the assessee company decided which shares were to be acquired - The investment was shown as such in the balance sheet of the assessee company, under Schedule Ill of the audited accounts. Relying upon Commissioner of Income Tax, U.P v. Madan Gopal Radhey Lal 1968 (9) TMI 14 - SUPREME Court - For 2006-07 the total share consideration was ₹ 3.4 crores, as against ₹ 4.58 for the previous year - the assessee had its own funds to the tune of ₹ 7.31 crores, in the form of shareholder s funds - Further, dividend income to the extent of ₹ 1.12 crore was also earned - The Commissioner found that during the year, there was no transfer from stock in trade to investment account and that the transfers had been accepted during the year 2005-06 - the income derived from sale of shares was, for 2006-07, not business income but capital gains - For AY 2007-08, the Appellate Commissioner s evaluation of facts was based on an overall consideration of all the circumstances Relying upon Commissioner Of Income-Tax, Bombay Versus H. Holck Larsen 1986 (5) TMI 30 - SUPREME Court - no single factor or criteria ought to be given undue weight, ordinarily there was no error in the order of the Tribunal Decided against Revenue.

Issues Involved:
1. Classification of income from sale of shares as business income or capital gains.
2. Evaluation of the nature of transactions (investment vs. trading).
3. Consideration of the frequency, volume, and duration of share transactions.
4. Assessment of the intention behind holding shares.
5. Impact of the absence of separate accounts for investments and trading activities.
6. Analysis of the assessee's business activities and infrastructure.
7. Relevance of previous rulings and CBDT guidelines.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue in these appeals was whether the Income Tax Appellate Tribunal (ITAT) erred in concluding that the amounts originally brought to tax as business income of the assessee were actually short and long-term capital gains. The Revenue contended that the ITAT incorrectly endorsed the decision of the Commissioner of Income Tax (Appeals) [CIT(A)] to treat the income from the sale of shares as capital gains rather than business income.

2. Evaluation of the Nature of Transactions:
The Assessing Officer (AO) assessed the short-term capital gains on the sale of shares as business income based on the frequency and nature of transactions. The AO noted that the assessee frequently purchased and sold shares, indicating an intention to earn profits from trading rather than holding shares for dividends. However, the CIT(A) and ITAT found that the shares were held as investments, not as stock-in-trade, and thus the profits should be treated as capital gains.

3. Consideration of Frequency, Volume, and Duration of Share Transactions:
The AO argued that the frequent transactions and short holding periods indicated trading activity. For instance, the assessee engaged in 40 transactions of sale and purchase of shares, with some shares held for as short as 10 days. However, the CIT(A) and ITAT concluded that the volume and frequency of transactions were not high enough to classify the activity as trading. The ITAT noted that the assessee dealt in only nine scrips during the entire year, with 17 purchase transactions and 22 sales transactions, which did not constitute a high frequency of transactions.

4. Assessment of the Intention Behind Holding Shares:
The intention behind holding shares was a critical factor. The AO believed that the assessee's intention was to trade in shares for profit, evidenced by the frequent transactions and lack of separate accounts for investments. Conversely, the CIT(A) and ITAT found that the intention was to invest, as the shares were purchased with the objective of capital appreciation and were shown as investments in the balance sheet.

5. Impact of Absence of Separate Accounts for Investments and Trading Activities:
The Revenue argued that the absence of separate accounts for investments and trading activities indicated that the transactions were part of the assessee's trading activities. However, the CIT(A) and ITAT emphasized that no single factor, such as the absence of separate accounts, should be decisive. The overall nature of the transactions and the intention behind them were more important.

6. Analysis of the Assessee's Business Activities and Infrastructure:
The assessee argued that its business activities and infrastructure were not geared towards trading in shares. The CIT(A) and ITAT found that the assessee's infrastructure was small, and the business activity required a much larger infrastructure, supporting the conclusion that the transactions were investments rather than trading activities.

7. Relevance of Previous Rulings and CBDT Guidelines:
The judgment referenced several Supreme Court rulings, including Commissioner of Income Tax v. Associated Industrial Development Company and P.M. Mohammed Meerakhan v. Commissioner of Income Tax, which emphasized that the intention behind transactions and the overall conduct of the assessee are crucial in determining whether income is from business or capital gains. Additionally, the CBDT guidelines were considered, which state that a taxpayer can have both an investment portfolio and a trading portfolio, and the total effect of all principles should be considered.

Conclusion:
The High Court concluded that the findings of the CIT(A) and ITAT, which treated the income from the sale of shares as capital gains, were based on a comprehensive analysis of the facts and circumstances. The court found no error in the conclusions reached by the lower authorities and dismissed the Revenue's appeals. The question of law was answered in favor of the assessee, affirming that the income from the sale of shares should be treated as capital gains, not business income. The appeals were dismissed without any order as to costs.

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