2017 (11) TMI 118 - AT - Income Tax

Income from sale of shares - capital gain or business income - Held that - After carefully considering the voluminous transactions entered into by the assessee during the year and the overall conduct of the assessee , we are of the considered view that gains arising from purchase and sale of shares which are squared within 30 days of purchase by the assessee, the same may be treated as a business income and correspondingly STT paid be allowed as deduction in accordance with law , while the transactions for purchase and sale of shares which are squared after 30 days of its purchase, the same may be treated as income from capital gains. In view of decision of CIT v. Pruthvi Brokers & Shareholders (2012 (7) TMI 158 - BOMBAY HIGH COURT) the claim of the assessee raised for the first time before tribunal for grant of deduction towards STT paid is admitted and allowed as business deduction after verification on merits in accordance with law and corresponding STT paid on such shares income of which is held to be business income be allowed by the AO after verification. For the limited purposes we are restoring this matter to the file of the A.O to make computation of business income as well capital gains on shares after verification of period of holding of such shares in accordance with our above directions.

Issues Involved:
1. Treatment of capital gain from the sale of shares as business income instead of short-term capital gain.
2. Adjustment for Securities Transaction Tax (STT) if the income is taxable as business income.

Detailed Analysis:

Issue 1: Treatment of Capital Gain from Sale of Shares as Business Income
The primary issue in this appeal is whether the income arising from the sale and purchase of shares should be treated as business income or as capital gains. The assessee, a company engaged in renting properties and dealing in shares, contended that the income from the sale of shares should be treated as capital gains. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, treating the gains as business income.

The AO's decision was based on several factors:
- The AO emphasized that the nature of the transaction (trading or investment) is a mixed question of law and facts, and the intention of the assessee is crucial.
- The AO noted that the assessee's frequent and systematic transactions in shares indicated a business activity rather than an investment.
- The AO pointed out that the assessee had borrowed funds for purchasing shares, which suggested a trading intent.
- The AO also highlighted that the shares were often sold within a short duration, further indicating trading activity.

The CIT(A) upheld the AO's decision, dismissing the assessee's appeal. The CIT(A) also rejected the assessee's alternative claim for an adjustment of STT, as it was not raised before the AO.

Issue 2: Adjustment for Securities Transaction Tax (STT)
The assessee argued that if the income from shares is treated as business income, the STT paid should be allowed as a business expense. The CIT(A) denied this claim because it was not made in the original return of income filed with the revenue.

Tribunal's Decision:
The tribunal considered the contentions of both parties and reviewed the material on record. The tribunal noted that:
- The assessee had explained that no interest-bearing borrowed funds were used for buying shares, as the interest expenses were allowed under the head "income from house property."
- The transactions in shares were numerous and frequent, with many shares sold within 90 days of purchase, indicating a business activity.
- The tribunal emphasized that the classification of income depends on the motives, frequency, and regularity of transactions.

The tribunal concluded that:
- Gains from shares sold within 30 days of purchase should be treated as business income, and the corresponding STT paid should be allowed as a deduction.
- Gains from shares held for more than 30 days should be treated as capital gains.

The tribunal also admitted the assessee's claim for the first time before the tribunal for the deduction of STT paid, relying on the decision of the Hon'ble Bombay High Court in CIT v. Pruthvi Brokers & Shareholders. The case was remanded to the AO for verification and computation of business income and capital gains based on the period of holding of shares.

Conclusion:
The appeal was partly allowed, with specific directions for the AO to verify and compute the income accordingly. The order was pronounced in the open court on 31.10.2017.

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