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2014 (5) TMI 229 - HC - Income TaxClaim of income as STCG Business income OR STCG - Sale of shares Held that - The Tribunal rightly held that the true nature of transaction can be understood from the intention of the assessee at the time of purchase - the profit motive is also relevant but this is also not conclusive because even an investor may earn profit by way of appreciation - the transactions of purchase of shares, and thereafter selling it within few days and most of the time within a month, with a view to earn profit, reflects motive of the assessee as a trader and not an investor - purchases as well as turnover are continually increasing and the assessee has regularly dealt in purchase and sales of shares - Profit motive is also clearly evident in making the transaction Relying upon The Commissioner of Income Tax Versus Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT thus, there was no infirmity with the findings of the Tribunal Decided against Assessee.
Issues Involved:
1. Whether the profit derived from the sale of shares for AY 2007-08 should be treated as short-term capital gain or business income. Detailed Analysis: 1. Nature of Income from Sale of Shares: Short-term Capital Gain vs. Business Income The core issue in this case is whether the profit of Rs. 65,45,321/- derived from the sale of shares for the assessment year 2007-08 should be classified as short-term capital gain or business income. The assessee contended that the income should be treated as short-term capital gain, citing that all transactions were conducted through a DEMAT account and that Securities Transaction Tax (STT) was paid on all transactions. The Assessing Officer (AO) disagreed, noting that the assessee engaged in frequent trading of shares through M/s Vimgi Investments Pvt. Ltd. and observed that the nature of transactions indicated business activity rather than investment. The AO relied on Instruction No.1827 and Circular No.4/2007 to classify the income as business income, emphasizing that Section 111A only prescribes the mode of tax computation and does not determine the nature of transactions. The Commissioner of Income Tax (Appeals) [CIT(A)] accepted the assessee's contention, highlighting factors such as: - The assessee's primary business being the export of jewelry and handicrafts. - No borrowed funds were used for share transactions. - Dividend income was earned, and the average holding period of shares was substantial. - The number of scrips traded was less than 25. - The assessee lacked infrastructure for share trading activities. CIT(A) referenced the judgment in CIT vs. Gopal Purohit, which supported the view that the transactions were investments. 2. ITAT's Evaluation and Decision The ITAT overturned the CIT(A)'s decision, emphasizing the following points: - The assessee was habitually trading in quoted shares with high frequency and volume, indicative of a trading intention. - The investment of Rs. 1 crore in shares and turnover of over Rs. 1 crore suggested business activity. - The meager dividend income of Rs. 21,952/- contrasted with the substantial profits from share transactions. - The short holding period of shares and the regularity of transactions pointed towards a trading motive rather than investment. The ITAT cited the Supreme Court rulings in CIT (Central) Calcutta vs. Associated Industrial Development Co. (P) Ltd. and CIT, Bombay vs. H Holck Larsen, which stressed the importance of the intention behind transactions and the totality of circumstances in determining whether activities are trading or investment. 3. High Court's Analysis and Conclusion The High Court upheld the ITAT's decision, noting that: - The ITAT correctly applied the relevant legal principles and Circular No. 4 of 2007. - The substantial turnover and short holding period of shares indicated a business motive. - The assessee's main business was not share trading, but the volume and frequency of transactions suggested otherwise. - The AO's observations about the magnitude of transactions and the average holding period supported the classification of income as business income. The High Court concluded that the ITAT's findings were neither perverse nor unreasonable and affirmed that the income from share transactions was business income. The appeal was dismissed, and the question of law was answered in favor of the revenue. Conclusion: The High Court dismissed the appeal, holding that the profit from the sale of shares for AY 2007-08 should be treated as business income, not short-term capital gain, based on the frequency, volume, and nature of the transactions. The findings of the ITAT were upheld as they were based on a proper application of legal principles and relevant facts.
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