2022 (10) TMI 47 - HC - Income Tax

Correct head of income - gain on sale and purchase of shares - normal business profit or short term capital gain - whether the tribunal was right in reversing the order passed by the CIT(A) holding that the gain made by the assessee on sell and purchase of shares was business profit and not short term capital gains? - HELD THAT - In Union of India Versus Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT it was pointed out that to decide as to whether the sale of shares amounted to capital gains or business income would require examination of facts - capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced value motivated the investment - a transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale - as pointed out where the purchase of any article or of any capital investment, for instance shares is made without the intention to resell it at a profit, the resale under such changed circumstances would only be realization of capital and would not stamp the transaction with a business character. If the above legal principles are applied to the facts of the case on hand, the only irresistible conclusion is to approve the view of the CIT(A) who had considered all the relevant materials and details which were placed by the assessee. The learned tribunal had failed to note that the assessee had maintained a separate account for investment, which fact was very material to consider the nature of transactions effected by the assessee during the relevant period. Thus, for the above reasons, we are of the considered view that the learned tribunal erred in reversing the order passed by the CIT(A) - substantial questions of law are answered in favour of the assessee.

Issues Involved:
1. Whether the Income Tax Appellate Tribunal erred in law by treating the gain of Rs. 29,28,799/- from the sale and purchase of shares as normal business profit instead of short-term capital gain.

Detailed Analysis:

Issue 1: Classification of Share Transactions as Business Income or Capital Gains

1. Background and Facts:
The appellant, a public limited company, engaged in granting loans and advances, and dealing in shares and mutual funds, filed an appeal under Section 260A of the Income Tax Act, 1961. The appeal challenged the Income Tax Appellate Tribunal's order, which classified gains from certain share transactions as business income rather than short-term capital gains.

2. Assessing Officer's Decision:
For the assessment year 2005-2006, the assessing officer accepted long-term capital gains and some short-term capital gains as investments. However, he treated short-term capital gains of Rs. 29,28,799/- from shares purchased during the previous year as business income, arguing that these transactions were adventures in the nature of trade.

3. Arguments by the Appellant:
The appellant argued that the Tribunal failed to consider that shares held as investments were valued at cost, and those held as stock-in-trade were valued at cost or market value, whichever was lower. The appellant emphasized that shares were purchased using its own funds, not borrowings, and maintained separate accounts for investments and trading. Reliance was placed on CBDT Circular No. 4 of 2007, which clarified that the classification of shares as capital assets or stock-in-trade should consider multiple factors, not just the holding period.

4. Arguments by the Respondent:
The respondent supported the Tribunal's decision, asserting that most shares were bought and sold within the financial year, indicating an intention to earn quick profits. The respondent cited various Supreme Court decisions to argue that these transactions were adventures in the nature of trade.

5. Legal Principles and Precedents:
The court referred to CBDT Circular No. 4 of 2007, which outlined tests for distinguishing between shares held as stock-in-trade and those held as investments. The Circular emphasized that a taxpayer could have both investment and trading portfolios, and the classification should consider the totality of facts and circumstances. The court also discussed relevant Supreme Court decisions, noting that the intention of the assessee and the nature of transactions are crucial in determining whether gains are capital or business income.

6. Court's Analysis:
The court found that the appellant maintained separate accounts for investments and trading, and the short-term capital gains in question constituted only 4.4% of the total investment income. The assessing officer's decision was primarily based on the holding period, which the court deemed insufficient. The court noted that the CIT(A) had correctly appreciated the facts, including the use of own funds for investments, the nature of transactions, and the maintenance of separate accounts.

7. Conclusion:
The court concluded that the Tribunal erred in reversing the CIT(A)'s order. The Tribunal failed to consider all relevant facts and materials, particularly the appellant's maintenance of separate accounts and the use of own funds for investments. The court emphasized that the classification of transactions as capital gains or business income depends on the totality of facts and circumstances and cannot be determined solely by the holding period.

Judgment:
The appeal filed by the assessee was allowed. The substantial question of law was answered in favor of the assessee, and the Tribunal's order was reversed, reinstating the CIT(A)'s decision to treat the gains as short-term capital gains.

← Previous Next →