2014 (4) TMI 972 - HC - Income Tax

Nature of income STCG or business income Trading in shares - Held that - If the business activity of the assessee is trading in shares, there can be a presumption that the amount claimed was derived through trade, the assessee in such cases has to establish that the amount was indeed invested and the proceeds of sale were of a capital asset - keeping a separate investment account would also be a relevant indicia - the assessee had purchased the Unitech shares in the previous year; it had been shown as investment and that treatment was accepted by the income tax authorities - He had sold 2000 shares during the previous year - the gains were treated as short term capital gains. The left out shares were firstly sub-divided leading to five hold increase in the assessee s holding - Unitech issued bonus shares which resulted in the assessee becoming owner of 1,95,000 shares - acquisition of shares cannot be considered as investment - in all there were a total of 47 share purchase and sale transactions and that the predominant or overwhelming gain was on account of sale of Unitech shares, the income derived cannot be called as business or share trading income; it is short term capital gain - There is nothing to show the frequency of trading, or volume of share transactions, or any other factor (use of borrowed funds, or the line of business of the assessee being share trading) pointing to the amount gained to be on account of share trading Decided against Revenue.

Summary

Issues:
1. Determination of whether the amount declared as business income by the assessee is actually short term capital gains.
2. Application of relevant criteria to distinguish between capital gains and business income in the context of share transactions.

Analysis:
1. The case involved a dispute over the nature of income declared by the assessee, an individual engaged in trading activities. The revenue contended that the amount declared as business income was, in fact, short term capital gains. The Assessing Officer treated a significant portion of the income from share transactions as business income, leading to an addition in the assessed income of the assessee.

2. The CIT (A) and ITAT, on the other hand, accepted the assessee's explanation that the income derived from share transactions was short term capital gains and not business income. The CIT (A) noted the history of the assessee's share transactions and concluded that the nature of the income was capital gains. The ITAT affirmed this view, emphasizing the assessee's status as an investor in shares in previous assessments.

3. The revenue argued that the substantial profits gained from share transactions indicated a business activity rather than mere investment. They highlighted the assessee's consistent engagement in share transactions and the use of funds from other business activities to support their claim that the income should be classified as business income.

4. The ITAT's decision was based on a detailed analysis of various factors favoring and opposing the assessee's case. The ITAT considered the assessee's history as an investor, the source of funds for share purchases, and the absence of a dedicated setup for share trading. The ITAT also examined the nature of the shares held by the assessee, including bonus shares, to determine the intention behind the transactions.

5. The judgment referred to established legal principles and precedents to guide the distinction between capital gains and business income from share transactions. Criteria such as the intention at the time of purchase, volume and frequency of transactions, and treatment of shares in accounts were highlighted. The judgment emphasized the need for a commercial motive and the duration of share holdings to determine the nature of income.

6. Ultimately, the ITAT's findings favored the assessee, concluding that the income derived from share transactions, particularly the sale of Unitech shares, was short term capital gains and not business income. The judgment highlighted the lack of evidence supporting a business activity in share trading and affirmed the assessee's classification of income as capital gains.

7. In conclusion, the court ruled in favor of the assessee, dismissing the revenue's appeal and affirming the ITAT's decision. The judgment underscored the importance of considering all relevant factors and legal principles to determine the nature of income derived from share transactions accurately.