2022 (4) TMI 445 - AT - Income Tax

Correct head of income - gains from purchase and sale of shares - business income or short term capital gain - HELD THAT - Frequency alone cannot show that the intention was to make any investment. Further, it has been held that the legislature has not made any distinction on the basis of frequency of transaction - it is also judicially settled that frequency alone cannot be taken as the basis to deny the claim by the assessee of short term capital gain. Various other facts need to be examined which mainly include the source of investment made in the equity shares. If a person takes loan, pays interest thereon and uses the borrowed funds for making investment in the equity shares on a regular basis then depending upon the facts and circumstances of the particular case it can be inferred that transactions carried out are in the nature of business. Thus in light of the ratio laid down in the case of Merlin Holding (P.) Ltd. 2015 (5) TMI 794 - CALCUTTA HIGH COURT hold that the assessee deserves to succeed on the sole ground raised in the instant appeal firstly, because the investment made in the equity shares for purchase are not from borrowed funds and they are majorly from the assessee s own capital, secondly, that the assessee has taken the delivery of the shares and held them in her demat account and sold thereafter and thirdly, the assessee is consistently showing the income from long term capital gain and short term capital gain from sale of shares in the past and in subsequent years and not disputed by Revenue. We, therefore, set aside the finding of the ld. CIT(A) and hold that the gain should be taxed as a short term capital gain and not as a business income - Appeal of assessee allowed.

Summary

Issues:
1. Classification of gains from purchase and sale of shares as business income or short term capital gain.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata involved the classification of gains made by the assessee from the purchase and sale of shares as either business income or short term capital gain for the Assessment Year 2013-14. The assessee contended that the gains should be treated as short term capital gain, while the Assessing Officer had treated them as business income. The key contention was whether the transactions in shares were in the nature of business or investment.

The assessee argued that they were not in the business of trading shares, did not take major loans for investments, and conducted all share dealings on a delivery basis. The assessee relied on a decision of the Calcutta High Court to support their case. On the other hand, the Departmental Representative supported the orders of the lower authorities.

Upon examining the facts and documents presented, the Tribunal noted that the assessee consistently showed income from shares as capital gains in previous and subsequent years. The assessee had not taken significant loans, had sufficient capital to cover investments, and engaged in transactions with a holding period ranging from 5 to 115 days. The Tribunal referred to a judgment of the jurisdictional High Court, emphasizing that frequency alone does not determine the nature of transactions. It highlighted that the source of investment in shares is crucial in determining whether transactions are in the nature of business.

Based on the facts and legal principles, the Tribunal held in favor of the assessee. It concluded that the gains should be taxed as short term capital gain and not as business income. The Tribunal emphasized that the investment was not from borrowed funds, the shares were held and sold after delivery, and the assessee consistently treated similar gains as capital gains in previous years. Therefore, the grounds raised by the assessee were allowed, and the appeal was allowed in favor of the assessee.

In conclusion, the Tribunal's decision clarified the distinction between business income and capital gains from share transactions, emphasizing the importance of the source of investment and holding period in determining the nature of transactions. The judgment provided a comprehensive analysis of the facts and legal precedents to support its decision in favor of the assessee.