2016 (11) TMI 971 - HC - Income Tax

Profit arising on transactions carried out with borrowed funds - Short Term Capital Gain OR Business Income - Held that - The facts in the present case are completely different from the facts existing in Assessment Years 2005-06 and 2006-07. In the subject assessment year, the assessee has carried out the business activity out of its own funds and the authorities have also rendered a finding of fact that the transactions are not large nor so frequent so as to hold that the respondent assessee was a trader in shares. The finding of fact arrived at both by the CIT(A) as well as the Tribunal for the subject assessment year that the respondent assessee was an investor in shares out of its own funds and considering the volume and frequency of purchase / sale of shares is not a trader has not been shown to be perverse by the Revenue.

Summary

Issues:
Challenge to common order of Income Tax Appellate Tribunal for Assessment Years 2005-06, 2006-07, and 2008-09 regarding classification of profit from share transactions as Short Term Capital Gain or Business Income.

Analysis:
1. The primary issue in this case is the classification of profit from share transactions as either Short Term Capital Gain or Business Income for Assessment Years 2005-06, 2006-07, and 2008-09. The Revenue questioned the Tribunal's reliance on previous decisions and consistency principle, arguing that the profit should be classified as Business Income based on verification and investigation by the Assessing Officer.

2. Specifically, the Tribunal's order for Assessment Year 2008-09 directed the Assessing Officer to treat an amount of ?1.24 crores from share transactions as Short Term Capital Gain, rejecting the Revenue's claim for it to be classified as Business Income. The Tribunal's decision was based on its previous rulings for Assessment Years 2006-07 and 2005-06, emphasizing consistency in treatment.

3. The Revenue filed appeals for Assessment Years 2006-07 and 2005-06, questioning the Tribunal's direction to treat profits from share transactions as Short Term Capital Gain instead of Business Income. The substantial questions of law raised in these appeals focused on the justification for this classification based on the nature of transactions and funding sources.

4. During the proceedings, it was highlighted that the transactions in the subject assessment year were not frequent or voluminous, and were not carried out with borrowed funds, contrary to the situations in previous years. The Commissioner of Income Tax (Appeals) found that the investment activity was conducted with the assessee's own funds, and the share transactions did not indicate a trading activity due to their frequency and volume.

5. Consequently, the Court concluded that the facts in the present case differed significantly from those in Assessment Years 2005-06 and 2006-07. The assessee's business activity in the subject assessment year was based on its own funds, and the transactions were not extensive or frequent enough to categorize the assessee as a trader in shares.

6. Based on the findings of the CIT(A) and the Tribunal regarding the nature of transactions and funding sources, it was determined that the Revenue's proposed question did not present a substantial question of law. Therefore, the appeal was dismissed, and no costs were awarded in this matter.