2016 (12) TMI 40 - AT - Income Tax

Income from sale of shares - busniss income or capital gain - Held that - Once the assessee was holding the shares as investment since 1996-97 up to 2013-14, there was no reason to treat the income from sale of shares under the head Business income because the intention of assessee was manifested very clearly by its conduct. The assessee had primarily utilised its surplus funds for investing in shares and not borrowed funds. Moreover, the learned Commissioner of Income-tax (Appeals) has also observed that in the memorandum of the assessee- company, there was no objects clause for trading in shares. We, therefore, uphold the order of the learned Commissioner of Income-tax (Appeals).

Summary

Issues Involved:
1. Classification of income from the sale of shares as business income or capital gains.
2. Treatment of short-term and long-term capital gains on shares.
3. Consistency in the treatment of income from shares in previous and current assessment years.
4. Applicability of CBDT Circulars and case law in determining the nature of income.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue is whether the income from the sale of shares should be treated as business income or capital gains. The Assessing Officer (AO) argued that due to the high volume and frequency of transactions, the income should be classified as business income. The AO noted that the assessee traded in 325 scrips with a turnover of ?5,68,10,283, holding periods ranging from 3 days to three months. The AO's stance was based on the volume of transactions and the short holding periods, suggesting a profit motive rather than investment.

2. Treatment of Short-term and Long-term Capital Gains:
The Commissioner of Income-tax (Appeals) [CIT(A)] partially agreed with the AO, holding that gains from shares sold within 30 days should be treated as business income, while gains from shares held longer should be considered capital gains. The CIT(A) observed that the assessee had been consistently showing such gains as capital gains in previous years, which had been accepted by the Department. The CIT(A) also noted that the assessee's memorandum did not include trading in shares as an object, and the investments were made using surplus funds, not borrowings.

3. Consistency in Treatment of Income:
The assessee argued that it had been treating the income from the sale of shares as capital gains since 1996-97, which had been accepted by the Department in previous assessments, including under section 143(3) for the assessment year 2005-06. The CIT(A) emphasized the principle of consistency, referencing the Central Board of Direct Taxes (CBDT) Circular No. 6, dated February 29, 2016, which provides guidelines for determining whether income from the sale of shares should be treated as capital gains or business income.

4. Applicability of CBDT Circulars and Case Law:
The CIT(A) and the Income-tax Appellate Tribunal (ITAT) considered various case laws and CBDT circulars. The CIT(A) referred to the case of Fidelity Northstar Fund, In re, and the guidelines laid down by the CBDT, which state that shares held for more than 12 months should be treated as capital gains if the assessee desires. The ITAT also considered decisions from other cases, such as Deputy CIT v. Ganesha Securities (P) Ltd. and Deputy CIT v. Mahender Kumar Bader, which supported the assessee's position.

Conclusion:
The ITAT upheld the CIT(A)'s decision, finding no reason to interfere with the findings. The ITAT noted that the assessee had been holding shares as investments since 1996-97, primarily using surplus funds, and there was no object clause for trading in shares in the assessee's memorandum. The ITAT concluded that the income from the sale of shares should be treated as capital gains, except for gains from shares sold within 30 days, which should be treated as business income. Consequently, the Revenue's appeal was dismissed, and the cross-objections of the assessee were dismissed as not pressed.