2011 (8) TMI 1216 - AT - Income Tax

Income arising from transfer of shares as Income from Capital Gains instead of as Income from Business & Profession - Held that - CIT(A) has rightly come to the conclusion that the transactions in question are investment in nature and therefore income from sale of the shares of the 3 companies made during the year requires to be taxed as income under the head capital gains .

Summary

Issues Involved:

1. Classification of income from transfer of shares as "Income from Capital Gains" versus "Income from Business & Profession".
2. Determination of the nature of the assessee company as an investment company or a trading company.
3. Consideration of the magnitude and frequency of transactions in shares.
4. Allowance of set off of capital loss brought forward.

Issue-wise Detailed Analysis:

1. Classification of Income from Transfer of Shares:
The Revenue challenged the CIT(A)'s direction to treat income from the transfer of shares as "Income from Capital Gains" instead of "Income from Business & Profession." The assessee, a Private Limited Company, claimed income from the sale of shares as Long Term and Short Term Capital Gains. The Assessing Officer (A.O.) had initially treated this profit as business income. However, the CIT(A) accepted the assessee's claim, leading to the Revenue's appeal.

2. Nature of the Assessee Company:
The Revenue argued that the CIT(A) erred in holding that the assessee company is purely an investment company without considering the nature of transactions and the company's objectives. The assessee maintained that it was an investment company with income solely from capital gains and dividends from shares and securities. The CIT(A) accepted this position, noting that the company had consistently treated shares as investments in its accounts, which had been accepted by the Department in previous years.

3. Magnitude and Frequency of Transactions:
The Revenue contended that the CIT(A) failed to consider the magnitude and frequency of transactions in shares, which they argued indicated a business activity. The assessee countered that it had only three transactions during the year, which were not frequent enough to constitute a business activity. The CIT(A) found that the transactions were in line with an investment activity, considering the long holding periods and the treatment of shares as capital assets in the accounts.

4. Allowance of Set Off of Capital Loss:
The Revenue challenged the CIT(A)'s decision to allow the set off of capital loss brought forward of Rs. 32,03,479/-. This was a consequential relief arising from the CIT(A)'s order to treat the income from the sale of shares as capital gains. Since the CIT(A)'s main finding regarding the classification of income was upheld, the set off of the capital loss was also upheld.

Conclusion:
The Tribunal upheld the CIT(A)'s order, concluding that the income from the sale of shares should be taxed under the head "capital gains" and not as business income. The Tribunal found that the transactions met the criteria for being considered investments rather than business activities. Consequently, the appeal was dismissed, and the set off of the capital loss brought forward was allowed. The decision emphasized the importance of the intention behind transactions and the consistent treatment of shares as investments in determining the nature of income.