2010 (8) TMI 699 - AT - Income Tax

Exemption u/s 10(38) - Assesse contended that shares of M/s. India Cements Ltd. (ICL) held by the assessee-company were in the nature of capital assets and transfer of such shares would result in long-term capital gains which is exempt in terms of section 10(38) of the Act - Addition made by AO as treating it as income from business - As per MOA of the assesse comapnay primary business of the assessee is to deal in shares/stocks and securities - Hence such activity is to be assessed as business income only and it cannot fall under any other head of income - Held that magnitude of shares held by the assessee is high. But there is no purchase of the shares from the open market - frequency in respect of the sale of shares is only two which cannot be said to be frequent and this transfer is also within the group companies - assessee has been disclosing before various other statutory authorities like the SEBI that it is in control and it is the promoter of ICL clearly shows that the intention of the assessee is not to trade in the shares of ICL - shares have been held by the assessee for acquiring and maintaining a controlling stake in the company - sale of the shares of ICL held by the assessee is in the nature of sale of capital asset and not in the nature of stock-in-trade is upheld. In the circumstances, the Assessing Officer is directed to grant the benefit of exemption under section 10(38) - Appeal of revenue of dismissed.

Summary

Issues:
- Appeal against the order of the Commissioner of Income-tax (Appeals) regarding the nature of shares held by the assessee and the tax treatment of income from their transfer.

Analysis:
1. The Revenue contended that the shares of M/s. India Cements Ltd. (ICL) held by the assessee were business assets, not capital assets, and income from their transfer should be treated as business income, not long-term capital gains exempt under section 10(38) of the Income-tax Act, 1961.

2. The Revenue argued that the primary business of the assessee, as per its memorandum of association, was dealing in shares, hence income from such activity should be assessed as business income. They emphasized that the assessee had acquired the ICL shares over eight years, invested borrowed funds, and declared operational profits related to these shares.

3. The Departmental representative highlighted the Assessing Officer's view that the multiplicity of share transactions and use of borrowed funds indicated a business activity, citing a Tribunal decision supporting this position.

4. The assessee maintained that the shares were held as investments, not stock-in-trade, evidenced by their consistent classification as investments in the balance sheets since 1996. They emphasized their promoter status in ICL, substantial shareholding, and historical dividend receipts.

5. The assessee clarified that the shares sold were part of a long-term investment, not actively traded, and the sale was to resolve disputes, with the remaining shares still held for control purposes.

6. The Tribunal examined the frequency and nature of share transactions, finding no open market purchases, infrequent sales within the group, and no trading pattern. They concluded that the shares were held for control, not trading, upholding the Commissioner's decision on the nature of the shares and granting the exemption under section 10(38) for long-term capital gains.

7. The Tribunal dismissed the Revenue's appeal, affirming that the shares of ICL held by the assessee were capital assets, not stock-in-trade, and the income from their sale qualified for exemption under section 10(38) as long-term capital gains.