2011 (5) TMI 537 - HC - Income Tax

Short-term capital gain or Business income - Sale of 206828 shares of ONGC - Held that - The acquisition of such shares in public issue with the intent of holding them for a long period of time to achieve long-term appreciation and the mere fact that the shares were sold in a short span of time of its acquisition due to steep and unanticipated rise in stock market does not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal in them - Therefore, the profit arisen from sale of shares of ONGC during the relevant previous year was to be treated under the head capital gain and not profit or gain of business and profession .

Summary

Issues:
1. Classification of profit from the sale of shares as capital gain or business income.

Analysis:
The judgment revolves around the issue of determining the nature of profit arising from the sale of shares - whether it should be classified as capital gain or business income. The appellant, an assessee, declared short-term capital gain on the sale of shares of ONGC. However, the Assessing Officer considered the transactions to be of a business nature due to the assessee's business activities related to investments and dealing in shares. The CIT(A) held the profit to be capital gain, a decision upheld by the Tribunal, leading to the Revenue appealing against this decision.

Upon review, the High Court considered various aspects of the case. It noted that the shares were acquired and sold within a short span of time by the assessee, who had asserted to be engaged in non-banking financial activities involving investments and shares. However, crucial facts emerged during the proceedings. The assessee was previously involved in manufacturing photographic goods before a de-merger in April 2004. The shares in question were purchased during the manufacturing phase, not as part of a share dealing business. The assessee also held long-term investments in various shares, indicating an intent for long-term appreciation rather than frequent trading.

The High Court concurred with the findings of the CIT(A) and the Tribunal, emphasizing that the intention at the time of share purchase was crucial. Despite the short-term sale due to market conditions, the original intent to hold the shares for long-term gain was evident. Therefore, the profit from the sale of shares was correctly categorized as capital gain, not business income. As no legal question arose, the appeal was dismissed.

In conclusion, the judgment clarifies the distinction between capital gain and business income in the context of share transactions, emphasizing the importance of intent at the time of acquisition. The decision underscores the significance of factual findings in determining the tax treatment of profits, ensuring consistency with the assessee's overall financial activities and intentions.