2019 (5) TMI 1605 - HC - Income Tax

Gain on sale of shares - correct head of income - capital gains or income from business - buy back of shares by the borrowers - AO held that the basic intention of holding equity shares by the assessee was to earn interest on the loans advanced and therefore held that the transaction could not be classified as capital gain and further held that it was in the ordinary course of business of the assessee and related to its primary object of financing and was therefore clearly business profit of the assessee. HELD THAT - On identical issue, it was held by this Court in CIT vs. Punjab Agro Industries Corporation Limited 2014 (1) TMI 490 - PUNJAB HARYANA HIGH COURT that the Tribunal rightly considered the facts that investment made in the shares of companies which were jointly promoted by the assessee alongwith the private entrepreneurs, was with the basic object of promoting agro/horticulture based industry in the State of Punjab and not as a dealer in shares with the object of trading. Infact, the object of trading in shares was lacking in as much as the financial collaboration agreement itself prescribed that the shares shall be bought back by the private promoter after a specified period at a defined consideration. Therefore, realization from such investments was liable to be taxed under the head Capital gains and not as business activity. Disallowance on account exempt income - dividend claimed exempt by holding the activity of the assessee as investment and not trading in shares - HELD THAT - Tribunal after examining the matter recorded that the Finance Act, 2003 inserted clause (34) to section 10 which deals with income which is exempt from taxation and does not form part of the total income at all excluding the income by way of dividend from the purview of taxation. At the same time, Section 115-O was inserted in the Act making the companies distributing dividend to pay tax at a specified rate thereon. Thus, taxation of dividend changed hands from the recipient to the payer of dividend by virtue of this amendment brought about in the Act. The case of Brook Bond India Limited 1986 (9) TMI 2 - SUPREME COURT did not apply to the present case since it related to the assessment years 1955-56 when the position of law vis a vis taxation of dividend was governed by the Income Tax Act, 1922 which taxed dividend in the hands of the recipient. It was further recorded that since the dividend income was exempt from tax, the provisions of Section 14A of the Act disallowing expenses incurred for earning the same were attracted. For that limited purpose, the issue was restored back to the AO to decide the same in accordance with law after giving due opportunity of hearing to the assessee. The findings recorded by the Tribunal on all the issues are findings of facts which have not been shown to be illegal or perverse by the learned counsel for the appellant-revenue, warranting interference by this Court. Thus, no substantial question of law arises.

Summary

Issues Involved:
1. Classification of profits from the sale of shares as capital gains or business income.
2. Treatment of dividend income as exempt or business income.
3. Application of the principle of consistency in tax treatment across different assessment years.
4. Treatment of unclaimed refunds as business income.
5. Verification of income from industrial area activities.

Detailed Analysis:

1. Classification of Profits from Sale of Shares:
The primary issue was whether the profits from the sale of shares should be classified as capital gains or business income. The Tribunal held that the profits earned from the sale of shares were capital gains, not business income. The Tribunal applied the principle of consistency, noting that since inception, the assessee had been claiming these profits as capital gains, which had never been disputed by the revenue. The Tribunal's decision was based on the precedent set by the special bench in the case of Punjab State Industrial Corporation Limited, which involved identical facts and circumstances. The Tribunal rejected the revenue's contention that the findings in the PSIDC case were obiter dicta, affirming that they were substantive findings.

2. Treatment of Dividend Income:
The additional issue in some appeals was whether the dividend income should be treated as exempt or business income. The Tribunal held that dividend income is exempt from taxation under Section 10(34) of the Income Tax Act, as amended by the Finance Act, 2003. The Tribunal noted that the taxation of dividend had shifted from the recipient to the payer of the dividend. The Tribunal also referenced the Supreme Court's decision in Brook Bond India Limited, which was not applicable to the current case due to changes in the law. However, the Tribunal restored the issue to the Assessing Officer to determine the expenses disallowable under Section 14A for earning the exempt dividend income.

3. Principle of Consistency:
The Tribunal emphasized the principle of consistency, stating that the revenue had accepted the assessee's treatment of profits from the sale of shares as capital gains in previous years. The Tribunal cited the Supreme Court's decision in Radha Soami Satsang vs. CIT, which held that a consistent position accepted by both parties should not be challenged in subsequent years without cogent reasons.

4. Treatment of Unclaimed Refunds:
The Tribunal addressed the issue of unclaimed refunds, noting the assessee's admission that a period of three years from the date of issue of the cheque was a reasonable period for the liability to subsist. Any liability subsisting beyond three years should be treated as business income. The Tribunal directed the Assessing Officer to exclude certain amounts from the unclaimed refunds barred by limitation.

5. Verification of Income from Industrial Area Activities:
The Tribunal restored the issue of income from industrial area activities to the Assessing Officer for verification. The Tribunal directed the Assessing Officer to verify the correctness of the claim that the income for the impugned year had been reflected in the assessment year 2014-15 and included in the taxable income of the assessee, with due taxes paid thereon.

Conclusion:
The Tribunal's findings were upheld by the High Court, which found no merit in the revenue's appeals. The High Court noted that the Tribunal's findings were based on detailed examination and were neither illegal nor perverse. Consequently, all the appeals were dismissed, affirming the Tribunal's decisions on all issues involved.