2015 (12) TMI 1227 - AT - Income Tax

Profit earned on sale of share - long-term capital gains OR business income - Held that - There has been some deviation to the contentions placed by learned authorised representative in relation to consistent treatment of transactions of purchase/sale of shares under the head shares investment account . There is no dispute that the books of account are audited under section 44AB of the Act duly certified by the chartered accountant and showing the total stock of equity shares held by the assessee in trading and profit and loss account and has been treated as closing stock and no information is placed on record that whether such stock has been converted into capital account or vice versa. In these circumstances in order to verify the submissions/claim of the assessee of capital gains from shares held in shares investment account in the light of our working as well as questions raised, it will be just and proper to remit this issue back to the file of the Assessing Officer before whom the assessee will place all records. If the Assessing Officer is satisfied that the assessee has consistently treated the shares investment account as her investment for long-term purposes and has not shifted the stock in investment account to shares trading stock account or share derivatives account or vice versa then the Assessing Officer will accept the claim of the assessee of claiming deduction under section 10(38) of the Act for long-term capital gains from sale of equity shares and if contrary results are discovered by the Assessing Officer from the records made available by the assessee then such total income from the transaction of purchase/sale of shares in all the three sub-groups account shall be treated as business income - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:

1. Classification of profit from the sale of shares as either long-term capital gains or business income.
2. Validity of the assessment order passed by the Assessing Officer.
3. Consistency in the treatment of shares as stock-in-trade or investment.

Issue-wise Detailed Analysis:

1. Classification of Profit from Sale of Shares:

The primary issue revolves around whether the profit earned from the sale of shares should be treated as long-term capital gains or business income. The Assessing Officer (AO) treated the profit as business income because the shares were consistently shown as stock-in-trade in the assessee's records. The AO relied on the Supreme Court's decision in CIT v. Associated Industrial Development Co. P. Ltd. [1971] 82 ITR 586 (SC), which emphasized that the distinction between stock-in-trade and investment shares is within the knowledge of the assessee and must be evidenced by their records.

The Commissioner of Income-tax (Appeals) (CIT(A)) disagreed with the AO, stating that the facts of the assessee's case differed from the Supreme Court case relied upon. The CIT(A) noted that the assessee had shown the shares as investments in their ledger account and that there was no evidence of extensive dealings or frequency of transactions that would suggest the shares were held as stock-in-trade. Consequently, the CIT(A) directed that the profit from the sale of shares be treated as long-term capital gains.

2. Validity of the Assessment Order:

The Revenue contended that the CIT(A) erred in law and facts by directing the assessee to treat the profit as long-term capital gains. The Revenue argued that the AO's assessment should be upheld because the assessee had shown the investments in equity shares as closing stock, which should be taxed as business income.

The Tribunal examined the CIT(A)'s findings and noted that the assessee maintained separate records for long-term investments and trading of shares. The Tribunal found no evidence to contradict the CIT(A)'s findings that the shares were held as investments and not as stock-in-trade.

3. Consistency in Treatment of Shares:

The Tribunal scrutinized the assessee's records and found that the assessee had maintained three sub-groups: shares investment account, shares delivery account, and shares derivatives account. The Tribunal observed that the assessee consistently treated the shares in the investment account as long-term investments and reported the gains as long-term capital gains.

However, the Tribunal identified discrepancies in the assessee's records, such as the absence of certain shares in the investment account and the lack of corresponding capital gains or losses in the return of income. The Tribunal noted that these discrepancies raised questions about the consistency of the treatment of shares.

Conclusion:

The Tribunal decided to remit the issue back to the AO for further verification. The AO was directed to examine the assessee's records to ensure that the shares in the investment account were consistently treated as investments and not shifted between accounts. If the AO finds that the shares were consistently treated as investments, the claim of long-term capital gains should be accepted. Otherwise, the income from the sale of shares should be treated as business income.

Final Judgment:

The appeal filed by the Revenue was allowed for statistical purposes, and the order pronounced on October 15, 2015, directed the AO to re-examine the assessee's records and make a determination based on the findings.