2015 (4) TMI 756 - AT - Income Tax

Treatment of gain on sale of shares - Business income or Capital gains - No borrowings to fund investment - Held that - On going through the order of the CIT(A) and the material placed on record, we find that the CIT(A) has taken into consideration the facts as well as legal position and the circulars of the CBDT, but did not interpret the same judiciously, as per the apparent facts of the case. Since the number of transactions were 48 in the entire year, this according to the CIT(A) was high in the case of the investor. This view by the CIT(A) baldly sustaining the observation of the AO. When we look into the facts, we find that the assessee is neither holding any SIT portfolio, nor was he indulging into sale and purchase on a regular interval basis. We also find that the department has accepted the status of the assessee as that of an investor in the preceding years as well as in the subsequent years. This shows the consistency of the approach by the assessee as well as by the department. However, in the instant years, the revenue authorities did not specify anything to suggest that somehow the facts were different, or conduct of the assessee was so different, to hold differently. We find ourselves gainfully supported by the decision of Special Bench of the ITAT at Mumbai in the case of Gopal Purohit 2009 (2) TMI 233 - ITAT BOMBAY-G , which has since been approved by the Hon ble Bombay High Court, dismissing the appeal filed by the department u/s 260A, reported in 2010 (1) TMI 7 - BOMBAY HIGH COURT , wherein the basic ratio as laid down was in the case of consistent approach to be adopted in case of separate portfolios maintained by the assessee. In such a circumstance, it would be erroneous to sustain the orders of the revenue authorities. In the course of proceedings before us, the AR had pointed out that the assessee had neither taken any loans nor it had any employees nor it conducted its activities in an organized and in any continuity. Besides this one of the most important factors is the intention the assessee. The intention has to be seen at the time of acquisition of shares, i.e. whether to hold or dispose off. This has to be gathered from the actual conduct of the assessee while dealing with the shares, We are supported by the decision of the Hon ble Supreme Court in the case of CIT vs Madangopal Radheylal 1968 (9) TMI 14 - SUPREME Court . In the instant case the holding period is shown to be 86 days in STCG and in excess of 16 months in LTCG, this by itself shows the intention of the assessee at the time of acquisition of shares and subsequent conduct of the assessee. Taking into the surrounding circumstances as well, we are of the opinion that the revenue authorities committed an error to treat the gains as business income instead of capital gains. - Decided in favour of assessees.

Summary

Issues Involved:

1. Treatment of gains on the sale of shares as business income versus capital gains.
2. Determination of the nature of transactions (trade transactions or investments).

Issue-wise Detailed Analysis:

1. Treatment of Gains on the Sale of Shares as Business Income versus Capital Gains:

The primary issue in both appeals is whether the gains from the sale of shares should be treated as business income or capital gains. The assessee declared Rs. 24,82,465/- as short-term capital gains (STCG) and Rs. 6,64,144/- as long-term capital gains (LTCG) from the sale of shares. The Assessing Officer (AO) reclassified these gains as business income, arguing that the assessee's activities indicated trading rather than investment. The AO's rationale included the high frequency of transactions, the use of borrowed funds, and the professional charges paid by the assessee. The AO concluded that the sole intention behind these transactions was to book profit and avoid taxes, thus treating the gains as business income.

2. Determination of the Nature of Transactions (Trade Transactions or Investments):

The assessee contended that it had been investing in shares since 1995 and ceased trading activities by 31.03.2003. The assessee argued that the transactions were delivery-based, with no borrowed funds involved, and the average holding period for STCG was 84 days and for LTCG was more than 16 months. The assessee relied on multiple case laws to support its position that the transactions were investments, not trading activities. The CIT(A) upheld the AO's decision, noting the frequent and continuous purchase and sale of shares, the high turnover compared to the average investment, and the involvement of the assessee's directors in stock market activities.

Judgment Analysis:

The ITAT examined the facts and legal principles, noting that the CIT(A) did not judiciously interpret the facts. The ITAT found that the assessee had maintained consistency in its approach, with no significant change in its conduct or facts to justify a different treatment for the current year. The ITAT referred to the Special Bench decision in Gopal Purohit vs JCIT, which emphasized consistency in treating separate portfolios for trading and investment. The ITAT also highlighted the Supreme Court's decision in CIT vs Madangopal Radheylal, which stressed the importance of the intention at the time of acquisition of shares.

The ITAT concluded that the assessee's intention was to hold the shares as investments, supported by the holding periods and the lack of organized trading activities. The ITAT set aside the CIT(A)'s orders and directed the AO to treat the gains as capital gains, as claimed by the assessee.

Conclusion:

The appeals filed by the assessee were allowed, and the orders of the CIT(A) were set aside. The AO was directed to treat the gains from the sale of shares as capital gains rather than business income. The judgment emphasized the importance of the intention at the time of acquisition and the consistency in the assessee's conduct in determining the nature of transactions.

Order Pronouncement:

The order was pronounced in the open court on 04/03/2015.