2009 (2) TMI 233 - AT - Income Tax

Claimed exemption u/s.10(38) - Sale and purchase of shares - Nature of Income - ''capital gains or nature of business income''- securities transactions tax - Non-delivery based transactions treated by the assessee as business activity - delivery based transactions treated as an investment activity - accordingly, the assessee has claimed himself both dealer as well as investor and has offered income for taxation - HELD THAT - Assessee has paid tax on short-term capital gains at normal rates on share transactions executed in the period prior to imposition of securities transactions tax. In our view, the legislative change of this nature, whereby no change has been made in respect of nature and modus operandi of such share transactions, resulting into any advantage cannot be taken away by the Revenue authorities in this manner and in these circumstances, we are of the view that, principle of consistency, though it is an exception to the principle of res judicata must be applied here. It is further so because the payment of securities transactions tax is mandatory i.e., whether an assessee earns the profit or not or suffers a loss and by imposition of such tax, the legislature has not given any benefit to a class of transactions as a whole though it may result into an apparent benefit to individuals entering into those transactions. Thus, in our view, the basis of principle of consistency alone, the action of the Revenue authorities is liable to be quashed. We order accordingly and direct the AO to accept the claims of assessee in regard to short-term capital gain and long-term capital gain. Assessee is maintaining separate records for both types of transactions. Further, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature i.e., one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee's case on a more strong footing. Hence, in our view, the ratio of the decision in Sarnath Infrastructure (P) Ltd. vs. Asstt. CIT 2007 (12) TMI 261 - ITAT LUCKNOW-B , is squarely applies to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain depending upon the period of holding. To conclude, we hold that, assessee's claim of short-term capital gain and long-term capital gain on share transactions where the delivery has been taken or given and securities transactions tax has been paid is liable to be accepted. Accordingly, we reverse the orders of Revenue authorities. Appeal filed by the assessee stands allowed.

Issues Involved:
1. Classification of income from share transactions as business profits versus capital gains.
2. Treatment of short-term capital gains and long-term capital gains from share transactions.
3. Application of the principle of consistency in tax assessments.

Issue-wise Detailed Analysis:

1. Classification of Income from Share Transactions:
The primary issue in this case was whether the income from share transactions should be classified as business profits or capital gains. The Assessing Officer (AO) classified the income as business profits due to the high frequency and volume of transactions, use of borrowed funds, and the presence of office infrastructure for share trading. The AO also noted that the assessee engaged in both delivery-based and non-delivery-based transactions, treating the former as investments and the latter as business activities.

The assessee argued that the delivery-based transactions were for investment purposes, supported by the fact that these shares were held for longer periods and dividends were earned. The assessee relied on CBDT Circular No. 4 of 2007 and various judicial decisions to support the claim that the intention behind the transactions was investment.

2. Treatment of Short-term Capital Gains and Long-term Capital Gains:
The AO assessed the short-term and long-term capital gains as business profits, arguing that the frequent transactions and short holding periods indicated a trading activity. The CIT(A) upheld this view, noting that the assessee's activities were not merely side activities but full-fledged trading activities.

The assessee countered by providing detailed records of transactions, showing that the shares were held for several months to years, contradicting the Revenue's claim of short holding periods. The assessee also pointed out that the same treatment had been accepted in previous years' assessments.

3. Application of the Principle of Consistency:
A significant point of contention was the principle of consistency. The assessee argued that similar transactions had been treated as capital gains in previous years, and there was no change in the nature of transactions or the modus operandi. The Revenue's different stance in the current year was attributed to changes in the taxation scheme, specifically the introduction of securities transaction tax and the exemption of long-term capital gains under Section 10(38).

The Tribunal noted that the facts and circumstances were identical to previous years, where the assessee's claims were accepted. The Tribunal emphasized the importance of consistency in tax assessments, especially when there was no significant change in the nature of transactions.

Conclusion:
The Tribunal concluded that the assessee's claim of short-term and long-term capital gains should be accepted based on the principle of consistency. The Tribunal also found merit in the assessee's argument that the delivery-based transactions were for investment purposes, supported by the detailed records and long holding periods. The Tribunal reversed the orders of the Revenue authorities, directing the AO to accept the assessee's claims regarding short-term and long-term capital gains.

Final Order:
The appeal filed by the assessee was allowed, and the Tribunal directed the AO to treat the income from delivery-based share transactions as capital gains, consistent with the treatment in previous years.

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