2014 (1) TMI 490 - HC - Income Tax

Sale of shares - Capital gain or income from business activity - Held that - Following Venkataswami Naidu & Co. v. CIT 1958 (11) TMI 5 - SUPREME Court - The character of a transaction cannot be determined solely on the application of any abstract rule, principle or test but must depend upon all the facts and circumstances of the case - Where a purchase is made with the intention of resale, it depends upon the conduct of the assessee and the circumstances of the case whether the venture is on capital account or in the nature of trade. A transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale - A capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment - Decided against Revenue.

Summary

Issues:
1. Whether the sale of shares by the assessee was correctly categorized as capital gain instead of profit and gain from business.
2. Whether the department was correct in directing consistency in treating the sale of shares as capital gain based on past acceptance.

Issue 1: Categorization of Sale of Shares
The High Court deliberated on whether the sale of shares by the assessee should be considered as capital gain or profit and gain from business. The Tribunal concluded that the nature of the activity of investing in shares by the assessee did not constitute a business activity but rather fell under the category of capital gain. The Tribunal highlighted that the investment in shares was part of a collaboration agreement to promote agro/horticulture industries, not for trading purposes. The terms of the investment agreement indicated that the shares would be repurchased by the private promoter after a specified period, emphasizing the lack of a trading motive. The Court referenced a previous judgment involving similar aspects and upheld the Tribunal's decision that the sale of shares should be taxed as capital gains.

Issue 2: Consistency in Treatment
The appellant contended that the investments in shares and subsequent sales should be treated as profit and gain from business. However, the Court dismissed this argument by emphasizing the principle of consistency. It noted that in previous assessment years, the department had accepted the activity as a pure investment activity, not a business activity. The Court highlighted that there was no substantial change in facts or law to justify departing from the accepted position in earlier years. Additionally, the Tribunal's reliance on a past decision regarding the nature of investments in jointly promoted companies further supported the consistency in treating such transactions as capital gains. The Court's judgment in a related case reinforced the view that the realization of investments could be taxed under the head of capital gains, aligning with the Tribunal's decision.

In conclusion, the High Court dismissed the appeal by the revenue, upholding the Tribunal's decision that the sale of shares by the assessee should be taxed as capital gains rather than profit and gain from business. The Court emphasized the specific nature of the investment activity and the lack of trading motives, supporting the categorization of the transactions as capital gains. The principle of consistency in treatment across assessment years further solidified the decision, ensuring uniformity in tax treatment based on past acceptance and legal precedents.