2011 (11) TMI 48 - HC - Income Tax

Revenue loss or capital loss - loss on sale of shares holding as investment - Held that - In the first instance, it may be noted that as per the memorandum/articles of association, investment in shares is one of the main objectives of the company. Then the shares in question held by the assessee were always shown as investment only. Even if the Assessing Officer has wrongly stated the period of 8 years for holding these shares before their sale, the fact remains that these shares remained with the company for substantial period. From the inception, the shares were treated as investment in every year till their sale in the balance sheet. While showing it in the profit and loss account, the remarks of the auditors become relevant and could not be brushed aside so conveniently as has been done by the Tribunal. - shares in question were held as investments and loss on the sale thereof was capital loss and not Revenue loss. - Decided in favor of revenue.

Summary

Issues involved:
Classification of loss on sale of shares as business loss or capital loss.

Analysis:
1. The respondent-assessee, a limited company engaged in various financial activities, filed its income tax return for the Assessment Year 2004-05. The Assessing Officer noted a loss on the sale of shares debited as business loss and questioned why it should not be treated as capital loss, considering the shares were shown as investments in the balance sheet for several years.

2. The Assessing Officer rejected the assessee's explanation that it was an investment company, emphasizing that shares could be held as stock-in-trade or as investments based on the initial purchase's intention. The AO highlighted circumstantial evidence against the assessee's claim, including the nature of shares, the holding period, and the company's association with the Modi Group.

3. The CIT (A) affirmed the AO's decision, but the ITAT ruled in favor of the assessee, treating the gain from the sale of shares as business income. The ITAT considered the intention at the time of purchase, treatment of shares in the past, and the nature of the transactions, relying on legal precedents to support its decision.

4. The High Court criticized the ITAT's narrow view, emphasizing that the classification of shares as investments in the profit and loss account was not conclusive. The Court highlighted the company's objectives, treatment of shares, auditor remarks, and separate investment and business portfolios as crucial factors indicating the intention behind holding the shares.

5. Drawing parallels with the Patiala Biscuits case, where similar factors led to a capital account treatment, the High Court concluded that the shares in question were held as investments, and the loss on their sale should be considered a capital loss, not a revenue loss. The Court set aside the ITAT's decision, ruling in favor of the Revenue and against the assessee.

6. In conclusion, the High Court's detailed analysis focused on the intention behind holding the shares, treatment in financial records, and past practices, emphasizing that the classification of shares and treatment in profit and loss accounts were not the sole determinants in deciding the nature of the transaction.