2022 (2) TMI 437 - HC - Income Tax

Correct head of income - gain on purchase and sale of shares and security had to be assessed under the head of capital gain or income from business - Tribunal treating the income from trading in shares as capital gains and not business income - proceedings initiated under Section 263 were dropped - HELD THAT - We note that the contention of the revenue that the shares and mutual funds that were sold during the year which resulted in the income has been shown as stock in trade and not an investment is a factually incorrect submission.On going through the order passed by the Tribunal therein we find that the Tribunal has recorded that it has been held as an investment and not as a stock in trade. Similar finding has also been rendered by the CIT. Therefore, the said contention cannot be accepted. Volume of transaction - Volume of transaction cannot have any impact to consider as to whether the transaction would give rise to short-term capital gain or not. This aspect of the matter was rightly dealt with by the Tribunal by taking note of the fact that similar transactions were accepted by the department for the previous year and the subsequent assessment year as giving rise to capital gain and not as business income. In fact, for the subsequent investment year 2007-08, proceedings initiated under Section 263 were dropped by the CIT on being satisfied with the nature of the transaction. Hence, if the same volume of transactions were not the subject matter of any review by the authorities, a solitary stand cannot be taken for the assessment year under consideration alone. In any event, the volume of transaction cannot have any impact to assess as to whether it would give rise to short-term capital gain especially when the fact is not in dispute that the assessee is engaged in the business of making investment in shares, mutual funds and debentures etc. for several years. Therefore, the second contention raised by the revenue also is not tenable Plea of res judicata - Tribunal rightly noted the law that rule of res judicata is not applicable to income tax proceedings but the principle of consistency will definitely apply. In the preceding paragraphs we have set out the facts to show as to how the department has examined the returns filed by the assessee for the previous assessment year and the subsequent year. Therefore, we find that there cannot be different yardstick for the assessment year under consideration when facts and circumstances are identical. - Decided against revenue.

Summary

Issues:
1. Treatment of income from trading in shares as capital gains or business income.
2. Principle of consistency in assessment across different years.
3. Applicability of circular no. 6/16 dated 29/2/2016 to assessment year 2006-07.

Analysis:
1. The first issue revolves around determining whether income from trading in shares should be treated as capital gains or business income. The appellant, the revenue, contested that the shares were treated as stock in trade and not as an investment. However, the Tribunal and CIT had previously held the shares as investments. The volume of transactions and the intention of the assessee were also considered. The Tribunal concluded that the volume of transactions should not impact the classification of income, especially when the assessee was engaged in the business of investing in shares for several years. The principle of consistency was highlighted, emphasizing that similar transactions in previous and subsequent years were accepted as capital gains, not business income.

2. The second issue addresses the principle of consistency in assessment across different years. The appellant argued that an under assessment in one year should not dictate the assessment in subsequent years. However, the Tribunal rejected this argument, stating that the rule of res judicata does not apply to income tax proceedings, but consistency in treatment does. The Tribunal referred to previous and subsequent assessments where similar transactions were accepted as capital gains, supporting the assessee's claim for consistency.

3. The final issue concerns the applicability of circular no. 6/16 dated 29/2/2016 to the assessment year 2006-07. The respondent argued that this circular, issued in 2016, could not be used to challenge the assessment order for 2006-07. The Tribunal agreed, stating that the circular's issuance post-dated the assessment year in question, making it irrelevant for assessing the correctness of the order. The Tribunal also cited a relevant legal precedent to support this conclusion.

In conclusion, the High Court of Calcutta dismissed the appeal, upholding the Tribunal's decision. The substantial questions of law were answered against the revenue, emphasizing the importance of consistency in assessing income from trading in shares and the inapplicability of a circular issued after the assessment year.