2012 (4) TMI 637 - HC - Income Tax

Gain on sale of shares - LTCG or business income - ITAT accepted STCG on sale of shares - Held that - The reply given by the assessee was clear and categorical that the five shares had been purchased in the last financial year and the average period of holding in the shares in question was more than four months. There were 12 shares and the transactions were not frequent. The purchases were out of surplus funds. Their main business was not trading in shares but was an occasional independent activity. The assessee had also pointed out that the short- term transactions were the result of either a mistake or wrong information. The reasons given by the Assessing Officer noted in paragraph 5 above do not justify the plea of the Revenue that the share sold was stock-in-trade. The assessee was not maintaining a separate heads in the books of accounts for shares held as stock in trade or investment as the shares were held and treated as investment. Further the number of transactions 19 in all in one year cannot be considered as continuous and regular. The provision for diminution in value was as per the Accounting Standard 13 regarding Accounting of Investments. The Assessing officer ignored several other aspects and questions which have been raised and noticed and form the basis of finding recorded by the Tribunal. The order by the Tribunal therefore does not require any interference.

Summary

Issues:
1. Treatment of long term capital gains on sale of shares as business income.
2. Treatment of short term capital gains on sale of shares as business income.

Analysis:
1. The High Court examined the order passed by the Assessing Officer regarding the treatment of long term capital gains on the sale of shares as business income. The court noted that the Assessing Officer failed to provide a valid reason for categorizing the shares as trading assets instead of investments, despite the substantial holding period of the shares. The CIT(Appeals) reversed the Assessing Officer's finding, which was further affirmed by the Tribunal. The court concluded that no substantial question of law arose regarding the treatment of income from the sale of shares held for more than two years.

2. The Assessing Officer treated the short term capital gains on the sale of shares as business income. The first appellate authority partially affirmed this treatment by distinguishing between shares held for less than 6 months and those held for more than 6 months. The Tribunal ruled in favor of the assessee, considering the &8377; 24,77,878/- gain as short term capital gains and disagreed with the Assessing Officer's classification as business income.

3. The court considered the submission made by the assessee before the Assessing Officer, emphasizing that the company primarily invested in shares as an investment activity and not for trading purposes. The assessee provided details on the number of transactions, holding periods, and the nature of the company's business. The court found merit in the assessee's arguments and concluded that the shares were treated as investments rather than stock-in-trade.

4. The Assessing Officer referred to a circular issued by the CBDT to determine whether a person is a trader or an investor in stocks. The circular outlined various factors to consider, such as the intention of purchase, scale of activity, holding period, and treatment in the books of accounts. The Assessing Officer highlighted continuous transactions and the absence of separate books for investments as reasons for considering the shares as stock-in-trade. However, the court upheld the Tribunal's decision, emphasizing the assessee's clear explanation and the occasional nature of share transactions.

5. In conclusion, the High Court dismissed the appeals filed by the Revenue, upholding the Tribunal's decision regarding the treatment of capital gains on the sale of shares. The court found no grounds for interference, considering the factual and legal aspects presented by the assessee in support of treating the shares as investments rather than business assets.