2013 (3) TMI 417 - HC - Income Tax

Profit on sale of shares - capital gain v/s business income - whether assessee eligible for exemption under section 47(v)? - Held that - As decided in Sutlej Cottom Mills Supply Agency Ltd. (1975 (7) TMI 2 - SUPREME COURT) while holding that even single transaction of purchase and sale may constitute adventure in the nature of trade, yet, the same has to be decided taking into account all the facts and circumstances of the case and not on the application of any single principle or test. As in the present case the Tribunal has considered the cumulative effect of all the facts and arrived at a conclusion that the transaction was not an adventure in the nature of trade as the shares sold by the respondent-assessee to its holding company was not tradeable in the market like any other normal trading asset, concluded that the gains arising from the sale of shares has to be tax under the head capital gains. Exemption under section 47(v) is to be allowed to assessee as the same applies only to capital gains and not to income taxed as business income - in favour of assessee.

Summary

Issues:
1. Classification of profit on sale of shares as capital gain or business income.
2. Eligibility for exemption under section 47(v) of the Income Tax Act, 1961.

Issue 1: Classification of profit on sale of shares

The appellant raised a question regarding the treatment of profit on the sale of shares as capital gain instead of business income. The respondent sold shares to its holding company and earned a profit, which was declared as long-term capital gains. However, the assessing officer considered the profit taxable under the head of profits and gains of business and profession, stating that the shares were held for a period of 8 months. The CIT(A) upheld this decision but noted that the shares were held for four years. The Tribunal, in its order, classified the profit as capital gains, emphasizing that the shares were not tradeable in the market and the funds used were more in the nature of capital infusion rather than commercial borrowing. The Tribunal concluded that the profit should be treated as long-term capital gains based on factual findings and cited relevant case law to support its decision, including the Supreme Court's ruling in Ramnarain & Sons Pvt. Ltd. v. CIT.

Issue 2: Eligibility for exemption under section 47(v)

The appellant contested the exemption under section 47(v) of the Act, arguing that it should not apply if the transaction is treated as business income. However, the Tribunal's decision to tax the gains as capital gains rendered this question moot. The Court found no reason to interfere with the Tribunal's findings, as it was based on a factual assessment that the shares were not tradable in the market like normal trading assets. Consequently, the question regarding the applicability of section 47(v) was deemed inconsequential, and the appeal was dismissed with no costs awarded.

In conclusion, the High Court of Bombay upheld the Tribunal's decision to classify the profit on the sale of shares as long-term capital gains rather than business income, based on the nature of the transaction and relevant factual considerations. The judgment provided a detailed analysis of the issues raised by the appellant and highlighted the importance of factual findings in determining the tax treatment of such transactions.