2014 (1) TMI 1707 - AT - Income Tax

Purchase and sale of shares / units - business income OR capital gain - Held that - We are of the opinion that the mutual funds activity falls in a zone of investment activity and not in the trading activity. Accordingly the assessee is granted relief on account of mutual funds and the relevant grounds are allowed. - Decided in favour of assessee Short term capital gains as sale on shares which is held by the AO as business income - Held that - It is an admitted fact that the claim of the assessee was accepted in the earlier years. The said assessments were not reopened or reviewed consequent to the decision of the AO in this year. It is not made out that it is a case of re-entered transactions predominantly by the Revenue Authorities. There is no allegation in the orders of the Revenue Authorities that the impugned shares sold by the assessee are taken out of the lots held as stock-intrade. Considering the above factual matrix on this case as well as transactional data of 61 scrips 69 transactions purchase turnover of Rs. 37.69 sales turnover of Rs. 39.19 we are of the opinion that the claim of the assessee should be accepted. As such the holding period alone is not a conclusive to decide if a transaction is of investment or trading transaction. Intention of the assessee is relevant and there is no reason made out by the AO to conclusively to determine that the impugned transactions are of the trading nature. - Decided in favour of assessee

Summary

Issues:
1. Characterization of income from sale of shares and mutual funds as business income or capital gains.
2. Treatment of mutual funds activity as investment activity.
3. Determining short term capital gains on sale of shares as business income.

Issue 1: Characterization of Income:
The appeal challenged the assessment of total income against the returned income, disputing the classification of income from the sale of shares and mutual funds as business income instead of capital gains. The appellant argued that the intention behind the transactions determines the character of income. The appellant contended that the shares were held as investments, not as stock-in-trade, and the delivery of shares was duly taken. The appellant emphasized that maintaining a diversified portfolio does not necessarily indicate a business activity.

Issue 2: Treatment of Mutual Funds:
Regarding the long term capital gains from the sale of mutual funds, the appellant argued that selling mutual funds to fund managers after holding them for a specific period should not be considered a business activity. The appellant cited various decisions supporting the view that mutual fund transactions should be treated as investment activities, not business transactions. The appellant relied on precedents to establish that gains from mutual funds' transfer should be treated as capital gains, not business income.

Issue 3: Short Term Capital Gains on Shares:
The dispute over short term capital gains on the sale of shares involved the appellant's claim that the shares were purchased for investment purposes, supported by evidence of past transactions and balance sheet details. The appellant highlighted the principle of consistency and provided transaction records to demonstrate the investment nature of the transactions. The Revenue Authorities, however, treated these gains as business income. The tribunal noted the absence of re-entered transactions and the investment conduct of the appellant, ultimately ruling in favor of the appellant based on the intention behind the transactions and the lack of conclusive evidence supporting a trading nature.

In conclusion, the tribunal allowed the appeal, granting relief to the appellant on the treatment of mutual funds as investment activity and accepting the characterization of short term capital gains on shares as capital gains, not business income. The decision was based on the intention of the appellant in conducting the transactions and the absence of substantial evidence to support a trading nature.