ITO Vs Jhaveri Sandeep Bipinchandra (HUF) (ITAT Ahmedabad)
In a recent judgment, the Income Tax Appellate Tribunal (ITAT) Ahmedabad Bench dismissed an appeal filed by the Revenue against Jhaveri Sandeep Bipinchandra (HUF), reaffirming two key decisions by the Commissioner of Income-tax (Appeals) [CIT(A)] for Assessment Year 2016-17. The rulings primarily concern the classification of income from share trading and the conditions for claiming exemption under Section 54F of the Income-tax Act, 1961.
Classification of Share Trading Income: Capital Gains vs. Business Income
The first ground of appeal by the Revenue challenged the CIT(A)’s decision to treat income of Rs. 54,49,539 from share trading as Short Term Capital Gain (STCG) instead of business income. The assessee had originally declared Rs. 65,49,765 as STCG from share transactions.
Assessing Officer’s Stance: The Assessing Officer (AO) reclassified a significant portion of this income as business income, primarily based on two points:
1. Prior Year Treatment: In the immediately preceding Assessment Year 2015-16, the assessee had substantially declared profit from similar share trading as business income, with only a small portion as STCG.
2. Accounting Nomenclature and Volume: The AO noted that the assessee maintained a Profit & Loss (P&L) account showing “Short Term Share Profit (STT Paid)” and debited related expenses like bank commission and demat charges. The AO also observed that the total number of sale and purchase transactions was substantial, nearing one transaction every day, with some days seeing multiple transactions, implying a business nature. The holding period, according to the AO, was also short, typically 3-4 months.
CIT(A)’s Rebuttal and Assessee’s Arguments: The CIT(A) overturned the AO’s decision, accepting the assessee’s arguments and emphasizing several crucial aspects:
1. Consistent Intent: The assessee consistently maintained that their primary motive for investing in the share market over the past decade was for long-term investment and earning dividend income, not speculative trading. They had consistently treated shares as “Investment” and not “Stock-in-Trade” in their books, and income from these transactions was consistently declared under the head “Capital Gains/Loss,” which had been accepted by the AO in all years prior to AY 2015-16.
2. One-Off Oversight: The assessee clarified that declaring gains as “Business Income” in AY 2015-16 was an inadvertent oversight, and this deviation from consistent practice should not dictate the character of income for other years.
3. Nomenclature Not Determinative: The CIT(A) held that the nomenclature used in the assessee’s accounts (e.g., “Short Term Share Profit”) should not be the sole basis for determining the nature of income. The CIT(A pointed out the inconsistency in the AO accepting “Long Term Share Profit (STT Paid)” as exempt Long Term Capital Gain (LTCG) from the same P&L account, while reclassifying STCG.
4. Transaction Volume Clarification: The AO’s claim of 4-5 transactions per day was factually incorrect. The actual number of transactions was 145 for the entire year, averaging less than one per day. Many entries were repetitive for the same scrips due to differing costs or piecemeal execution by brokers. This volume was deemed not “substantial” enough to indicate business activity, especially given that the Karta of the HUF was engaged in other full-time activities.
5. Investment Characteristics: The assessee confirmed taking delivery of shares for each purchase, making full payments, and selling them upon delivery. Investments were made from own funds, without borrowing. Expenses debited in the P&L account were for accounting purposes and not claimed as deductions while computing capital gains.
6. Reliance on CBDT Circular No. 6 of 2016: The CIT(A) specifically cited CBDT Circular No. 6 of 2016 dated February 29, 2016. This circular provides guidelines for treating profit from share transactions as either business income or capital gains. Paragraph 3(b) of the circular states that if listed shares and securities are held for more than 12 months, and the assessee desires to treat the income as Capital Gain, the AO should not dispute it. The CIT(A) extended this principle, stating that even for shares held for less than one year but consistently shown as “investment,” the assessee’s choice to treat the income as capital gains should be respected.
ITAT Ahmedabad’s Decision on Share Income: The ITAT Ahmedabad concurred with the CIT(A)’s findings. The Tribunal noted that the Revenue was unable to controvert any of the factual findings presented by the CIT(A), particularly the assessee’s consistent practice of treating shares as investments and declaring capital gains, except for the “inadvertent” entry in the preceding year. The ITAT emphasized that mere accounting nomenclature or a one-off error in a previous year cannot be the basis for determining the fundamental character of income. Consequently, Ground No. 1 of the Revenue’s appeal was dismissed, upholding the classification of share trading income as Short Term Capital Gain.
