2015 (9) TMI 284 - AT - Income Tax

Treatment to profits derived from share transaction - business income OR short term capital gains - Held that - The CIT(A) s findings extracted demonstrate frequency and magnitude of share transactions, assessee s accounting treatment, holding period, absence of any borrowed funds being utilized in shares etc. to name a few decisive factors. It has come on record that assessee s identical profits in preceding assessment year stand treated as capital gain only. It entered into 10 transactions in relevant previous year. The former head of long term capital gains comprise of shares held from minimum 15 months to holding period as long as 32 months. The same can in no way be taken an instance of a trading activity. More particularly, when such a long term investment covers almost three assessment years. Decided against revenue. Short term capital gains vis- -vis business income - Held that - Suffice to say, the transactions relate to five scripts. This gross amount involves a sum of ₹ 22,09,327/- i.e. more than 90% arising from sale of M/s Guj. Heavy Chemicals scrips carried over from preceding assessment year only. This leaves behind other four scrips. Two of them have holding period less than a month i.e. 18 days and two days; respectively involving profits of ₹ 7,873/- and ₹ 2,600/-. We take into account non usage of borrowed funds, separate portfolio being maintained along with judicial consistency as in preceding assessment year and hold that these transactions do not involve any trading element therein. We accept assessee s grounds and reverse the CIT(A) s corresponding findings. Decided in favour of assessee.

Issues Involved:
1. Treatment of profits from share transactions as business income versus capital gains.
2. Classification of share profits as long-term or short-term capital gains.

Detailed Analysis:

Issue 1: Treatment of Profits from Share Transactions
The core issue revolves around whether the profits derived from share transactions should be classified as business income or capital gains. The assessee contended that the profits from share transactions were capital gains, relying on the nature of the transactions and the treatment in previous assessment years. The Assessing Officer (AO), however, treated both long-term and short-term capital gains as business income, arguing that the assessee's accounting treatment did not alter the nature of the transactions since the assessee was engaged in the share business.

The CIT(A) partly accepted the assessee's contentions, distinguishing between long-term and short-term capital gains based on the period of holding and the nature of transactions. The CIT(A) concluded that shares held for periods ranging from 15 to 32 months should be treated as long-term capital gains, while shares held for shorter periods with frequent transactions indicated trading activity and should be treated as business income.

Issue 2: Classification of Share Profits as Long-Term or Short-Term Capital Gains
The CIT(A) provided a detailed analysis of the holding periods and the frequency of transactions. For long-term capital gains, the CIT(A) noted that the shares were held for periods ranging from 15 to 32 months, which justified their classification as long-term investments. Consequently, the CIT(A) directed the AO to exclude Rs. 8,52,221 from business income and tax it as long-term capital gains.

For short-term capital gains, the CIT(A) observed that the shares were held for periods ranging from 2 days to 10 months, with frequent transactions in some cases. This pattern suggested trading activity, leading the CIT(A) to uphold the AO's decision to treat Rs. 23,95,326 as business income.

Tribunal's Findings:
The Tribunal reviewed the facts and arguments presented by both sides. It noted that the assessee's profits in the preceding assessment year were treated as capital gains and that the assessee had entered into 10 transactions in the relevant previous year. The Tribunal emphasized the holding periods, the absence of borrowed funds, and the separate portfolio maintained by the assessee.

Long-Term Capital Gains:
The Tribunal agreed with the CIT(A) that the shares held for 15 to 32 months could not be considered as part of trading activity. Therefore, the Tribunal dismissed the Revenue's appeal, affirming the classification of Rs. 8,52,221 as long-term capital gains.

Short-Term Capital Gains:
For short-term capital gains, the Tribunal considered the nature of transactions and the holding periods. It noted that a significant portion of the profits (Rs. 22,09,327) arose from the sale of shares carried over from the preceding assessment year. The Tribunal also considered the non-usage of borrowed funds and the separate portfolio maintained by the assessee. Based on these factors, the Tribunal concluded that the transactions did not involve trading elements and reversed the CIT(A)'s findings, allowing the assessee's appeal and classifying Rs. 23,95,326 as short-term capital gains.

Conclusion:
The Tribunal dismissed the Revenue's appeal (ITA No. 1032/Ahd/2010) and allowed the assessee's appeal (ITA No. 432/Ahd/2010), thereby treating the profits from share transactions as capital gains rather than business income. The order was pronounced in open court on 26-08-2015.

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