2015 (11) TMI 807 - HC - Income Tax

Transaction of shares - Capital Gain or business profits - whether the entire activity of declaring the gain made on account of sale of shares/units of mutual funds was only with the view of avail of lower rate of taxation applicable to profits made on account of capital gains? - Held that - This issue has been dealt with by the Tribunal by recording the fact that it was not the case of revenue before the Tribunal that the respondent-assessee had converted it s stock in trade into the investment with the intention to avoid and/or reduce the tax. In the absence of any factual basis the allegation that the entire exercise was carried out as investment only to avail of the concessional rate of tax as urged by the revenue cannot be accepted. Moreover, on the issue of long term capital gains with regard to mutual funds, there are concurrent findings of facts by the CIT(A) and the Tribunal in favour of the respondent-assessee. Whether Tribunal right in holding that the mere entry in books of accounts that shares are held as investment, make the respondent individual an investor, whereas the period of holding of these scrips, the frequency, the volume and value of transactions are indicative of being trader and not an investor? - Held that - We find that the Assessing Officer in the Assessment Order gives a table of the transaction entered during the year. From the table, it is evident that a single purchase/sale transaction which are received/delivered in multiple lots i.e. more than one lot are each considered as separate transaction. The Assessing Officer has computed each lot as a separate transaction resulting in inflated figure of 205 transactions. So far large value of transactions are concerned, one must not loose sight of the fact that large value has to be looked at in the context of the wealth of the person concerned. In this case, the respondent-assessee is engaged in a very profitable business of embroidery which has turnover of ₹ 19.28 crores and profit of ₹ 9 crores during the subject assessment year. Thus the value of the transactions for purposes of deciding the issue is to be considered from case to case and there can be no absolute value beyond which the transaction would be considered to be trading. Therefore in the facts of the present case, the view taken by the CIT(A) and Tribunal on the aforesaid facts is a plausible view. The determination of whether an assessee is carrying a trading or investment activity is to be determined on a cumulative assessment of various factors, which has in fact been done by the CIT(A) and the Tribunal. The revenue has not been able to show that the factual finding recorded by CIT(A) and the Tribunal is in any manner perverse and/or arbitrary. - Decided in favour of assessee.

Summary

Issues Involved:
- Challenge to the order passed by the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2005-06.
- Determination of whether gains declared as capital gains were essentially profit from trading in shares or qualified as business profits.
- Analysis of the nature of investments made by the individual assessee in mutual funds and shares.
- Examination of factors to differentiate between an investor and a trader based on holding period, volume, and frequency of transactions.
- Consideration of the motive behind the investments, treatment in books of accounts, and absence of borrowing for investments.
- Evaluation of the revenue's appeal regarding the classification of gains as income from trading in shares.
- Assessment of the grievance raised by the revenue regarding the intention behind declaring gains for tax purposes.
- Review of the high turnover and frequency of transactions to determine if the individual was engaged in the business of trading in shares.

Detailed Analysis:
1. The appeal challenged the Tribunal's order regarding the classification of gains declared by the individual assessee as capital gains or business profits. The Assessing Officer treated the gains as business profits, but the CIT(A) and Tribunal considered the nature of investments in mutual funds and shares, concluding that the gains were not from trading activities but from investments held for appreciation and dividend income.

2. The revenue's appeal raised questions about the motive behind declaring gains for tax purposes and the high turnover of transactions. However, the Tribunal found no evidence to support the claim that the investments were made solely for tax benefits. The frequency and volume of transactions were analyzed in the context of the individual's profitable embroidery business, leading to the dismissal of the revenue's appeal.

3. The Tribunal's decision emphasized the importance of considering various factors to differentiate between investment and trading activities. The CIT(A) and Tribunal independently assessed the facts and motives behind the investments, concluding that the gains were not classified as income from trading. The revenue's contentions were deemed unsubstantiated, and the appeal was dismissed.

4. The judgment highlighted the significance of factual findings and the absence of evidence supporting the revenue's claims regarding the individual's intention behind the investments. The Tribunal's thorough analysis of the transactions and motives led to the rejection of the revenue's appeal, affirming the classification of gains as capital gains from investments rather than business profits from trading activities.