2016 (8) TMI 253 - AT - Income Tax

Profit on transactions of voluminous and frequent purchase and sale of shares - capital gain or business income - two investment portfolio - Held that - We find from the balance-sheet of the assessee where assessee maintains two portfolios as discussed above. Even the CBDT Circular no. 4 of 2007 dated 15.06.2007 envisages the practice of assessee s maintaining dual portfolios. We also find that the decision was rendered by the Hon ble Bombay High Court in the case of CIT vs. Gopal Purohit reported (2010 (1) TMI 7 - BOMBAY HIGH COURT), wherein the assessee had maintained dual portfolios and ultimately the court held that the resultant gains from investment activity would be assessable as capital gains and not business income. We also find that the CBDT in its Instruction No.1827 dated 31.08.1989 has laid down certain criteria to determine whether an activity of purchase and sale of shares is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given in the books of accounts which is indicative of assessee s intention whether to hold the shares with a view to earn dividend and long term appreciation or with a view to carrying on as business. We further find the intention of the assessee to maintain two independent portfolios i.e. one for investment purposes and one for trading purposes when he converted his stock in trade into investment on dated 1.4.2004. We hold that surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolios - Decided in favour of assessee.

Summary

Issues:
1. Determination of income as capital gains or business income based on the nature of transactions in shares.

Analysis:
The judgment involved appeals by the Revenue against the orders of the Commissioner of Income Tax (Appeals) for assessment years 2006-07 and 2007-08. The main issue was whether the transactions of purchase and sale of shares by the assessee constituted capital gains or business income. The Assessing Officer treated the income as business income due to the systematic and organized manner of transactions. However, the Commissioner of Income Tax (Appeals) allowed the assessee's appeal, considering the assessee's maintenance of two separate portfolios for investment and stock-in-trade. The Commissioner relied on various judgments, including the Bombay High Court decision in the case of Gopal Purohit, to support the treatment of income as capital gains.

The Tribunal analyzed the facts and legal principles involved. It noted that the assessee maintained dual portfolios, as allowed by CBDT Circular no. 4 of 2007. The Tribunal highlighted the importance of the assessee's intention, as evidenced by the maintenance of separate portfolios, in determining the nature of the income. It referenced the judgment of the Madras High Court in distinguishing between trading and investment activities based on the assessee's intention. The Tribunal also cited the Mumbai Tribunal's decision emphasizing the assessee's intention over the frequency of transactions in determining the nature of income.

Furthermore, the Tribunal considered the judgment of the Calcutta High Court in the case of CIT vs. Merlin Holding P Ltd., which emphasized that the frequency of transactions alone does not determine the nature of the investor's intention. The Tribunal also relied on CBDT Circular 6 of 2016, which provided guidelines for treating income from the transfer of shares as business income or capital gains. Based on the precedents and legal provisions, the Tribunal concluded that the income earned by the assessee should be treated as capital gains and upheld the Commissioner's order.

In summary, the Tribunal dismissed the Revenue's appeal for both assessment years, affirming the treatment of the income as capital gains based on the assessee's maintenance of separate portfolios and adherence to legal guidelines and precedents.