2016 (2) TMI 161 - AT - Income Tax

Sale of shares - Short Term Capital Gain/Loss and Long Term Capital Gain /Loss - Held that - Assessee is a regular investor and the assessee has shown the income of Short Term Capital Gain/Loss and Long Term Capital Gain /Loss from the sale of shares which is being shown consistently since preceding several year s and the same was accepted in the preceding years by the Revenue. We have observed that the assessee has also valued the investment in shares at cost in his books of accounts and not cost or market value which ever is lower which is again indicative that the shares are held by the assessee as investment. The shares purchased and sold are all delivery based transactions on which STCG/STCL or LTCG/LTCL is earned. The assessee has also offered for tax , income from sale of shares as speculative profits (net) of ₹ 3,03,915/- under the Act where the transactions are not backed with delivery. The assessee is partner in M/s Dia Export Corporation which is engaged in trading in diamond and assessee has made substantial investment in said partnership firm from which receivable as on 31-03-2010 stood at ₹ 6.74 crores and has substantial income from the said firm which stood at ₹ 32,88,053/- for the assessment year 2010-11 which again indicates that it must be occupying substantial time of the assessee as the assessee has also contended that he is working partner of the said firm M/s Dia Export Corporation . We have also observed that the assessee has not borrowed any funds for buying and holding the shares which also indicates that the assessee is an investor. In our considered view keeping in view facts and circumstances of the case , the CIT(A) has rightly classified and distinguished whereby the shares transacted repeatedly within short period of time within few days was held to be business income of ₹ 8,03,879.90 as per chart above in preceding para s while the rest of income/gain from sale of shares is classified as STCG or LTCG and we do not find any infirmity in the well reasoned orders of the CIT(A) which we uphold. - Decided against revenue

Summary

Issues Involved:
1. Whether the sale of shares should be treated as Short Term and Long Term Capital Gain or as "Income from Business".
2. Whether the CIT(A) erred in not considering the precedent set by the Bombay High Court in the case of CIT v/s. Gopal Purohit.

Issue-wise Detailed Analysis:

1. Treatment of Sale of Shares:
The primary issue was whether the income from the sale of shares should be classified as Short Term and Long Term Capital Gain or as "Income from Business". The assessee, an individual with income from business, capital gains, and other sources, reported Short Term Capital Gains (STCG) of Rs. 1,27,94,968/- and Long Term Capital Gains (LTCG) and losses for the assessment year 2010-11. The Assessing Officer (AO) argued that the nature of transactions indicated trading activity due to the high volume and frequency of transactions, and thus, the income should be treated as business income. The AO emphasized that the principle of 'res judicata' does not apply to income tax proceedings, implying that each assessment year is distinct and past treatment does not bind the current assessment.

The assessee contended that the shares were held as investments, consistently shown in the balance sheet at cost, and that the income from these investments was treated as capital gains in previous years, which were accepted by the Revenue. The assessee also highlighted that there were no borrowings for purchasing shares, and the transactions were delivery-based, further supporting the claim of being an investor rather than a trader.

2. Precedent Set by Bombay High Court in CIT v/s. Gopal Purohit:
The CIT(A) considered the precedent set by the Bombay High Court in CIT v/s. Gopal Purohit, which established that an assessee could maintain two separate portfolios for investment and trading. The CIT(A) observed that the assessee had consistently shown income from the sale of shares as investment income, giving rise to capital gains, and this treatment had been accepted in previous assessment years. The CIT(A) also noted that the assessee's case was scrutinized under Section 143(3) of the Income Tax Act for several years, and the assessee was treated as an investor.

The CIT(A) applied the principle of consistency, holding that the Revenue should maintain uniformity in treatment when facts and circumstances are identical across years. The CIT(A) distinguished between transactions where the holding period was very short (less than ten days), treating those as business income, while the rest were treated as capital gains.

Conclusion:
The Tribunal upheld the CIT(A)'s order, emphasizing the principle of consistency and the established judicial precedent. It was noted that the assessee had been consistently treated as an investor in previous years, and there was no significant change in facts to warrant a different treatment for the current year. The Tribunal found no infirmity in the CIT(A)'s decision to classify certain short-term transactions as business income while treating the rest as capital gains. The Revenue's appeal was dismissed.

Order Pronounced:
The order was pronounced in the open court on 1st January, 2016, dismissing the Revenue's appeal.