2015 (2) TMI 103 - AT - Income Tax

Sale of shares - Short term capital gains v/s business income - assessee is an individual non-resident Indian settled in Jeddah since more than 30 years - Held that - Capital gain was earned only on delivery basis transactions and there was no income by way of speculation or further and options. The assessee has not only earned not only dividend income but also short term and long term capital gains in respect of investments in shares held by it since last 7-8 years. The AO has not shown any reason to deviate from the conclusions drawn in earlier year and subsequent years vis-a-vis treatment of investment shown by assessee in its audited account. The fact that assessee has earned substantial long term capital gain amounting to ₹ 30,06,635/- and also dividend income of ₹ 41,13,545/- clearly establishes intention of assessee regarding holding of shares as investment. Since intention of assessee was always to make investments and not trade, hence, the holding period and investment gone from year to year from 6 crores to 22 crores. Without any cogent material the AO has reached to the conclusion that assessee has traded in shares since he was not having any business in India, whereas the fact is that assessee is an NRI, engaged in his business at Jeddah since more than 30 years. No merit in the action of the lower authorities for treating capital gain as business income. - Decided in favour of assessee

Summary

Issues:
1. Treatment of short term capital gains as business income.

Analysis:
The appeal was filed against the CIT(A)'s order confirming the AO's decision to treat short term capital gains as business income for the assessment year 2007-08 under Section 143(3) of the I.T. Act. The assessee, a non-resident Indian settled in Jeddah, had income from various sources, including house property, dividend income, perquisites from a private limited company, and capital gains on the sale of shares in India. The AO contended that since the assessee was fully engaged in the business of purchasing and selling shares without any other business in India, the gains from share sales should be taxed as business income. The CIT(A) upheld this decision, leading to the appeal.

Upon review, it was noted that the assessee had a consistent history of investing in shares, resulting in dividend income, long term capital gains, and short term capital gains. The department had previously accepted the capital gains declared by the assessee as either long term or short term depending on the holding period of shares. However, for the assessment year in question, the AO sought to tax short term capital gains as business income while accepting long term capital gains. The assessee's investment pattern, lack of repetitive investments, reflection of shares as investments in audited accounts, and the substantial dividend income earned indicated an investment intent rather than a trading motive. The absence of borrowing for investments further supported the investment nature of the transactions.

The appellate bench considered various legal precedents emphasizing the principle of consistency in assessing income from share transactions. The introduction of security transaction tax and differential tax rates for long term and short term capital gains were also discussed to highlight the legislative intent behind the tax regime on securities transactions. The bench emphasized that the mere frequency of transactions or quick liquidation of investments leading to better earnings does not necessarily imply a trading intent over an investment motive.

Citing judicial decisions and legislative provisions, the bench concluded that the lower authorities erred in treating the capital gains as business income. The consistent investment pattern, lack of material changes in facts, and the assessee's intention to hold shares as investments rather than for trading purposes were pivotal in allowing the appeal. The judgment highlighted the importance of interpreting statutory provisions in line with legislative intent and legal precedents to ensure a fair and consistent application of tax laws.

Therefore, the appeal filed by the assessee was allowed, and the decision to treat capital gains as business income was overturned.