2015 (3) TMI 720 - HC - Income Tax

Capital gain v/s business Income - Whether the transaction in question was rightly held by the Tribunal in the nature of investment and not in the nature of trade? - Held that - In the present case, there is no dispute that the opening investment cost for the relevant year AY 2006-07 was ₹ 2.60 crores; the corresponding closing value was ₹ 4.70 crores. Furthermore, the Court notices that the assessee derived, in addition to the short term capital gains, dividend income to the tune of nearly ₹ 10 lakhs. The authorities have all emphasised that even while seeing the cumulative effect of the tests, in the given facts of a case, one test might be determinative or conclusive. At the same time, no single test having regard to the facts of a case and a cumulative effect thereof, need be determinative or conclusive. In the present instance what is apparent is that the assessee, an individual, did not borrow any funds; the share scripts traded were only from amongst what were held by him. Significantly, dividend income amounting to about 4% of the value of the investment was earned by the assessee. What appears to have weighed almost conclusively with the tax authorities in the first and second instance is the value and frequency of the transactions. As underlined by us, that factor alone cannot be conclusive and would have to be weighed along with the totality of facts. An important detail which cannot be overlooked by the Court is that in all past periods and even subsequent periods, similar income reported by the assessee was accepted by the Revenue as short term capital gain. In fact for AY 2005-06, the scrutiny assessment under Section 143 (3) accepted the sum of ₹ 1.02 crores as short term capital gain. In the circumstances, it was all the more necessary for the Revenue to point to some unique feature or distinctive material to differentiate the assessee s activities for the subject assessment year, since they fundamentally remained the same and unchanged. Thus ITAT s findings and view cannot be faulted in the circumstances of the case - Decided in favour of assessee.

Summary

Issues:
1. Determination of whether the transaction in question was rightly held as investment or trade.

Analysis:
The case involved the assessment of an individual's income for the AY 2006-07, specifically focusing on the treatment of short term capital gains amounting to Rs. 2.61 crores. The Assessing Officer (AO) contended that the nature of the transaction did not align with the claim of short term capital gains, categorizing it as business income due to the volume and frequency of trading activities. The CIT (Appeals) upheld this view, but the Income Tax Appellate Tribunal (ITAT) ruled in favor of the assessee.

The ITAT's decision was based on the assessee's history of investment, lack of stock-in-trade classification, absence of borrowed funds, and substantial dividend income earned. The Revenue argued that legal tests should determine the income classification, citing the Gujarat High Court judgment and various tests to distinguish between business income and capital gains. The ITAT's findings were supported by past acceptance of similar income as capital gains by the Revenue, emphasizing the need for consistency.

The Court considered several legal precedents and principles outlined in decisions like Raja Bahadur Visheshwar Singh and CBDT Circular No. 4/2007 to assess the income's nature. Noting the absence of borrowed funds, the assessee's history of trading, and the dividend income earned, the Court found that the Revenue failed to present unique evidence to alter the income's classification for the AY 2006-07. The Court upheld the ITAT's decision, emphasizing the need to consider all relevant factors and past practices in determining the income's character.

In conclusion, the Court ruled in favor of the assessee, rejecting the Revenue's appeal. The judgment highlighted the importance of consistent treatment of income, consideration of various legal tests, and the totality of circumstances in determining whether income from share transactions should be classified as business income or capital gains.