2016 (8) TMI 1034 - AT - Income Tax

Profits from sale of shares - capital gains OR business income - qualification for deduction u/s 111A - Held that - The assessee has indulged in purchase & sale of shares, no doubt with the intention of making profit but intention and timing of holding of investments determines the nature of transactions. It is worth to note that assessee also entered into F&O transactions, which clearly demonstrates that the intention was to make quick money/profit. The frequency of transactions are such that the minimal holding was 1 day and maximum was 77 days. This also demonstrates that the intention of the assessee was not for making investment but rather making quick profit, which is nothing but indulging in business. There is no doubt that all the transactions are conducted with the profit intention only. But, the intention to invest for holding as investment will qualify for deduction u/s 111A whereas the intention is to make quick profit, will definitely gives the impression that it was carried on as short term business to make quick money. As held in the case of CIT Vs. Rewa Shankar A. Kothari 2006 (1) TMI 80 - GUJARAT High Court where on finding that there was a long gap between date of acquisition of shares and their sales, also shares having been shown as investments in Wealth Tax returns right from its purchase, it was held that profits from sale of shares were required to be taxed under capital gains and not as business income. In the present case, it is quite opposite to the above discussion. Hence, we are inclined to conclude that the transactions are in the nature of business and not as investment. Accordingly, we hold that the action of the AO in this case is appropriate and the appeal of the assessee is dismissed.

Summary

Issues:

1. Determination of nature of income - whether short term capital gains or business income.

Analysis:

The case involved an appeal by the assessee against the order of the Commissioner of Income-tax (Appeals) for the assessment year 2008-09. The assessee had initially shown short term capital gains on the sale of shares and short term loss on derivatives, which were set off to arrive at the total short term capital gains. The Assessing Officer (AO) observed that the assessee engaged in frequent trading of shares, sometimes buying and selling on the same day. The AO concluded that the intention was to make a profit by trading shares rather than holding them as investments. Consequently, the AO treated the income as business income instead of short term capital gains under section 111A of the Income Tax Act, 1961.

Upon appeal, the CIT(A) upheld the AO's decision based on the volume of transactions, frequency of trading, and the nature of the activities carried out by the assessee. The CIT(A) noted that the assessee traded in a significant number of shares with a high frequency of transactions, indicating a trading activity rather than investment. The CIT(A) confirmed the AO's treatment of the income as business income.

The assessee further appealed the decision, arguing that the income should be considered short term capital gains as the shares were purchased for investment purposes. The assessee contended that being a salaried employee, there was no intention to trade in shares for profit. The assessee highlighted the treatment of similar transactions in preceding and subsequent assessment years as short term capital gains.

However, the Tribunal upheld the decisions of the revenue authorities, emphasizing that the intention and timing of holding investments determine the nature of transactions. The Tribunal noted the frequency of transactions, including futures and options, and the short holding periods, indicating a profit-making motive rather than long-term investment. Citing relevant case law, the Tribunal concluded that the transactions were conducted as a business to make quick profits, leading to the dismissal of the assessee's appeal.

In conclusion, the Tribunal affirmed the AO's treatment of the income as business income, dismissing the appeal of the assessee. The judgment highlighted the importance of intention and holding periods in determining the nature of income from share transactions, emphasizing profit-making activities as indicative of business income rather than capital gains.