2016 (7) TMI 17 - AT - Income Tax

Revision u/s 263 - whether gain from sale of shares is to be assessed as a business income or short term capital gain/long term capital gain? - Held that - CIT(A) did not dispute with regard to the contention of the assessee that in the books the assessee has shown share transaction as an investor. Her status as investor was accepted by the department in preceding year as well as in subsequent year. The assessee has not used any borrowed funds. It has not incurred any expenditure for portfolio management or keeping a track on the investment. The shares were not valued either at market value or at cost, whichever is lower on the close of the year. We have also perused the details of long term capital gains and short term capital gains reproduced by the ld.CIT. Only reason assigned by the CIT is that some of the shares were sold immediately after their acquisition. But the CIT nowhere pointed out that whether the deliveries of the shares were taken by the assessee or not. In our opinion, the ld.CIT failed to make a case that the assessee was trading in shares and not made investment. The reason assigned by the CIT is based only one circumstance, which was also not being conclusively demonstrated. No doubt, three scrip were sold by the assessee in very short span of time, but the total investment made by the assessee, with regard to the short term capital gain is in nine scrip. Similarly, under long term capital gain, it has purchased shares of three companies only. Therefore we are of the view that the ld.CIT could not bring sufficient material on record demonstrating the fact that the assessee was acting as trader and not an investor. Therefore, we allow the appeal of the assessee, and set aside the order passed under section 263 of the Income Tax Act, 1961 - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of the CIT's order under Section 263 of the Income Tax Act.
2. Classification of income from the sale of shares as either business income or capital gains.

Issue-Wise Detailed Analysis:

1. Validity of the CIT's Order under Section 263 of the Income Tax Act:

The assessee challenged the CIT's order under Section 263, which was passed on the belief that the original assessment order was erroneous and prejudicial to the interests of the revenue. The CIT observed that the assessee was trading in shares and should have treated the income from the sale of shares as speculation business income, not as short-term capital gain. The assessee contended that the shares were purchased as investments, shown as investments in the balance sheet, and financed from own funds, not borrowed funds. The CIT did not accept these contentions and issued a show-cause notice under Section 263, which the assessee responded to by reiterating that the shares were investments and not stock-in-trade.

2. Classification of Income from the Sale of Shares:

The core issue revolved around whether the income from the sale of shares should be classified as business income or capital gains. The CIT argued that the assessee was trading in shares, citing the short holding period of some shares. However, the assessee maintained that the shares were held as investments, as evidenced by their treatment in the balance sheet, the use of own funds for purchase, and the lack of frequent transactions. The assessee also highlighted that the status as an investor was accepted in previous and subsequent years.

The Tribunal examined the facts, considering principles from various judicial pronouncements, including those from the Hon'ble Supreme Court and High Courts. The Tribunal noted that the intention behind the purchase, the treatment in the books, the frequency of transactions, and the use of own funds were crucial factors. The Tribunal found that the assessee had shown the shares as investments, not stock-in-trade, and had not used borrowed funds or incurred expenses for portfolio management. The CIT's sole reliance on the short holding period of some shares was insufficient to classify the transactions as trading.

Conclusion:

The Tribunal concluded that the CIT failed to provide sufficient material to demonstrate that the assessee was trading in shares rather than investing. The order under Section 263 was set aside, and the original assessment order was restored. The appeal of the assessee was allowed, affirming the classification of income from the sale of shares as capital gains.