2010 (6) TMI 379 - HC - Income Tax

Notice u/s 148 - income from shares, whether business income or capital gains - framing of question of law before HC - Whether the Company dealing with the share holding can change its stand by converting certain shares to be their long term capital asset? - Held that - it is the duty of the Court to do justice and in case a substantial question of law arises, it would be very extremely unfair not to permit the party to raise the substantial question of law only on the ground that such substantial question of law was not framed at the stage of admission of the appeal. The law is very well settled that the onus is on the assessee to show that his investment is a long term investment. Whether a particular holding of shares is by way of long term investment or is a stock in trade is a matter solely within the knowledge of the assessee who holds the shares. - It is apparent that due to issuance of bonus shares and splitting of shares the value of the shares of Information Technology rose sharply and realizing that the company would be liable to pay 30% tax, the assessee started claiming the profits realized from sale of these shares as long term capital gains. - After going through the entire record the revenue authorities have come to the conclusion that the shares of Information Technology was purchased by the assessee not by way of assessment but by way of trading. This is a pure finding of fact and not of law. It is true that the principles of law have to be applied and the question as to whether certain shares had been purchased by way of trade or by way of investment may be a mixed question of fact and law but if the authorities have properly considered the legal position then the resultant finding is basically a finding of fact. - Decided in favor of revenue.

Summary

Issues Involved:
1. Whether the Assessing Officer was justified in reopening the assessment proceedings by issuing a notice under Section 148 of the Income-tax Act, 1961.
2. Whether the income derived from the sale of shares should be treated as business income or as a long-term capital gain.

Detailed Analysis:

1. Reopening of Assessment Proceedings:

The first issue addressed was whether the Assessing Officer (AO) had the jurisdiction to reopen the assessment proceedings by issuing a notice under Section 148 of the Income-tax Act, 1961. The court examined the provisions of Section 260A and the relevant case law, including the Supreme Court's ruling in Kondiba Dagadu Kadam vs. Savitribai Sopan Gujar, which clarified that an appeal to the High Court under Section 260A can only be filed if a substantial question of law is involved. The court noted that it is the duty of the High Court to frame substantial questions of law at the time of admission of the appeal and that the proviso to Section 260A(4) allows the court to hear an appeal on any other substantial question of law not framed at the admission stage if it is satisfied that the case involves such a question.

The court then reframed the questions of law and addressed whether the AO had "reason to believe" that income chargeable to tax had escaped assessment, justifying the issuance of a notice under Section 148. It referred to the Supreme Court's judgment in Rajesh Jhaveri Stock Brokers Pvt. Ltd., which explained that the AO's "reason to believe" need not be based on conclusive evidence but should be sufficient to justify the reopening of the assessment. The court concluded that the AO had reason to believe that the assessee was evading tax by claiming income from the sale of shares as long-term capital gains instead of business income. Therefore, the AO was justified in reopening the assessment, and Question No. 1 was decided in favor of the revenue.

2. Nature of Income from Sale of Shares:

The second issue was whether the income derived from the sale of shares should be treated as business income or as long-term capital gains. The court examined the facts and evidence presented, noting that the assessee's main business involved trading and investment in shares. The court emphasized that the onus was on the assessee to prove that the shares were held as long-term investments rather than stock-in-trade. It referred to the legal principle that the initial intention of the assessee regarding the nature of the holding is relevant.

The court observed that the assessee had shown the shares as stock-in-trade in earlier years and had treated losses from the sale of shares as business losses. It was only in later years, when the value of certain shares increased significantly, that the assessee began claiming the profits as long-term capital gains. The revenue authorities concluded that the shares were purchased for trading purposes, and this finding was upheld by the court as a factual determination supported by the evidence.

The court found no error in the revenue authorities' orders and concluded that the income from the sale of shares should be treated as business income. Therefore, Question No. 2 was decided against the assessee and in favor of the revenue.

Conclusion:

The appeals were dismissed, with both questions answered in favor of the revenue and against the assessee. No order as to costs was made.