2019 (1) TMI 1358 - AT - Income Tax

Sale of shares - Capital gain or busniss gain - company s main object is of trading in equity shares and NSE derivatives - Held that - Hon ble jurisdictional High Court in the case of CIT V/s Commissioner of Income Tax Vs Om Prakash Suri 2013 (12) TMI 418 - MADHYA PRADESH HIGH COURT wherein held that a tax payer can use two portfolios which are to be treated as capital assets and trading portfolio comprising the securities which are to be treated as capital assets and portfolio comprising of stock in trade has to be treated as trade assets . Gain from sale of equity shares of M/s. FCS Software Ltd at ₹ 1,09,16,692/- has been rightly claimed by the assessee as Long Term Capital Gain exempt u/s 10(38) as the assessee is consistently carrying out such transactions of purchase and sale and equity shares under the investment portfolio and separate details are maintained for the trading of shares on behalf of the customers. We therefore find no merit in the appeal raised by the revenue and the same deserves to be dismissed for the Assessment Year 2010-11. Now we take up the appeal raised by the Revenue for the Assessment Year 2011-12. Both the parties have not disputed the fact that the issues raised for Assessment Year 2011-12 is similar to that of 2010-11 which relates to taxability of capital gain from sale of equity shares of M/s. FCS Software Ltd. As the facts and as issues remain the same, we are of the considered opinion that the decision given by us in preceding para while adjudicating the issue for 2010-11 in the case of assessee shall apply mutatis mutandis on the appeal for Assessment Year 2011-12. Therefore no interference is called for in the finding of CIT(A) holding that the gain has been rightly shown by the assessee as Short Term Capital Gain and is not taxable as business profit. The appeal raised by the revenue for Assessment Year 2011-12 also deserves to be dismissed.

Summary

Issues Involved:

1. Whether the gains from the sale of shares should be treated as business profit or capital gain.
2. Validity of maintaining separate portfolios for investment and trading purposes.
3. Applicability of CBDT Circular No. 4/2007 and relevant judicial precedents.

Issue-Wise Detailed Analysis:

1. Treatment of Gains from Sale of Shares:
The primary issue was whether the gains from the sale of shares of M/s. FCS Software Ltd should be treated as business profit taxable at the normal rate or as capital gains exempt under Section 10(38) of the Income Tax Act, 1961. The Assessing Officer (A.O.) argued that due to the volume and frequency of transactions, the gains should be treated as business income. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal found that the assessee maintained separate portfolios for investment and trading, and the shares in question were held as investments. Thus, the gains were correctly claimed as Long Term Capital Gains exempt under Section 10(38).

2. Maintenance of Separate Portfolios:
The Tribunal upheld the assessee's practice of maintaining two distinct portfolios—one for investment and another for trading. This practice was supported by various judicial precedents, including CIT V/s Gopal Purohit, where it was held that even a share trader could maintain two portfolios. The Tribunal noted that the assessee had separate Demat accounts and consistently maintained these portfolios in its books of accounts, which were reflected in the audited balance sheet.

3. Applicability of CBDT Circular No. 4/2007 and Judicial Precedents:
The Tribunal referred to CBDT Circular No. 4/2007, which distinguishes between shares held as investments and those held as stock-in-trade. The Tribunal also cited several judicial precedents, including decisions by the Hon'ble Supreme Court and High Courts, which supported the view that an assessee could hold shares as investments and that gains from such investments should be treated as capital gains. The Tribunal emphasized that the assessee's intention, as evidenced by the maintenance of separate portfolios and the nature of transactions, was to hold the shares as investments.

Conclusion:
The Tribunal dismissed the appeals filed by the Revenue for both Assessment Years 2010-11 and 2011-12, upholding the CIT(A)'s decisions. The gains from the sale of shares were rightly claimed as Long Term Capital Gains exempt under Section 10(38) for the Assessment Year 2010-11 and as Short Term Capital Gains for the Assessment Year 2011-12, based on the consistent practice of maintaining separate portfolios for investment and trading purposes. The Tribunal found no merit in the Revenue's appeals and affirmed the CIT(A)'s findings.