2007 (10) TMI 295 - HC - Income Tax

Dealing in Shares - Capital Asset versus Business Asset Business profit or capital gains held that - shares were purchased with a view to sell them at a profit and in fact those shares were sold within the same accounting year, the conduct of the assessee was not to hold them as investment and earn some interest income but to trade in shares. That was clear from the frequency and nature of transactions in shares. Merely because the assessee had shown those shares as investments in its books of accounts, it could not be said to determine that those shares were held on the investment account, whereas, in fact, the close perusal of the paper book showed who the assessee had purchased and sold shares - . In the absence of any material to show that the assessee has changed his business, that they are not dealing with shares, and that the shares were kept exclusively for the investment purpose, we are not able to take a different view than the one taken by the authorities below concurrently Taxable as business income

Summary

Issues:
1. Classification of profit from the sale of investment as business income or capital gains.
2. Assessment of premium for renouncing the rights share as business income.
3. Treatment of depreciation in the value of original shares due to the issue of rights shares.

Analysis:
1. The appellant, a company dealing in shares, contested the treatment of income from the sale of shares as business income instead of capital gains for the assessment year 1993-94. The Assessing Officer considered the income as business income and disallowed the loss on the sale of right entitlement of shares. The Commissioner of Income Tax (Appeals) upheld this decision based on the Tribunal's finding that the shares were purchased with the intention to sell for profit, indicating a trading activity rather than investment. The Tribunal, following a Supreme Court precedent, confirmed the business income classification for the shares sold within the same accounting year. The High Court, noting the absence of evidence showing a change in the appellant's business nature or exclusive investment purpose for the shares, upheld the previous decisions, dismissing the appeal.

2. The appellant argued that the shares were held as investments, as reflected in the audited balance sheet, and periodic review of investments does not automatically imply trading activity. However, the Court, considering the finality of the previous year's decision classifying the income from share sales as business income, found no grounds to differ from the concurrent findings of the lower authorities. Without evidence of a shift in the appellant's business operations or exclusive investment intent for the shares, the Court dismissed the appeal, emphasizing the continuity in the treatment of share sale income as business income.

3. The judgment highlights the importance of establishing the intent behind holding shares to determine the nature of income derived from their sale. In this case, the Court relied on past decisions and the nature of the appellant's business activities to support the classification of income from share sales as business income. The appellant's argument regarding the investment nature of shares based on the balance sheet was deemed insufficient to overturn the consistent categorization of share sale income as business income. The Court's decision underscores the significance of demonstrating a clear investment purpose to differentiate capital gains from business income in the context of share transactions.