2022 (7) TMI 1255 - AT - Income Tax

Gain on sale of shares - business income or capital gain - HELD THAT - We note that the shares are always valued at cost and assessee never took any benefit of valuation loss for invested shares, even if the market value had fallen below the cost. We note that this accounting practice has been consistently followed by the assessee for several years and is a deciding factor in such matters as held in the case of CIT VS. Gopal Purohit 2010 (1) TMI 7 - BOMBAY HIGH COURT - Considering the aforesaid facts as well as taking into consideration the CBDT Circular No.04/2007 dated 15.06.2007, we find that the assessee s intention of buying and selling of shares was that of an investor and therefore, the action of the AO to treat the consideration from sale of shares as business income has been rightly not agreed upon by the CIT(A). We find that there was no new facts before the AO to upset the earlier actions taken by the department to treat the assessee as an investor. So on the principle of consistency also the assessee has made out a case in her favour. Therefore, we are inclined to uphold the order of the Ld. CIT(A) and dismiss the ground of appeal raised by the revenue. Long Term Capital Loss (LTCL) from the off-market share transactions - whether the LTCL claim of the assessee on sale of seven scrips in the off-market transactions can be allowed to be set off and carried forwarded as per the provisions of the Act? - allegation of the AO was that the De-mat accounts of certain buyers of these seven scrips were handled by the share broking company of which the assessee was one of the Director - HELD THAT - DR could not point out how this allegation of AO has any material bearing in this case. Moreover, it was brought to our notice that the AO in the assessment year for A.Y.2014-15 has accepted the same transaction in the scrutiny assessment u/s 143(2) (except in-respect of three scrips, where the reasons given by AO was that same were executed at a price more than the prevailing market price on the relevant date). We note that the AO has accepted the other transaction carried out by the assessee in the off-market transaction where the price was as per the prevalent market prices. Thus we note that the AO had no objection to off-market transactions per-se for A.Y.2014-15, when the same was transacted off-market. Coming back to the relevant AY 2013-14, it was brought to our notice that all the transactions (except) the scrip of Baroda Rayon where shares were not traded for long and hence market price was not available. Considering the aforesaid facts as well as the case laws in similar case wherein the Tribunal has accepted the off-market transaction of an assessee who had also made the claim of set off of or carried forward, as the case may be was allowed by the Tribunal. - Decided against revenue.

Summary

Issues Involved:

1. Treatment of Short Term Capital Gain (STCG) as business income.
2. Deletion of Long Term Capital Loss (LTCL) claimed from off-market share transactions.

Issue-wise Detailed Analysis:

1. Treatment of Short Term Capital Gain (STCG) as Business Income:

The core issue revolves around whether the STCG of Rs.12,18,961/- from the sale of shares should be treated as business income or as capital gains. The assessee, a high net worth individual with a net worth of Rs.135.20 crores and investments in shares amounting to Rs.107.78 crores, claimed STCG on the sale of shares. The Assessing Officer (AO) treated this STCG as business income, citing high volume, frequency, and continuity of transactions. However, the Commissioner of Income Tax (Appeals) [CIT(A)] reversed this decision, treating the assessee as an investor.

The Tribunal noted that the assessee's substantial investments in shares and the historical acceptance of the assessee's status as an investor by the department should not have been disturbed. The Tribunal emphasized the principle of consistency, referencing past assessment years where the assessee's status as an investor was accepted. The Tribunal upheld the CIT(A)'s decision, noting that the AO's yardstick was erroneous and that the assessee's intention in buying and selling shares was that of an investor. The Tribunal dismissed the revenue's appeal on this ground.

2. Deletion of Long Term Capital Loss (LTCL) Claimed from Off-Market Share Transactions:

The second issue pertains to the LTCL of Rs.4.12 crores claimed by the assessee from off-market share transactions. The AO disallowed this loss, asserting that the shares were sold in off-market transactions to parties whose demat accounts were managed by a share-broking company where the assessee was a director. The AO deemed these transactions as bogus, arguing that if the shares were sold through a stock exchange, the LTCL would not have been carried forward.

The Tribunal, however, noted that off-market transactions are recognized and permitted, referencing the Bombay High Court's decision in CIT Vs. Smt. Jamnadevi Agarwal, which validated off-market transactions if the prices were in line with market rates. The Tribunal found no prohibition against off-market sales and highlighted that the AO had accepted similar transactions in subsequent assessment years. The Tribunal concluded that the AO's objections were unfounded and upheld the CIT(A)'s decision to allow the LTCL claim. The Tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on both issues. The assessee's STCG was rightly treated as capital gains, and the LTCL from off-market transactions was correctly allowed. The ruling emphasized the principles of consistency and the legitimacy of off-market transactions within the legal framework.