2021 (2) TMI 231 - AT - Income Tax

Treatment of gain arising on sale of shares - Business income or capital gain - period of holding of shares - HELD THAT - It is not in dispute that the shares of M/s. Lee Edges were purchased by the assessee in the Financial Year 2003-04 and those of M/s. Shaw Wallace Breveries Ltd., were purchased in the Financial Year 2001-02 were unlisted shares. These shares were sold in Financial Year 2004-05. These shares were held for more than 12 months in both the cases. The admitted position with regard to treatment in the books of accounts is that the shares have been treated as investment and not as stock-in-trade. In the light of the CBDT s Circulars referred to above which are in modification of Circular No.4/2007 dated 15.06.2007, we are of the view that the CIT(A) was justified in coming to the conclusion that the gain on sale of shares has to be regarded as LTCG. As already observed, the only reason given by the AO for coming to the conclusion that income on sale of shares has to be regarded as business income is due to the fact that the cost of acquisition of the shares was less and the sale proceeds of those shares were very high and therefore the gain in question should be regarded as income from business. This approach of the AO is contrary to the tests laid down in the several Circulars in particular Circular No.4/2007. In the light of the subsequent Circulars pointed out above, we are of the view that the income on sale of shares has to be regarded as LTCG. We therefore uphold the order of CIT(A). In view of the above conclusion in the appeal of the Revenue, we are of the view that no adjudication is necessary in so far as the C.O. filed by the assessee is concerned. Accordingly, the same is dismissed.

Summary

Issues Involved:
1. Validity of the assessment order passed in the name of a non-existent entity due to merger.
2. Classification of income from the sale of shares as Long Term Capital Gain (LTCG) or Business Income.
3. Validity of the initiation of reassessment proceedings under section 148 of the Income Tax Act.

Detailed Analysis:

1. Validity of the Assessment Order Passed in the Name of a Non-Existent Entity:
The assessee argued that due to the merger of Shaw-Wallace Financial Services Ltd. (SWFSL) with Shaw Wallace Breweries Ltd. (SWBL) effective from 1st April 2005, SWFSL ceased to exist as a separate legal entity. Consequently, any assessment framed in the name of SWFSL would be invalid. The Assessing Officer (AO) passed an assessment order under section 144 of the Income Tax Act on 31.12.2007, despite the merger. This order was later sought to be revised under section 263 but was dropped because SWFSL no longer existed post-amalgamation.

2. Classification of Income from the Sale of Shares:
The AO classified the income from the sale of shares as business income instead of LTCG, arguing that the shares were sold with a commercial profit objective. The assessee contended that the shares were held as investments, not stock-in-trade, and pointed to the financial statements and the CBDT Circular No.4/2007, which provided tests to distinguish between business income and capital gains. The CIT(A) agreed with the assessee, noting that the shares were held for a long period and were not traded frequently, thereby indicating that the transactions were investments rather than business activities. The CIT(A) directed the AO to treat the income as LTCG.

3. Validity of the Initiation of Reassessment Proceedings:
The AO issued a notice under section 148 to SWBL, the successor of SWFSL, to reassess the income, arguing that the LTCG should be taxed as business income. The assessee challenged this, stating it was a mere change of opinion without new tangible material. The CIT(A) did not address this issue directly as the assessee succeeded on the merits of the primary issue. The Tribunal upheld the CIT(A)'s decision, noting that the AO's approach was contrary to the established tests and guidelines provided in various CBDT circulars, including Circular No.6/2016 and Circular No.4/2007. The Tribunal confirmed that the gains from the sale of shares should be treated as LTCG.

Conclusion:
The Tribunal upheld the CIT(A)'s order, confirming that the income from the sale of shares should be classified as LTCG and not business income. The reassessment proceedings under section 148 were deemed unnecessary for adjudication due to the resolution of the primary issue. Both the appeal by the Revenue and the cross-objection by the assessee were dismissed.