2010 (6) TMI 797 - AT - Income Tax

Summary

Issues Involved:
1. Whether the profit arising on the sale of shares of Jubilant Organosys Ltd. (JOL) should be treated as 'Capital Gains' or 'Business Income'.

Summary:

Issue 1: Treatment of Profit Arising on Sale of Shares

The revenue's solitary grievance is that the Ld. CIT(A) erred in directing the AO to treat the profit arising on the sale of shares of JOL as 'Capital Gains' instead of 'Business Income' as held by the AO.

Facts of the Case:

The assessee, a non-banking financial company (NBFC) registered with the Reserve Bank of India, filed its return of income declaring a loss. The case was selected for scrutiny, and the AO observed that the assessee sold 2,09,500 shares of JOL, claiming a capital gain of Rs. 168,492,709/- as exempt u/s 10(38) of the Income Tax Act, 1961. The AO suspected that the assessee used a colorable device to evade tax by selling shares from the investment portfolio while keeping shares held as stock in trade unsold.

AO's Findings:

The AO did not accept the assessee's contention that the shares sold were from the investment portfolio. The AO treated the transaction as a business transaction, rejecting the claim of the assessee for treating the gain as long-term capital gain.

Assessee's Contention:

The assessee argued that it maintained two separate accounts for business and investment purposes. It submitted that the shares were acquired as investments, supported by board resolutions and accounting standards. The shares were valued at cost, not at the lower of cost or market value, indicating long-term investment. The sale profits were not reflected as turnover but as profit on sale of investment.

CIT(A)'s Decision:

The Ld. CIT(A) accepted the assessee's stand, noting that the shares sold were from the investment portfolio, giving rise to capital gains. The CIT(A) summarized the reasons for this conclusion, including the substantial shareholding in JOL since 2000-01, the valuation of shares at cost, and the objective of earning dividend income.

Tribunal's Analysis:

The Tribunal considered the rival contentions and the relevant sections of the Income Tax Act. It noted that shares held as investment qualify as a capital asset, and profit arising on their sale would be taxable as capital gain. The Tribunal referred to various judicial precedents, including the Hon'ble Supreme Court and High Courts, which supported the assessee's claim of maintaining separate accounts for investment and stock in trade. The Tribunal found that the AO did not provide evidence to contradict the assessee's claim and upheld the CIT(A)'s order, dismissing the revenue's appeal.

Conclusion:

The Tribunal concluded that the assessee's profit from the sale of shares of JOL should be treated as 'Capital Gains' and not 'Business Income'. The appeal of the revenue was dismissed.

Order Pronounced:

Order pronounced in the open court on 30.6.2010.