2016 (7) TMI 1236 - AT - Income Tax

Income from sale of shares - Long term capital gains v/s business income - Held that - The assessee sold 25 script during the year out of which three were of Long term which were held for more than 12 months and 21 scrips were held for less than a year. In all there were 28 transactions of purchases and 43 transactions of sales in all. The average period of holding for long term securities was 768 days whereas the securities which yielded short term capital gain was 107 days and those yielded short term capital gains was 48 days. The assessee also filed the details of short term and long term capital gains right from the assessment year 2005-06 to AY 2011-12 which reveals that the revenue has consistently accepted the stand of the assessee barring the year under consideration. The department cannot dictate the manner and method of treating the activity of assessee in shares as trading activity in one year while accepting the same as investment in shares in other years which were even scrutinized u/s 143(3). Moreover the case of the assessee is fortified by the CBDT circular bearing number 6 of 2016 dated 29.2.2016. The assessee was not carrying any trading activity into equity shares and securities and therefore we are inclined to set aside the order of the ld. CIT(A) and direct the AO to treat the income from sale and purchase of shares as short term and long term capital gains. - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of Long Term Capital Gains on sale of shares as business income.
2. Treatment of Short Term Capital Gains and Short Term Capital Loss on sale of shares as business income and business loss respectively.

Issue 1: Treatment of Long Term Capital Gains on Sale of Shares as Business Income

The primary issue in this case is the treatment of Long Term Capital Gains (LTCG) on the sale of shares amounting to ?5,14,30,041/-. The Assessing Officer (AO) treated these gains as business income rather than capital gains, which the assessee claimed as exempt under Section 10(38) of the Income Tax Act. The AO's decision was based on the frequency and nature of transactions, concluding that the assessee was engaged in trading activities rather than investment.

The First Appellate Authority upheld the AO's decision, noting the magnitude and frequency of transactions, the low average holding period, and the assessee's main business in derivatives trading. The authority also mentioned that principles of res judicata do not apply to tax proceedings, thus supporting the AO's stance.

However, the assessee argued that the shares were held as investments, not as stock-in-trade, and were valued at cost, not market value. The assessee contended that the intention was to invest in shares for dividend and appreciation, not for trading. The assessee also highlighted that in previous assessment years, similar gains were accepted as capital gains by the department, emphasizing the principle of consistency.

The assessee relied on the CBDT Circular No. 6 of 2016, which states that if shares are held for more than 12 months and the assessee treats the income as capital gains, the AO should not dispute this treatment. The Tribunal found merit in the assessee's arguments, noting that the department had accepted similar treatment in previous years and that the assessee's activities were consistent with investment rather than trading.

Issue 2: Treatment of Short Term Capital Gains and Short Term Capital Loss on Sale of Shares as Business Income and Business Loss Respectively

The second issue pertains to the treatment of Short Term Capital Gains (STCG) of ?2,57,89,560/- and Short Term Capital Loss (STCL) of ?7,57,10,331/-. The AO treated these as business income and business loss, respectively, based on the same rationale applied to the LTCG.

The assessee argued that the shares were held as investments and not as stock-in-trade, and that the transactions were delivery-based. The assessee also pointed out that the shares were purchased using own funds, not borrowed funds, further indicating an investment intent. The assessee emphasized the principle of consistency, as similar transactions were treated as capital gains/losses in previous years.

The Tribunal noted that the assessee had consistently shown shares as investments in the balance sheet and that the department had accepted this treatment in previous assessment years. The Tribunal also acknowledged the CBDT Circular, which supports the assessee's stance.

Conclusion:

The Tribunal concluded that the assessee was not engaged in trading activities in equity shares and securities. The Tribunal set aside the order of the First Appellate Authority and directed the AO to treat the income from the sale and purchase of shares as short term and long term capital gains, in line with the assessee's claims. The appeal of the assessee was allowed, and the order was pronounced in the open court on 27th July, 2016.