2015 (10) TMI 392 - AT - Income Tax

Income from sale of shares - income from business OR short term capital gains - Held that - From the record we found that assessee has disclosed shares as investment in the balance sheet, there is no claim of any expenses while computing capital gains which demonstrates the intention of the assessee to treat the shares and securities as investment and not as stock-in-trade. No borrowed interest bearing funds was invested in shares except for making investment in one security on long term basis. The said fact was also explained to the AO and the AO has not disputed the same while accepting assessee s claim of long term capital gains. CBDT in its Instruction No 1827 dated 31.08.1989 has laid down certain criteria to determine whether an activity of purchase & sale of shares/securities is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given by the assessee in its books of account as a trading asset or investment; treatment given in the books is indicative of assessee s intention whether to hold the shares with a view to earn dividend & long term appreciation or with a view to carrying on as business. Even various Courts and Tribunals have approved that treatment given by the assessee in its books of account as a vital factor to decide whether the assessee is a trader or an investor. We also found that the assessee has regularly treated shares as investment in the earlier year and has offered gain on sale of shares under the head capital gain . In the case of Gopal Purohit (2010 (1) TMI 7 - BOMBAY HIGH COURT), the Hon ble High Court also accepted tribunal s observations that the principle of res judicata is not attracted since each year is separate in itself. However, there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. No merit in the action of the AO for not accepting assessee s claim for short term capital gains while accepting the long term capital gains on the similar investment made in earlier years. - Decided in favour of assessee.

Issues Involved:
1. Treatment of income from the sale of shares as business income versus short-term capital gains.
2. Disallowance of 20% of telephone expenses.
3. Disallowance of 20% of fuel and car maintenance expenses.
4. Disallowance of 20% of depreciation on assets forming part of the block of assets.

Issue-wise Detailed Analysis:

1. Treatment of Income from Sale of Shares:
The primary issue was whether the income from the sale of shares amounting to Rs. 1,07,24,457 should be treated as business income or short-term capital gains. The assessee argued that he was an investor in shares, consistently offering long-term and short-term capital gains in previous years, which were accepted by the department. The AO, however, treated the short-term capital gains as business income for the assessment year 2006-07, while accepting the long-term capital gains. The CIT(A) upheld the AO's decision.

The tribunal noted that the assessee was engaged in the business of import and export of marble and granite and had a consistent history of treating share transactions as investments. The tribunal referred to several judicial pronouncements, including the Bombay High Court's decision in Gopal Purohit, which upheld the principle of consistency in treating share transactions as investments. The tribunal also considered factors such as the volume and frequency of transactions, the intention behind purchasing shares, and the treatment of shares in the assessee's books. It concluded that the AO's decision to treat the short-term capital gains as business income was not justified, especially given the consistent treatment of similar transactions in previous years.

2. Disallowance of 20% of Telephone Expenses:
The assessee contested the disallowance of Rs. 33,256, which was 20% of the telephone expenses, arguing that it was based on conjectures and surmises and was excessive. The tribunal did not provide a detailed analysis of this issue in the judgment, implying that the primary focus was on the treatment of share transactions.

3. Disallowance of 20% of Fuel and Car Maintenance Expenses:
Similarly, the assessee challenged the disallowance of Rs. 25,610, which was 20% of the fuel and car maintenance expenses. The tribunal did not elaborate on this issue, focusing instead on the main issue of the treatment of income from share transactions.

4. Disallowance of 20% of Depreciation:
The assessee also contested the disallowance of 20% of the depreciation on assets forming part of the block of assets. The tribunal did not delve into this issue in detail, indicating that the main contention was regarding the classification of income from share transactions.

Conclusion:
The tribunal allowed the appeal of the assessee, overturning the AO's decision to treat the short-term capital gains as business income. It emphasized the importance of consistency in the treatment of similar transactions and the intention of the assessee while making investments. The tribunal's decision was based on a thorough analysis of the facts, previous assessments, and relevant judicial pronouncements.

Order Pronouncement:
The order was pronounced in the open court on 7th August 2015.

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