2015 (2) TMI 685 - AT - Income Tax

Transaction of shares - Capital gain v/s business income - CIT(A) upheld the short term capital gain of ₹ 8,88,153/- as business income - Held that - The assessee had explained regarding fund transfer between the two bank accounts. We do not find anything wrong if an assessee transfers his funds from business account to his personal account and from his personal accounts to his business accounts as the case may be unless assessee had borrowed funds but in the present case, it is not that the assessee was using borrowed funds. As regards the allegation of A.O. regarding holding period of shares, we find that this observation is also baseless as when assessee holds some shares for investment purposes and declares his intention of investment by classifying as investment then the income has to be assessed as capital gain either as long term capital gain or short term capital gain depending upon holding period of shares. Ld. CIT(A) on the one hand has arrived at the decision and has allowed part relief by treating a part of income as long term capital gain on the basis of holding period which exceeded one year. Therefore there is no justification in not allowing the balance part of same investment as short term capital gain on the basis that holding period was less than an year. The Ld. CIT(A) has distinguished the facts of present case with earlier years on irrelevant considerations as none of the circumstances as explained by Ld. CIT(A) can be applied to hold the capital gains earned by assessee as business income. The pledging of shares held for investment purposes cannot alter the nature of investment as in that case, even land mortgaged by a person to secure credit facilities from a bank will change the nature of land to business purposes from investment purposes. Similarly, use of funds from business accounts for personal purposes or vice versa cannot alter the nature of investment. - Decided in favour of assessee.

Issues Involved:
1. Classification of income from share transactions as either business income or capital gains.
2. Intermingling of funds between business and personal accounts.
3. Pledging of shares held for investment purposes.
4. Holding period of shares and its impact on classification of income.

Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue in this case was whether the income from the sale of shares should be classified as business income or capital gains. The assessee argued that the investments in shares were made in his personal capacity, shown in his personal balance sheet as investments, and should be treated as capital assets. The assessee cited CBDT Circular No. 4/2007 and Supreme Court rulings to support this classification. However, the Assessing Officer (A.O.) contended that the assessee was engaged in the business of trading shares, treating the gains as business income based on factors like inter-code transactions and frequent fund transfers.

2. Intermingling of Funds Between Business and Personal Accounts:
The A.O. observed that there were frequent transfers of funds between the assessee's business and personal accounts, suggesting that the funds used for purchasing shares were business funds. The assessee countered that transferring funds between accounts to support business requirements is not unusual and does not alter the nature of the investments.

3. Pledging of Shares Held for Investment Purposes:
The A.O. noted that the assessee had pledged shares to obtain margin limits, implying that the shares were used for business purposes. The assessee argued that pledging personal holdings to secure business credit facilities does not change the nature of the shares from investments to business assets.

4. Holding Period of Shares:
The A.O. and CIT(A) distinguished between long-term and short-term capital gains based on the holding period of shares. The CIT(A) held that while long-term capital gains could be classified as such, short-term gains were indicative of trading activity and should be treated as business income. The assessee maintained that the holding period should determine the classification as per the Income Tax Act, irrespective of the frequency of transactions.

Judgment:
The ITAT Delhi allowed the appeal filed by the assessee, concluding that the income from share transactions should be treated as capital gains. The tribunal found the assessee's explanations satisfactory and noted that the CIT(A) had ignored these explanations. The tribunal emphasized that the classification of income should be consistent with the assessee's treatment of investments in previous years, and the principle of consistency should apply unless there is a material change in facts. The tribunal also clarified that the pledging of shares and fund transfers between accounts do not alter the nature of investments.

Conclusion:
The tribunal ruled in favor of the assessee, holding that the income from share transactions should be classified as capital gains, both long-term and short-term, based on the holding period of the shares. The appeal was allowed, and the order was pronounced in the open court.

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