2005 (7) TMI 277 - AT - Income Tax

Business Income - assessability of profit arising to assessee out of sale and purchase of shares - business income or income under the head Long-term capital gain - HELD THAT - Looking into the volume, frequency, continuity and regularity of transactions of purchase and sale in shares by the assessee, it cannot be said that assessee entered into this activity not with a motive of profit. Therefore, only inference which can be drawn is that the income earned by assessee out of sale and purchase of these shares was an income under the head Profits and gains of business or profession . We see no justification in the finding of the ld. CIT(A) that the profit arising to assessee on sale of shares acquired by her from primary market was assessable as income from capital gain. The purchase of shares from primary market is only one of the modes of purchase, the only difference is that if the same are purchases from the market the assessee may have paid more price for it. Merely for the reasons that assessee has to wait for two to three months for allotment process, the transaction cannot be held to be a non-business transaction. Similarly the transfer of shares purchased from secondary market in the name of the assessee has little relevance to arrive at a conclusion that profit arising out of sale of those shares is also a non-business transaction as non-transfer of those shares in the name of the assessee may have effected the legal title of assessee to enable her to sell them at appropriate time. We are of the opinion that the Assessing Officer was right in holding that the income arisen to the assessee out of sale of shares was assessable under the head 'Profits and gains of business or profession' and the ld. CIT(A) was wrong in holding that such profit in the case where assessee acquired shares from primary market and in a case where purchases were from secondary market and the assessee got the shares transferred in her name was an income assessable under the head 'Capital gain'. We, therefore, set aside the order of the ld. CIT(A) and restore that of the Assessing Officer for all the years under consideration. In the result, the departmental appeals are allowed.

Summary

Issues:
Assessability of profit from sale and purchase of shares as "business income" or "Long-term capital gain."

Analysis:
1. The appeals filed by the revenue were against two separate orders of CIT(A) for assessment years 1992-93 to 1994-95 and 1995-96, all concerning the assessability of profit from shares as either business income or long-term capital gain.

2. The core issue was whether the income from the sale and purchase of shares by the assessee should be classified as "business income" or "long-term capital gain." The assessee claimed the income was from investments, while the revenue argued it constituted business income due to the scale of transactions.

3. The assessee transitioned from a cloth trading business to investing in shares with surplus funds. The Assessing Officer viewed the volume of share transactions as indicative of a business activity, relying on legal precedent for his decision.

4. The CIT(A) analyzed the nature of the transactions, distinguishing between shares purchased from primary and secondary markets. He concluded that income from primary market shares was long-term capital gain, while secondary market shares constituted business income.

5. The revenue contended that the assessee's intent was solely profit-driven, justifying the classification of income as business income. They emphasized the volume, frequency, and capital investment in share transactions.

6. The assessee argued that shares were primarily purchased from the primary market using personal funds, not borrowed money, for investment purposes. They cited a tribunal decision supporting the capital gain classification for long-held shares.

7. The Tribunal evaluated the transactions' volume, frequency, and profit motive, crucial elements for defining business activity. They referenced legal interpretations of "business" and concluded that the share transactions indicated a profit motive, justifying the income classification as business income.

8. The Tribunal disagreed with the CIT(A)'s differentiation between primary and secondary market shares, emphasizing the profit motive in all transactions. They rejected the capital gain classification and upheld the Assessing Officer's decision for all relevant years.

This detailed analysis outlines the legal judgment's thorough consideration of the issues surrounding the classification of income from share transactions, ultimately upholding the revenue's position on assessing the income as "Profits and gains of business or profession."