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2009 (5) TMI 925 - AT - Income TaxTreatment to sale of shares - Capital gain or business income - Principles of Res Judicata - frequency of transaction - Whether the activity of the assessee constitute the activity as a business or as an investor? - Assessee is indeed in dealings in investment in shares in past for many years. The main thrust of the argument of the learned counsel is that no borrowed funds are used for purchasing the shares which were held as an investment. HELD THAT - On the perusal of the balance sheet filed by the assessee we find that the assessee has shown the investment in shares under the head Investment and not as stock-in-trade . It is true that the principles of res judicata do not apply to income-tax proceedings as each and every assessment year is treated as a separate one. As in strict sense what is decided in one year may not apply in the following year but where a fundamental aspect for permeating through the different assessment years has been found as a matter of fact one way or the other and parties have allowed such position to be sustained then as held by the Hon ble Supreme Court in the case of Radhasoami Satsang v. CIT 1991 (11) TMI 2 - SUPREME COURT the position should not be allowed to change in the subsequent year merely because on the same set of facts different view is possible. Another aspect to be considered here is that the assessee has not borrowed any money for making the investment in the shares. Moreover the assessee is consistently holding shares as an investment which is always accepted by the AO in the past. In our opinion there is no justification for treating the activity of the assessee of purchase and sale of the shares as a business merely on reason of the volume of the transactions. As per well settled principles of law the frequency of the transactions cannot be per se decisive - We answer this issue in favour of the assessee and direct the AO to treat the profit and gain on the sale of the shares as a capital gain and not as a business income. As both the authorities below have only considered whether the profit declared on the sale of the shares is to be assessed as a business income both the authorities have not considered the another plea of the assessee as well as computation of the short-term capital gain and long-term capital gain declared by the assessee. We therefore consider it fit to restore this issue for the limited purpose of verifying the quantum of short-term capital gain as well as long-term capital gain as declared by the assessee to the file of the AO whether the same has been correctly computed. At the same time the AO is also directed to consider the claim of the assessee regarding concessional rate of tax u/s. 111A in respect of short-term capital gain as well as u/s. 112 in respect of long-term capital gain and accordingly work out tax liability of the assessee. Assessee s appeal is allowed.
Issues Involved:
1. Classification of income from the sale of shares as either capital gains or business income. 2. Entitlement to concessional tax rates under Section 111A for short-term capital gains and Section 112 for long-term capital gains. Issue-wise Detailed Analysis: 1. Classification of Income from Sale of Shares: The primary issue in this appeal was whether the income from the sale of shares should be classified as capital gains or business income. The assessee, an individual and a partner in several firms, declared short-term capital gains (STCG) of Rs. 25,94,143 and long-term capital gains (LTCG) of Rs. 3,05,757 from the sale of shares, treating these as investments. The Assessing Officer (AO) disagreed, treating the income as business income based on the volume and frequency of transactions, and the short holding periods of some shares. The AO's main arguments were: - The volume of transactions indicated a business activity. - The short holding periods suggested trading rather than investment. The CIT(A) upheld the AO's decision, noting that the assessee engaged in substantial and systematic business activities aimed at earning income. The CIT(A) highlighted the high volume of transactions, the significant ratio of sales to purchases, and the short holding periods of several shares as evidence of trading activity. The CIT(A) also noted that the assessee's main source of income was from share trading rather than dividends or other business activities. 2. Entitlement to Concessional Tax Rates: The assessee argued that the shares were held as investments, consistently shown as such in the balance sheet, and not as stock-in-trade. The assessee also contended that no borrowed funds were used for purchasing shares, and the profits from share sales had been accepted as capital gains in previous assessment years. The Tribunal considered several factors: - The shares were consistently shown as investments in the balance sheet. - The assessee did not use borrowed funds for purchasing shares. - The principle of consistency, as established in Radhasoami Satsang v. CIT, suggested that the treatment of income should not change if the fundamental facts remained the same over the years. The Tribunal concluded that the frequency of transactions alone could not determine the nature of the activity. It directed the AO to treat the profits from the sale of shares as capital gains and not business income. Conclusion: The Tribunal allowed the appeal, directing the AO to: - Treat the profits from the sale of shares as capital gains. - Verify the computation of STCG and LTCG as declared by the assessee. - Consider the assessee's claim for concessional tax rates under Section 111A for STCG and Section 112 for LTCG. Outcome: The appeal was allowed, and the AO was instructed to reassess the income as capital gains and apply the appropriate concessional tax rates.
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