2016 (10) TMI 194 - AT - Income Tax

Transaction of shares - whether the impugned transactions of purchase of shares and sale thereof tantamounts to an investment activity or a trading activity? - Held that - The CBDT Circular No.6/2016 dated 29.02.2016 clarifies that once a particular stands has been taken by the assessee to such purchases in a particular assessment year it shall remain applicable in subsequent assessment years also and the taxpayers shall not be allowed to adopt divergent stand in different assessment years. Clearly, the CBDT Circular (supra) attempts to tone down the ongoing controversy on the issue in favour of the assessee. We find on fact that the action of the assessee is consistent with the aforesaid CBDT Circular. Consequently, gains arising on sale is required to be taxed under the head capital gains only. We also take note of the averments made on behalf of the assessee that several purchases made in the earlier year and declared as capital investment in the Balance Sheet of the earlier year were also sold and gain arising therefrom formed part of the impugned capital gains arising in this year. We, thus, find no reason to impugne the declared intention of the assessee that the share were acquired as capital asset. In the aforesaid view of the matter, we find considerable merit in the arguments raised on behalf of the assessee. Hence, in our view, the assessee is entitled to treat the gains arising on purchase and sale of shares in the impugned assessment year as short term capital gains as claimed. Accordingly, the action of the Revenue on the issue requires to be reversed. - Decided in favour of assessee.

Summary

Issues:
Determining whether short term capital gain from the sale of shares should be taxed as business income or short term capital gain under the Income-tax Act, 1961.

Analysis:
The appellant, a Hindu Undivided Family (HUF), declared a short term capital gain of ?13,59,669 from the sale of shares for assessment year 2008-09. The Assessing Officer treated this gain as business income instead of short term capital gain due to the volume, frequency, and regularity of share transactions. The CIT(A) upheld this decision. The appellant contended that the shares were held as investments, not for trading purposes, as reflected in the Balance Sheet under 'investment'. The appellant emphasized the limited number of scrips held, the physical delivery of shares, and compliance with Security Transactions Tax requirements. The appellant argued that the gains should be treated as short term capital gains under specific provisions of the Act, supported by a CBDT Circular and a Tribunal decision.

The Departmental Representative argued that the share transactions resembled a business activity due to their regularity and volume, justifying taxation as business income. The Tribunal analyzed the facts and noted the appellant's consistent treatment of shares as investments, the limited number of scrips held, and payment of Securities Transaction Tax. The Tribunal referenced a CBDT Circular addressing the distinction between capital assets and stock-in-trade, providing guidelines for assessing such transactions. The Circular emphasized maintaining consistency in the treatment of income from share transfers. The Tribunal found merit in the appellant's arguments, concluding that the gains from share transactions should be taxed as short term capital gains, in line with the CBDT Circular and the appellant's consistent treatment of shares as capital assets.

Therefore, the Tribunal allowed the appeal, reversing the Revenue's decision and determining that the gains from the purchase and sale of shares should be treated as short term capital gains. The judgment highlighted the importance of consistent treatment of share transactions as capital assets and the applicability of specific provisions and guidelines provided by the CBDT Circular to reduce litigation and ensure a uniform approach in such cases.