2017 (7) TMI 1463 - HC - Income Tax

Addition on account of transaction on sale and purchase of shares - capital gain or business income - aspect pertaining to the volume of transactions the frequency of transactions and the continuity and regularity of the purchase and sale of the shares - whether the said shares were bought and sold as a part of trading activity or as a part of investments? - addition on account of legal expenses - HELD THAT - The tribunal while examining the issue has referred to a decision of the Delhi High Court in the case of Commissioner of Income Tax v. Vinay Mittal 2012 (5) TMI 89 - DELHI HIGH COURT referring to case of Rewashanker A. Kothari 2006 (1) TMI 80 - GUJARAT HIGH COURT held that one of the most important tests outlined in that decision was as to whether the transactions in the shares were of a large volume and were frequent and whether there was continuity and regularity in such transactions of purchase and sale. It was noted that if there was repetition and continuity coupled with the magnitude of the transactions bearing a reasonable proportion to the holding then it would be an important circumstance in considering such activity to be in the nature of trade and business. All the circumstances outlined in the decision of the Delhi High Court and that of the Gujarat High Court as also the guidelines of the Central Board of Direct Taxes referred to in the impugned order needed to be considered and then a view was required to be taken on the totality of circumstances. Unfortunately that has not been done. It is for this reason that we feel that the present appeal ought to be disposed of by setting aside the impugned order and by remitting the matter to the tribunal for a fresh consideration in the manner indicated above. It is ordered accordingly. Since we are in any event remitting the matter with regard to the nature of the transaction concerning the sale and purchase of shares we also set-aside the finding with regard to legal expenses and that also ought to be considered afresh. Parties shall be entitled to raise all contentions available to them in law.

Summary

Issues involved:
1. Competency of ITAT to delete additions made by Assessing Officer on shares transaction.
2. Legality of ITAT's deletion of additions on legal expenses.

Analysis:

Issue 1: Competency of ITAT to delete additions on shares transaction

The High Court noted that the question of whether shares are held as investments or as stock-in-trade involves a mixed question of fact and law. Referring to a decision of the Delhi High Court and a Gujarat High Court decision, the court highlighted the importance of considering factors such as the volume, frequency, and continuity of transactions in determining whether an assessee is engaged in a trading activity or holds shares as investments. The court observed that the tribunal did not adequately examine these crucial aspects in the present case. While the tribunal relied on past treatment by the department in earlier assessment years, the court emphasized that a comprehensive assessment based on all relevant factors outlined in previous decisions and CBDT guidelines was necessary. Consequently, the court set aside the tribunal's order and remitted the matter for fresh consideration, directing a holistic evaluation of the circumstances to determine the nature of the shares transaction.

Issue 2: Legality of ITAT's deletion of additions on legal expenses

In addition to the shares transaction issue, the High Court also addressed the legality of the ITAT's deletion of additions on legal expenses. Given the decision to remit the shares transaction matter for fresh consideration, the court decided to set aside the finding on legal expenses as well. The court instructed that the issue of legal expenses should be reconsidered along with the shares transaction upon remittance to the tribunal. Parties were granted the opportunity to present all legal contentions available to them during the fresh consideration. Consequently, the High Court disposed of the appeal by setting aside both the shares transaction and legal expenses findings, directing a comprehensive review by the tribunal in light of the relevant legal principles and guidelines.

This judgment from the Jammu and Kashmir High Court underscores the importance of a thorough evaluation of factors determining the nature of shares transactions and legal expenses in income tax assessments. It emphasizes the need for a holistic consideration of volume, frequency, and continuity of transactions to differentiate between trading activities and investments. The decision highlights the significance of adhering to established legal principles and guidelines in tax matters, ensuring a comprehensive analysis for accurate determinations.