2023 (2) TMI 313 - AT - Income Tax

Profit earned from the sale of PSTL shares - Treatment of Business Income OR Long-Term Capital Gain - as AO noted that SEBI has found the assessee to have manipulated the share price of PSTL with ulterior motives and has banned the assessee from doing any trading in the stock markets - why the entire long-term capital gains be not taxed as income from business or profession on the basis that the assessee was engaged in the trading in shares of PSTL and made a profit on the transaction without earning any dividend or received a meagre dividend - HELD THAT - In the present case, it is evident from the record that the assessee has been found to be involved in manipulating the prices of shares of PSTL by the SEBI. However, even thereafter the AO merely taxed the gains arising from the share transaction as business income. As is evident from the record, the AO never alleged in the present case that since the gains have arisen from the manipulative transaction of rigging the price by issuing the forged letter of SEBI, therefore, the entire long-term capital gain, claimed as exempt by the assessee from the transaction in shares of PSTL, is not genuine and thus added the same to the total income of the assessee. AO has based its order on the issue of treatment of long-term capital gain as business income . As per the assessee, he has two portfolios, (i) investment portfolio, and (ii) trading portfolio, and the shares of PSTL were always held under the investment portfolio. We find that the said fact is also evident from the relevant extracts of Schedule-4 to the balance sheet and profit and loss account, annexed to the impugned order, wherein PSTL is appearing under the head investment . From the details of the share transaction of PSTL scrip, on page 9 of the assessment order, it is evident that after purchasing the shares on 27/03/2006, the assessee held the shares for a period of more than 2 years before its sale in the year 2008. Further, nothing contrary has been brought on record to controvert the findings of the learned CIT(A) that these shares have been shown as an investment and the same were treated as an investment by the Revenue, in the preceding years. No infirmity in the findings of the learned CIT(A) in treating the profit earned from the sale of PSTL shares as a long-term capital gain. Since the SEBI has computed the unlawful gain of Rs.32,50,882 from the price manipulation of shares of PSTL, CIT(A) restricted the addition to the aforesaid amount by treating the same as income from unlawful activity. Thus, in view of the above, we find no infirmity in the impugned order passed by the learned CIT(A). As a result, all the grounds raised by the Revenue are dismissed.

Summary

Issues:
Challenge to impugned order dated 17/09/2020 under section 250 of the Income Tax Act, 1961 for assessment year 2009-10.

Analysis:
1. The Revenue raised grounds questioning the Commissioner's decision to restrict the addition of a substantial amount as Long-Term Capital Gain exempted under section 10(38) of the Act. The Revenue argued that the income should be treated as Business Income due to alleged price rigging in shares of a specific company.

2. The facts revealed the assessee's engagement in trading securities, declaring a loss but also claiming exemption for long-term capital gain. The Assessing Officer (AO) alleged the assessee manipulated share prices, leading to an investigation by SEBI. The AO concluded the long-term capital gain should be taxed as business income due to various factors, including lack of dividend income and frequent share transactions.

3. The Commissioner, however, considered the nature of the asset use and the assessee's dual portfolios, treating the profit from the share sale as long-term capital gain. The Commissioner restricted the addition to the amount deemed unlawful gain by SEBI, holding it as income from unlawful activity, while allowing the remaining profit as exempt under section 10(38) of the Act.

4. The Tribunal upheld the Commissioner's decision, noting that the AO did not challenge the genuineness of the long-term capital gain but focused on treating it as business income. The Tribunal found no fault in the Commissioner's conclusion that the shares were held as an investment, supported by past treatment and balance sheet details. The Tribunal dismissed the Revenue's appeal, affirming the treatment of profit as long-term capital gain.

5. The Tribunal's decision resulted in the appeal by the Revenue being dismissed, rendering the cross-objection filed by the assessee irrelevant and also dismissed. The judgment upheld the Commissioner's order, emphasizing the distinction between business income and long-term capital gain based on the nature of asset use and portfolio management.