2018 (5) TMI 1439 - HC - Income Tax

Whether the income generated through sale of shares should be taxed as capital gain or business income of the assessee - Held that - the declaration made by an assessee with respect to its intention in buying and selling shares would be accepted - where the assessee itself, irrespective of the period of holding the listed shares opts to treat them as stock-in-trade - the income arising from transfer of such shares would be treated as its business income - in case of listed shares held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain - then it shall be treated as capital gain - the assessee is not allowed to change his position from time to time - decided in favor of assessee

Summary

Issues:
1. Whether the income from the sale of shares should be treated as capital gain or business income?
2. Interpretation of CBDT circular No. 6 of 2016 regarding the treatment of income generated through the sale of shares.
3. Application of exclusion clause in the CBDT circular in cases of questionable transactions.

Issue 1:
The High Court considered the appeal against the judgment of the Income Tax Appellate Tribunal regarding the categorization of income from the sale of shares as capital gain or business income. The Revenue authorities had treated the income as business income due to suspicions of price manipulation by the assessee. However, the Tribunal overturned these decisions and relied on CBDT circular No. 6 of 2016, which provides directives for such cases. The Court noted that the circular allows the assessee to declare their intention in buying and selling shares, with restrictions on changing this position. The exclusion clause in the circular applies to transactions with questionable genuineness, such as sham transactions or bogus claims of capital gain or loss. The Court found that the Revenue's suspicions were not enough to prove questionable transactions, leading to the dismissal of the Tax Appeal.

Issue 2:
The Court analyzed the CBDT circular in detail, highlighting the directives for determining the nature of income from the sale of shares. The circular allows the assessee to choose whether to treat the income as business income or capital gain based on the holding period of the shares. For shares held for over 12 months, the assessee's choice to treat the income as capital gain should not be disputed by the Assessing Officer. However, once a stand is taken, it must remain consistent in subsequent assessment years. The circular aims to reduce disputes and provide clarity in such cases by accepting the assessee's declaration of intention, except in cases of questionable transactions as specified in the exclusion clause.

Issue 3:
The Court examined the application of the exclusion clause in the CBDT circular to cases where the genuineness of transactions is questionable. The clause specifies that the directives in the circular do not apply to transactions involving sham transactions, bogus claims of capital gain or loss, or other questionable dealings. In this case, the Court found that the Revenue's suspicions of price rigging did not meet the threshold of questionable transactions as outlined in the exclusion clause. Therefore, the Court upheld the Tribunal's decision to treat the income from the sale of shares as capital gain and dismissed the Tax Appeal.