2018 (5) TMI 1095 - HC - Income Tax

Income on sale of shares of VEOL - to be treated as capital gain OR business income - Held that - The materials on record would suggest that the shares in question were of one Vishal Exports Overseas Ltd. VEOL which was a limited company. The assessee had been strenuously arguing that it was not possible to rig the prices of the shares through small trading. CBDT circular in question lays down certain directives for limiting the disputes arising out of the issue at hand. In this context, in the said circular it is noted that despite earlier directions, disputes continued to exist on the application of the principles laid down in the said circulars and the individual tax buyers find it difficult to prove the intention in acquiring the shares and securities in question. There are no universal principles which could be applied uniformly. This exclusion clause would apply where the genuineness of transaction itself is questionable. In cases such as bogus claims of long term capital gain or short term capital loss or sham transactions, the instructions of CBDT would not apply. It is not even the case of the Revenue that the transactions in question were sham. The observations of the Assessing Officer and CIT (Appeals) about the rigging of the shares could be at best seem to be more of suspicion than establishing the necessary conclusions. Appellate Tribunal is right holding the income shown by the assessee on sale of shares of VEOL is to be treated as capital gain instead of business income - Decided against revenue

Summary

Issues:
1. Whether the income from the sale of shares should be taxed as capital gain or business income.

Analysis:
The case involved a dispute regarding the tax treatment of income generated through the sale of shares. The Revenue authorities initially treated the income as business income, alleging that the assessee had manipulated share prices to inflate income. However, the Income Tax Appellate Tribunal overturned these decisions and relied on a CBDT circular from 2016 for guidance. The circular provided directives for determining the tax treatment of income from share transactions, emphasizing the importance of the assessee's declared intention in buying and selling shares. It also specified conditions under which income should be treated as capital gain or business income.

The Revenue argued that the Tribunal did not adequately consider the facts on record and claimed that the circular should not apply due to an exclusion clause. The shares in question belonged to a limited company, and the assessee contended that price manipulation was not feasible through small trading. Both the Assessing Officer and the CIT (Appeals) rejected this argument based on price fluctuations and the assessee's trading patterns. The CBDT circular aimed to reduce disputes by accepting the assessee's declared intention, with restrictions on changing positions in subsequent years.

The circular's exclusion clause stated that it would not apply to transactions where the genuineness was questionable, such as bogus claims of capital gain or sham transactions. In this case, the Revenue did not allege that the transactions were sham, and suspicions of share price manipulation were not conclusive. As a result, the High Court dismissed the Tax Appeal, upholding the Tribunal's decision to treat the income from share sales as capital gain rather than business income.