2021 (10) TMI 105 - AT - Income Tax

Characterisation of profit/surplus - Gain on sale of shares - STCG or business income - shares converted as the stock-in-trade - HELD THAT - If the income/surplus arising from the sale of shares (forming part of a lot purchased by the assessee) had undisputedly been subjected to tax as STCG, then, by way of an implication it can safely be inferred that the said entire lot of shares was purchased by the assessee with an intention to hold the same as a capital asset. Accordingly, backed by the aforesaid fact the income/surplus arising on the sale of the balance shares (forming part of the aforesaid lot) shall have to be given a similar treatment. However, in case the assessee is found to have converted or treated such shares as the stock-in-trade of the business carried on by him, then, the income/surplus arising on the sale of such shares shall be assessed in the manner provided in the provisions of sub-section (2) of Sec. 45 of the Act. Accordingly, in terms of our aforesaid observations, we herein modify the view taken by the CIT(A) and direct the A.O to give effect to our aforesaid observations and re-determine the re-characterization of the income/surplus arising on the sale of shares under consideration. Effect of CBDT Circular No. 6/2016, dated 29.02.2016 - where an assessee irrespective of the period of holding opts to treat the listed shares and securities as stock-in-trade, then, the income arising from the transfer of such shares/securities would be treated as his business income. Also, the same further contemplate that in respect of shares and securities held by an assessee for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as capital gain, the same shall not be put to dispute by the A.O. In fact, the CBDT in its aforesaid circular had observed that in all other cases, the nature of transaction (i.e whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the circulars issued by the CBDT., viz. Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007, dated June 15, 2007. We, thus, are of the considered view that the aforesaid Circular No. 6/2016, dated 29.02.2016 relied upon by the assessee would be of no avail in the backdrop of the facts involved in his case before us.Appeal filed by the assessee is partly allowed for statistical purposes

Issues Involved:
1. Classification of income from the purchase and sale of shares as Business Income or Short Term Capital Gain (STCG).
2. Treatment of an amount of ?24,94,457/- as Business Income instead of STCG.
3. Consideration of previous assessment orders.
4. Adherence to the directions of the CBDT circular dated 29.02.2016.
5. Allegations of the order being against the principles of natural justice.
6. Allegations of the order being based on surmises and conjectures.

Detailed Analysis:

1. Classification of Income from Shares:
The primary issue was whether the income from the purchase and sale of shares within 5 days should be treated as Business Income or STCG. The CIT(A) had bifurcated the income into Business Income for shares held for not more than 5 days and STCG for shares held for more than 5 days. The Tribunal found this approach to be arbitrary and lacking a logical basis, emphasizing that the period of holding is a material factor but not the sole determinant for classifying income. The Tribunal highlighted that the intention at the time of purchase is crucial, as per the Supreme Court's judgment in G. Venkataswami Naidu & Co. vs. CIT.

2. Treatment of ?24,94,457/- as Business Income:
The CIT(A) had treated ?24,94,457/- as Business Income based on the holding period of not more than 5 days. The Tribunal observed that this resulted in incongruous outcomes where shares from a single lot were taxed differently. The Tribunal directed the A.O to re-characterize the income by considering the intention at the time of purchase and to follow the provisions of Sec. 45(2) of the Act if shares were converted to stock-in-trade.

3. Consideration of Previous Assessment Orders:
The assessee argued that the CIT(A) overlooked previous assessment orders for AY 2006-07. The Tribunal did not specifically address this argument, implying that the current assessment should be based on the merits of the case and the directions provided by the Tribunal in the first round of appeal.

4. Adherence to CBDT Circular Dated 29.02.2016:
The assessee relied on CBDT Circular No. 6/2016, dated 29.02.2016, which allows taxpayers to treat listed shares as stock-in-trade or capital assets based on their intention. The Tribunal found this reliance misplaced, clarifying that the circular does not preclude the need to examine the intention at the time of purchase, especially for shares held for less than 12 months.

5. Allegations Against Principles of Natural Justice:
The assessee claimed that the order was against the principles of natural justice. The Tribunal did not find merit in this claim, as the CIT(A) had provided a reasonable opportunity for the assessee to present his case during the set-aside proceedings.

6. Allegations of Order Based on Surmises and Conjectures:
The assessee alleged that the CIT(A)'s order was based on surmises and conjectures. The Tribunal agreed to an extent, noting that the bifurcation based solely on the holding period was arbitrary. The Tribunal directed a more nuanced approach, considering the intention at the time of purchase and the provisions of Sec. 45(2) if applicable.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, directing the A.O to re-determine the classification of income from the sale of shares based on the intention at the time of purchase and the relevant legal provisions. The Tribunal emphasized that the period of holding should not be the sole criterion and that the entire lot of shares should be treated consistently based on the initial intention of the assessee. The reliance on the CBDT circular was deemed misplaced, and the Tribunal provided guidance for a more equitable assessment.

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