2015 (5) TMI 756 - AT - Income Tax

Income from sale of shares - income from capital gain or business income - Held that - The assessee though had classified all unsold shares as on the close of accounting year as investments yet he was a both trader and an investor. CBDT in its circular No. 4 of 2007 has also emphasized that it is possible for a tax payer to have two portfolios one as investment portfolio and another as trading portfolio and where, the assessee has both portfolios, the income has to be assessed under both heads i.e. capital gain and business income. Moreover, we find that assessee had earned significant income from portfolio schemes and therefore the nature of income as to whether the same was capital gain or business income, has to be looked into keeping in view the objectives of such schemes and other terms and conditions of such schemes and also on the basis of settled law with respect o taxation of income from portfolio schemes. In view of the above facts and circumstances, we set aside the order of Ld. CIT(A) and direct him to re-adjudicate on the issue after taking into account all facts and circumstances as enumerated above. The Ld. CIT(A) should examine the three years independently as entire facts in one year may not be available in another year. The case laws relied upon by Ld. A.R. are distinguishable on the facts as in the case law as M/s. Devasan Investments (P) Ltd. 2014 (4) TMI 682 - DELHI HIGH COURT the number of scripts was quite low and there was no frequency of transactions. Moreover, in determination of the nature of income of an assessee as to whether income is from capital gains or from business, a combination of factors has to be considered and no case law can be made as a precedent. - Decided in favour of revenue for statistical purposes.

Summary

Issues Involved:
1. Classification of income from the sale of shares as business income or capital gains.
2. Assessment of the nature of transactions in shares and securities.
3. Determination of whether the assessee is a trader or an investor in shares.
4. Examination of the treatment of shares in the books of accounts.
5. Consideration of borrowed funds for purchasing shares.
6. Frequency and volume of transactions in shares.
7. Treatment of income from portfolio management schemes.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue in these appeals is whether the income from the sale of shares should be classified as business income or capital gains. The Assessing Officer (A.O.) had treated the income as business income, while the Commissioner of Income Tax (Appeals) [CIT(A)] had classified it as short-term and long-term capital gains.

2. Nature of Transactions in Shares and Securities:
The A.O. observed that the assessee was dealing in a large number of securities, indicating that the assessee was not an investor but a trader. The A.O. relied on various judicial pronouncements and CBDT circulars to conclude that the income should be treated as business income. Key observations included:
- The assessee had a substantial turnover in shares and mutual funds.
- The dividend earned was negligible, indicating the intention was to earn profit from sales.
- The scale of activities was substantial, with turnover running into crores.
- The assessee used secured loans for purchasing shares.
- Some securities were held for less than a month.
- The assessee devoted substantial time to dealing in shares, indicating it was a means of livelihood.

3. Determination of Whether the Assessee is a Trader or Investor:
The CIT(A) considered various judicial decisions and principles to determine the nature of transactions. The principles included:
- The intention at the time of purchase.
- The treatment of shares in the books of account.
- Whether borrowed funds were used.
- The frequency and volume of transactions.
- The period of holding and the objective of transactions.
- The nature of the assessee's authorization in the memorandum of association.
- The distinction between trading and investment portfolios.
The CIT(A) concluded that the assessee was not a trader in shares and treated the income as capital gains.

4. Treatment of Shares in the Books of Accounts:
The CIT(A) noted that the assessee treated the securities as investments in the balance sheet and valued them at cost. The assessee did not borrow money for dealing/investment in shares. The frequency of transactions was examined, and it was found that the retention period for many shares was significant, indicating an investment objective.

5. Consideration of Borrowed Funds:
The A.O. observed that the assessee used secured loans for purchasing shares. However, the CIT(A) found that the assessee did not use borrowed funds for purchasing shares, and the interest claimed was related to other investments.

6. Frequency and Volume of Transactions:
The CIT(A) examined the frequency and volume of transactions and found that the assessee did not engage in day-to-day trading. The retention period for shares was substantial, indicating an investment objective. The CIT(A) also noted that the assessee earned significant dividends from investments.

7. Treatment of Income from Portfolio Management Schemes:
The CIT(A) did not specifically address the nature of income from portfolio management schemes. The Tribunal noted that the nature of such income should be examined to determine whether it is capital gains or business income.

Conclusion:
The Tribunal found that the CIT(A) did not consider all relevant factors and circumstances in determining the nature of income. The Tribunal set aside the order of the CIT(A) and directed a re-adjudication of the issue, taking into account all relevant facts and circumstances. The Tribunal emphasized that the assessee could have both trading and investment portfolios, and income should be assessed under both heads accordingly. The appeals filed by the Revenue were allowed for statistical purposes.