2017 (4) TMI 518 - AT - Income Tax

Income from transactions in securities - capital gains or business income - Held that - Assessee company is engaged in the business of trading in securities. During the year assessee has shown the sale of securities as business receipts at ₹ 73,91,026/-. We also observe that assessee has entered into as many as 7000 transactions of purchase and sale of around 4lacs equity shares of a single company namely Suraj Stainless Steel Ltd. and the total value of shares sold is ₹ 8,58,03,298/-. The transactions of purchase and sale carried on by the assessee in which even on a single day i.e. 14.11.2006 almost 63 transactions have been entered into of the same scrip. We also observe that the total share capital of the company was ₹ 2,42,000/- and the unsecured loan stood at ₹ 45lacs which proves the fact that assessee has borrowed funds for entering into the share transactions. We also find that assessee has not controverted the fact during the assessment proceedings that the purchase and sale transactions of the very same scrip i.e. Suraj Stainless Steel Ltd. was entered into in preceding financial year also and sale value was treated as business turnover and unsold shares were shown as stock in trade. Thus assessee is regularly in the business of purchase-sale of equity shares, share transactions entered during the year were in large number, funds were borrowed for the purpose of trading, no separate account has been maintained for the investment portfolio and all the transactions of purchase sale raised are only for one scrip namely Suraj Stainless Steel Ltd. In these facts and circumstances, assessee cannot take shelter of the CBDT Circular no. 4/2007 dated 15.06.2007. As far as the decision of co-ordinate bench in the case of Sugamchand C. Shah vs. ACIT (2010 (1) TMI 942 - ITAT, Ahmedabad) is concerned there have been various decisions thereafter by the Jurisdictional High Court wherein it has been held that transactions cannot be bifurcated by the period of holding and actual nature of transactions with surrounding circumstances are to be seen and therefore the directions of ld. CIT(A) given to Assessing Officer will not stand for. In the totality of facts we are of the considered opinion that the alleged short term capital gain shown by the assessee for A.Y. 2007-08 & 2008-09 should be treated as business income. - Decided in favour of revenue.

Summary

Issues Involved:
1. Classification of income from transactions in securities as "capital gains" or "business income."
2. Treatment of short-term capital gains and business income based on the period of holding of equity shares.
3. Applicability of various judicial pronouncements and CBDT Circulars in determining the nature of transactions.

Issue-wise Detailed Analysis:

1. Classification of Income from Transactions in Securities:
The primary issue raised by the Revenue was the classification of income from transactions in securities. The Revenue contended that the assessee was engaged in trading of shares and securities, and thus, the income should be classified as "business income" instead of "capital gains." The Assessing Officer (AO) observed that the assessee had no investment in equity shares as on 31.03.2006 and 31.03.2007, except an unquoted investment. The AO noted that the assessee engaged in more than 7000 transactions of purchase and sale of around 4 lakh equity shares of Suraj Stainless Steel Ltd. throughout the year. The AO concluded that the pattern of transactions indicated trading activities, not investment activities, and thus, the income should be treated as business income.

2. Treatment of Short-term Capital Gains and Business Income:
The CIT(A) directed the AO to verify each transaction based on the period of holding the equity shares sold, following the decision of the Co-ordinate Bench in the case of Sugamchand C. Shah vs. ACIT. The CIT(A) held that gains from the sale of equity shares held for 30 days or less should be treated as business income, while gains from shares held for more than 30 days should be treated as short-term capital gains. The CIT(A) cited various judicial pronouncements, including those from the Hon'ble Supreme Court and High Courts, to support this bifurcation based on the holding period.

3. Applicability of Judicial Pronouncements and CBDT Circulars:
The CIT(A) referenced several judicial decisions to support the bifurcation of gains based on the holding period. These included the Supreme Court's decisions in cases like Raja Bahadur Visheshwara Singh and Dalhusie Investment Trust Co., which provided guidance on distinguishing between investment and trading activities. The CIT(A) also referred to the CBDT Circular No. 4/2007, which outlines criteria for determining whether transactions should be classified as business income or capital gains. However, the Tribunal noted that subsequent decisions by the Jurisdictional High Court emphasized that the actual nature of transactions and surrounding circumstances should be considered, rather than solely relying on the holding period.

Tribunal's Decision:
The Tribunal observed that the assessee was engaged in the business of trading in securities, with substantial transactions and borrowed funds used for trading activities. The Tribunal noted that the assessee had not maintained separate accounts for investment and trading portfolios and had entered into numerous transactions of the same scrip, Suraj Stainless Steel Ltd. The Tribunal concluded that the assessee's activities were indicative of trading rather than investment. Consequently, the Tribunal held that the alleged short-term capital gains for the assessment years 2007-08 and 2008-09 should be treated as business income, overturning the CIT(A)'s direction to bifurcate the gains based on the holding period.

Conclusion:
The Tribunal allowed the Revenue's appeal for both assessment years, treating the income from transactions in securities as business income rather than capital gains. The Tribunal emphasized the need to consider the actual nature of transactions and surrounding circumstances, rather than solely relying on the holding period, in determining the classification of income.