2021 (2) TMI 274 - AT - Income Tax

Characterization of income - whether gains arising on sale of certain quantity of shares of a company, namely, Pyramid Siamira Theatre Ltd. (PSTL) by the assessee in the relevant assessment order is required to be taxed under the head 'capital gains' as offered by the assessee or is to be treated as 'business income' of the assessee? - HELD THAT - The cumulative effect of all factors need to be weighed and a mere involvement of borrowed funds in some instances would not per se denude the transactions of its character of capital assets. The issue is essentially factual and depends of peculiar facts of each case. In the absence of any straight jacket formula available despite plethora of judgments, the lack of regularity and isolated instances of capital transactions would vindicate the stand of assessee that income/loss from seven transactions have been rightly regarded as capital gains. Assessee has taken delivery of shares before sale. While maintenance of capital and trading transactions as a separate category in books can be insisted upon in practice to ascertain the underlying intentions, the maintenance of separate D-mat account separately is not necessarily in conformity with usage of share trade and thus cannot be insisted upon. We thus find merit in the plea of assessee. Consequent claim of assessee deserves to be allowed on merits.

Issues Involved:
1. Legality of assessment orders under Section 143(3) read with Section 254.
2. Classification of gains from the sale of shares as business income versus capital gains.
3. Validity of proceedings under Section 153A in the absence of incriminating documents.
4. Requirement of approval under Section 153D for the assessment order.

Issue-wise Detailed Analysis:

1. Legality of Assessment Orders under Section 143(3) read with Section 254:
The assessees challenged the assessment orders confirming the treatment of gains on the sale of shares as business income instead of capital gains. The orders were passed under Section 143(3) read with Section 254 of the Income Tax Act, 1961. The Tribunal noted that the AO's cryptic order failed to properly verify the books of accounts and merely assumed the utilization of borrowed funds for investment purposes. The Tribunal emphasized the need for a detailed examination of the facts, including the deployment of borrowed funds and the maintenance of demat accounts.

2. Classification of Gains from Sale of Shares as Business Income versus Capital Gains:
The primary issue was whether the gains from the sale of shares should be taxed as business income or capital gains. The assessees maintained separate portfolios for investment and trading purposes. The Tribunal considered the frequency of transactions, the utilization of borrowed funds, and the intention behind the transactions. It noted that the gains arose from the sale of a limited number of shares with minimal transactions, indicating an investment intention. The Tribunal found merit in the assessees' claim that the gains should be treated as capital gains, aligning with judicial precedents and CBDT guidelines.

3. Validity of Proceedings under Section 153A in the Absence of Incriminating Documents:
The assessees argued that the proceedings under Section 153A were invalid in the absence of any incriminating documents found during the search. The Tribunal admitted this additional ground for adjudication, acknowledging that objections challenging the jurisdiction of the AO are legal in nature. However, since the Tribunal decided in favor of the assessees on the merits of the classification issue, it did not address this additional ground further.

4. Requirement of Approval under Section 153D for the Assessment Order:
The assessees raised an additional ground questioning the validity of the assessment orders due to the absence of approval under Section 153D. The Tribunal admitted this ground, noting that the AO did not reference any approval from the superior authority under Section 153D in the assessment order. The Tribunal acknowledged that the absence of such approval could render the assessment order invalid. However, since the Tribunal ruled in favor of the assessees on the primary issue of classification of income, it did not delve into this additional ground.

Conclusion:
The Tribunal allowed the appeals of the assessees, ruling that the gains from the sale of shares should be treated as capital gains rather than business income. The Tribunal found that the assessees' intention and the nature of transactions supported the classification as capital gains. Consequently, the Tribunal did not address the additional grounds related to the validity of proceedings under Section 153A and the requirement of approval under Section 153D.

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