2019 (1) TMI 524 - AT - Income Tax

Gain on sale of shares - capital gain or business gain - Held that - The assessee never purchased shares from open market. When the shares were allotted, the assessee waited for the right opportunity and sold the shares thereby making profits which were returned as short term capital gain. It is not the case of the AO that the assessee has been consistently buying and selling shares of the same company or companies. The only grievance of the Assessing Officer is that the assessee sold the shares in a very short span of time. This objection of AO is not acceptable when law itself provides that profits on shares held for less than 12 months shall be treated as short term capital gain. Therefore, in the light of the said provisions of the Act, the Assessing Officer cannot say that why the shares were held for less than 12 months. Moreover, shares applied through IPOs are directly allotted in the DEMAT account and if subsequent sale has to be made through DEMAT account. There is no dispute that the Security Transaction Tax paid by the assessee was never claimed as expenditure. - decided against revenue.

Summary

Issues:
1. Classification of gain as capital gain or business gain.

Analysis:
The appeal before the Appellate Tribunal ITAT Delhi concerned the classification of gain as either capital gain or business gain for the assessment year 2006-07. The Assessing Officer initially treated the gain of ?2,95,41,232/- as short term capital gain taxable at a special rate of 10%. However, upon scrutiny, the Assessing Officer believed that the assessee was consistently dealing in shares at a significant scale and asked for justification. The assessee explained that the shares were acquired through IPOs and sold opportunistically. Despite the assessee's explanation, the Assessing Officer categorized the gain as business income due to the nature of the assessee's share dealings.

Upon appeal, the CIT(A) analyzed the facts and submissions. The CIT(A) observed that the appellant had acquired shares only through IPOs and treated the transactions as investments in the books of accounts, not claiming security transaction tax as business expenditure. The CIT(A) found that the frequency of transactions did not necessarily indicate a business activity, especially considering the appellant's primary business in the commodity market. Additionally, the CIT(A) noted that even with a turnover of ?80 crores in the subsequent assessment year, it did not alter the character of transactions for the year in question. The CIT(A) also dismissed the argument that the use of borrowed funds automatically classified the transactions as business, citing judicial precedents where share transactions with borrowed funds resulted in capital gains. Consequently, the CIT(A) directed the Assessing Officer to treat the gain as capital gain instead of business income.

During the Tribunal proceedings, the Departmental Representative (DR) supported the Assessing Officer's stance, while the Authorized Representative (AR) for the assessee upheld the CIT(A)'s decision. The Tribunal examined the case records and noted that the assessee had acquired shares exclusively through IPOs and sold them for profit after waiting for the right opportunity. The Tribunal emphasized that the law deemed profits on shares held for less than 12 months as short term capital gains. As the shares were directly allotted through IPOs and subsequently sold through DEMAT accounts without claiming Security Transaction Tax as expenditure, the Tribunal found no grounds to interfere with the CIT(A)'s findings. Consequently, the Tribunal dismissed the Revenue's appeal, affirming the classification of the gain as capital gain.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision and dismissed the Revenue's appeal, confirming the treatment of the gain as capital gain rather than business income for the assessment year in question.