2016 (2) TMI 623 - AT - Income Tax

Sale of investments - Short term capital gain V/S business income - Held that - As per Section 45(1) of the Act, any gain arising on transfer of a capital asset is to be taxed as capital gain. Further section 2(14) define capital asset to mean property of any kind held by an assessee whether or not earmarked for his business or profession, but does not include any stock in trade, consumable stores or raw material held for the purpose of business. Thus the gain arising on capital asset falling within the meaning as defined in Section 2(14) is to be charged as capital gain. In the present case as is evident from the facts on record, the investments in shares were held as capital asset. The assessee has accounted for these investments in shares as capital asset in its books of accounts. The same has also been declared in the financial statements as capital asset. These financial statements have been audited and also have been approved by the shareholders filed with the Registrar of Companies. The books of accounts and the audited financial statements have evidentially value and what is recorded therein cannot be disturbed lightly. The income arising on sale of capital asset, as stated hereinabove, has to be assessed under section 45(1) as capital gain and accordingly the CIT(A) was right in holding that gain arising on sale of investment will be chargeable as capital gain and not as business income.

Summary

Issues:
Taxation of short term capital gain as business income.

Detailed Analysis:

Issue 1: Taxation of short term capital gain as business income
The Revenue appealed against the CIT(A)'s order directing the AO to treat the income of Rs. 95,92,653 as short term capital gain (STCG) instead of business income. The Revenue contended that the AO rightly assessed it as business income based on the company's Memorandum & Articles of Association stating investment in shares as its business. However, the Assessee argued that both short and long term capital gains arose from share investments and should be treated as capital gains. The Assessee highlighted the lack of organized trading activities, emphasizing the company's main business as financing. The Assessee also pointed out that the Memorandum of Association permitting share investments does not automatically classify gains as business income.

Issue 2: Legal Grounds and Jurisdiction
The Assessee's Cross Objection challenged the initiation of proceedings under Section 153A and the AO's order, arguing they lacked jurisdiction and incriminating material. The Assessee contended that additions made were not based on seized incriminating material, limiting the reassessment scope. The Assessee also claimed the AO's order under Section 153A was invalid due to an allegedly unlawful search. However, the CIT(A) rejected these contentions.

Issue 3: Treatment of Income and Assessments
The AO assessed the short term capital gain as business income, differing from the treatment of long term capital gain. The Tribunal observed that the company consistently treated share investments as capital assets in its financial statements, which were audited and approved. Relying on legal provisions, the Tribunal upheld the CIT(A)'s decision to tax the gain from share sales as capital gain, not business income.

In conclusion, the Tribunal dismissed the Revenue's appeal and the Assessee's Cross Objection, affirming the treatment of short term capital gain as capital gain, not business income, based on the company's historical treatment of share investments and legal provisions governing capital gains taxation.