2016 (12) TMI 489 - AT - Income Tax

Income from sale of shares - Nature of income - short term capital gain or business income - Held that - From the record, we found that assessee was having capital of ₹ 2.30 crores as against investment in shares of ₹ 1.21 crores. Thus, capital was much more than the investment in shares. There was secured loans of 5.23 lakhs against assessee‟s own Kisan Vikas Patra, and bank overdraft of ₹ 11.56 lacs against assessee‟s own FDR‟s. Thus, loan from bank was only against assessee‟s own security which cannot be treated as business advance. Assessee was also having loan from family members without any interest. From the record we also found that assessee has no business income. No evidence on record to suggest that assessee had any establishment for running share activities. Assessee has also not claimed any business expenditure in respect of her activity of dealing in shares. No organized activity to suggest a business activity in existence. No significant risk exposure from borrowings. Capital is more than investments in shares. Secured loans are not significant compared to the level of investment in shares and any case, obtained on security of liquid assets. Unsecured loans are from family members and after taking into account corresponding loans given to family members, the net amount is not significant. From the record, we also found that in the immediate preceding assessment year 2005-2006, assessment was framed u/s.143(3) r.w.s.153A dated 31/03/2010, wherein AO has accepted assessee‟s claim of short term capital gains on sale of shares, however, in the assessment year 2007-08 to 2009-2010, the AO has followed his order for assessment year 2006-07 without mentioning any peculiar facts for treating the capital gain as business income. We found that decision of Supreme Court in Radhasaomi Satsang vs. CIT (1991 (11) TMI 2 - SUPREME Court ) has been relied by CIT (A) on proposition that each year s assessment is final for that year does not govern later year and principle of res judicata is not applicable to income tax proceedings. In view of the above, we direct the AO to treat gain arising out of sale of shares as short term capital gains rather than business income.

Issues Involved:
1. Classification of income from share transactions as short-term capital gains or business income.
2. Consistency in the treatment of similar transactions in previous and subsequent assessment years.
3. Intention behind the purchase of shares – investment vs. trading.
4. Use of borrowed funds for share transactions.
5. Frequency and volume of transactions as indicators of trading activity.

Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue in this case is whether the income from the sale of shares should be classified as short-term capital gains or business income. The assessee, a housewife, claimed the income as short-term capital gains, while the Assessing Officer (AO) treated it as business income due to the frequency and volume of transactions.

2. Consistency in Treatment:
The assessee argued that she had been consistently treated as an investor in previous years, with similar transactions being accepted as capital gains. The tribunal emphasized the principle of consistency, citing the case of Sidhalchal Enterprises Pvt. Ltd., where it was held that the Revenue cannot adopt a double yardstick by treating long-term capital gains as investment income and short-term capital gains as business income. The tribunal also referenced the Bombay High Court decision in Gopal Purohit, which stressed uniformity in treatment.

3. Intention Behind Purchase of Shares:
The tribunal examined the intention behind the purchase of shares. It was noted that the assessee had been investing in shares since 1997 and had consistently earned dividend income, which was offered for tax as income from other sources. The tribunal highlighted that the intention to earn dividends and hold shares as investments is a crucial factor in determining the nature of the income. The tribunal referenced the Supreme Court decision in CIT vs. H. Holck Larsen, which held that activities undertaken to nurse investments do not amount to trading.

4. Use of Borrowed Funds:
The AO argued that the assessee had borrowed funds for investment in shares, indicating a trading activity. However, the tribunal found that the only loan taken was ?5 lakhs for immovable property, and the assessee had sufficient capital to cover the share investments. The tribunal concluded that the borrowed funds were not significant compared to the level of investment in shares.

5. Frequency and Volume of Transactions:
While the AO relied on the frequency and volume of transactions to classify the income as business income, the tribunal noted that these factors alone are not conclusive. The tribunal cited several judicial pronouncements, including Bharat Kuverji Kenia vs. Add.CIT, which held that the volume of transactions does not justify treating the activity as a business. The tribunal also referenced the case of Mr. Nehal V. Shah vs. ACIT, where it was held that the splitting of a single transaction into multiple smaller transactions by stock exchange systems does not indicate trading activity.

Conclusion:
The tribunal directed the AO to treat the income from the sale of shares as short-term capital gains rather than business income. The tribunal emphasized the importance of consistency in treatment, the intention behind the purchase of shares, and the use of borrowed funds. The tribunal also highlighted that the frequency and volume of transactions are not sole indicators of trading activity. The appeal of the assessee was allowed, and the order was pronounced in the open court on 05/12/2016.

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