2011 (3) TMI 607 - HC - Income Tax

Capital gain or business income - The main reason because of which the Assessing Officer treated the income from sale of shares as business income was that the assessee was in the business of sales/purchase of shares - The assessee even otherwise entitled to have these two portfolios as per given Accounting Standard 13 issued by the Institute of Chartered Accountants of India on Accounting for Investments which provides that the company is required to value its short term investments i.e. investment which have been made with a view to resell at a profit in a short period of time at cost or fair market value whichever is lower whereas long term investments are required to be valued at cost unless there is a permanent diminution in their values - Right from the very beginning it has been valuing its shares held in the investment account on cost basis and not on the basis of cost or market value which is lower at the end of relevant accounting year - The profits resulted therefrom was capital gain - Therefore these appeals are dismissed in limine

Issues:
1. Determination of whether profit on the sale of shares was capital gain or business income.

Analysis:
1. The primary issue in this case revolved around whether the profit earned from the sale of shares should be classified as capital gain or business income. The Assessing Officer initially treated the income as business income due to the assessee's involvement in the sales/purchase of shares. However, the CIT(A) and ITAT disagreed with this classification.

2. The crux of the matter was the nature of the shares in question, particularly 5,38,106 shares of Jubilant Oranosys Ltd (JOL) held by the assessee. These shares were acquired over time, with a significant portion received through bonuses, gifts, and mergers. The CIT(A) delved into the objective of acquiring the shares, the holding period, and the frequency of transactions to determine the intention behind holding these shares.

3. The CIT(A) highlighted that the assessee maintained two separate portfolios - one for investment purposes and the other for business activities. The shares in question were consistently treated as part of the investment portfolio and not as stock in trade. This distinction was crucial in determining the treatment of the profit on the sale of shares.

4. Additionally, the CIT(A) considered various factors such as the promoters' association with JOL, the valuation of shares in the profit and loss account, the holding period, and the conversion of stock in trade to investment in a subsequent assessment year. These factors supported the conclusion that the profit from the sale of shares should be treated as capital gain.

5. The ITAT further examined the case, referencing the judgment of the Gujarat High Court to establish broader tests for determining the nature of transactions. These tests included the intention behind the initial acquisition, the purpose of subsequent sales, treatment in accounts, income reporting, and the volume and frequency of transactions.

6. Applying these tests to the facts of the case, the ITAT affirmed the findings of the CIT(A) that the profit on the sale of shares should indeed be considered as capital gain. The consistent treatment of shares as investments, along with the absence of evidence to the contrary, supported this conclusion.

7. Ultimately, the High Court dismissed the appeals, emphasizing that the findings regarding the maintenance of two portfolios and the treatment of shares as investments were factual determinations. No substantial question of law was identified, leading to the rejection of the appeals.

This detailed analysis of the judgment highlights the meticulous consideration given to the nature of the shares, the intention behind holding them, and the consistent treatment of shares as investments, leading to the classification of the profit on the sale of shares as capital gain.

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