2011 (11) TMI 481 - AT - Income Tax

Sale of shares of Pvt Ltd Company - Trading assets - Capital gain vs business income - Held that - The treatment accorded to a transaction in the books of account, by itself, cannot be decisive of it s true nature. Therefore, nothing conclusive really turns on the fact that the shares in these two private limited companies were held as stock in trade in the books of account of the assessee. The shares were in private limited companies and could not have been, therefore, freely transferable. An asset which is freely transferable cannot be in the nature of stock in trade, unlike shares in listed companies which can be freely bought and sold in stock exchanges or even in off market transactions. Also the assessee has given an explanation for investment in these shares and no inconsistencies have been found in the said explanation. Thus the shares held by the assessee in Marine Container Services Pvt Ltd., and Bay Container Terminal Pvt. Ltd., were not trading assets and the CIT(A) was justified in holding that gain on sale of these shares are required to be treated as long term gains - Decided against the Revenue.

Issues Involved:
1. Classification of gains on sale of shares as "capital gains" versus "business profits."
2. Treatment of shares in private limited companies as stock-in-trade or investments.
3. Validity of the assessee's explanation and conduct regarding the shares in question.

Detailed Analysis:

Classification of Gains on Sale of Shares:
The primary issue in this appeal was whether the gains from the sale of shares in Marine Container Services Pvt. Ltd. and Bay Container Terminal Pvt. Ltd. should be classified as "capital gains" or "business profits." The Assessing Officer (AO) had treated these gains as business profits, arguing that the shares were disclosed as stock-in-trade in the assessee's balance sheet. However, the CIT(A) disagreed, concluding that the shares were investments, not trading assets, and thus the gains should be treated as long-term capital gains. The Tribunal upheld CIT(A)'s decision, emphasizing that the treatment in the books of account is not conclusive of the true nature of the transaction.

Treatment of Shares in Private Limited Companies:
The shares in question were held in private limited companies, which inherently have restrictions on transferability. The CIT(A) noted that the shares were acquired for controlling interest and not for trading purposes. The Tribunal agreed, stating that an asset which is not freely transferable cannot be considered stock-in-trade. The Tribunal also highlighted that the holding period of nearly ten years and the receipt of dividends supported the classification of these shares as investments.

Validity of the Assessee's Explanation and Conduct:
The assessee provided a detailed explanation for the acquisition and holding of the shares, citing the need for managerial control and the long-term nature of the investment. The CIT(A) found this explanation credible, noting that the shares were held for a significant period and were not traded frequently. The Tribunal concurred, finding no inconsistencies in the assessee's explanation. The Tribunal also referenced various judicial precedents and CBDT Circulars, which support the view that the nomenclature in the accounts is not determinative of the nature of the transaction.

Conclusion:
The Tribunal dismissed the appeal, affirming CIT(A)'s decision that the gains from the sale of shares in Marine Container Services Pvt. Ltd. and Bay Container Terminal Pvt. Ltd. should be treated as long-term capital gains. The Tribunal emphasized that the true nature of the transaction, the holding period, and the restrictive nature of the shares were crucial factors in this determination.

Pronouncement:
The appeal was dismissed, and the judgment was pronounced in the open court on 18.11.2011.

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