2017 (7) TMI 659 - AT - Income Tax

Disallowing the loss on account of sale of shares of HCL Technologies Ltd - Held that - The issue in favour of the assessee in the appeal filed against the original assessment order and original CIT(A) s order and since no incriminating material was found during the course of search and the addition was made solely on the basis of the statement of the assessee, therefore, we hold that the CIT(A) was not justified in disallowing the loss on account of sale of shares of HCL Technologies Ltd. The grounds raised by the assessee are accordingly allowed.

Issues Involved:
1. Disallowance of loss on account of sale of shares of HCL Technologies Ltd.
2. Classification of the transaction of purchase and sale of shares of HCL Technologies Ltd. as an adventure in the nature of trade.
3. Classification of profit on sale of shares of City Parks Pvt. Ltd. as capital gain or business income.

Detailed Analysis:

1. Disallowance of Loss on Account of Sale of Shares of HCL Technologies Ltd.:
The assessee claimed a short-term capital loss of ?15,01,80,424 on the sale of shares of HCL Technologies Ltd. The Assessing Officer (AO) and CIT(A) disallowed this loss, treating the transaction as an adventure in the nature of trade and valuing the shares on an average cost basis. The assessee argued that the shares were purchased as an investment and sold following FIFO method, with the cost of bonus shares considered nil as per CBDT Circulars 704 and 717. The Tribunal found merit in the assessee's argument, noting that the transaction was genuine and not covered by Section 94(8) of the Act, which applies to bonus stripping for units, not shares. The Tribunal directed the AO to re-compute the capital gain/loss considering it as assessable under the head capital gains.

2. Classification of the Transaction of Purchase and Sale of Shares of HCL Technologies Ltd. as an Adventure in the Nature of Trade:
The AO treated the transaction in HCL shares as a business activity due to the frequency and magnitude of transactions within a short span. The CIT(A) upheld this view. The assessee contended that the transactions were investments, not trading activities, supported by the fact that gains from other shares and mutual funds were accepted as capital gains in previous and subsequent years. The Tribunal agreed with the assessee, noting the absence of any organizational structure for trading and the consistent treatment of share transactions as investments in other years. The Tribunal concluded that the transactions in HCL shares were not business activities but investments, and the resultant loss should be treated as a capital loss.

3. Classification of Profit on Sale of Shares of City Parks Pvt. Ltd. as Capital Gain or Business Income:
The AO treated the profit from the sale of shares of City Parks Pvt. Ltd. as business income, asserting that the transaction was an adventure in the nature of trade. The CIT(A) disagreed, treating the profit as capital gain, noting that the shares were received as a gift and held as investments. The Tribunal upheld the CIT(A)'s view, emphasizing that the shares were not marketable or tradable like listed shares and were held as investments. The Tribunal found no evidence of the assessee engaging in trading activities with these shares and concluded that the profit from their sale should be assessed as capital gain.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, directing the AO to re-compute the loss on the sale of HCL shares as a capital loss and upheld the CIT(A)'s decision to treat the profit from the sale of City Parks Pvt. Ltd. shares as capital gain. The revenue's appeal was dismissed.

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