2024 (6) TMI 424 - AT - Income Tax

Correct head of income - Nature of gain arising on sale of shares allotted to the assessee in IPO - whether it is STCG or business income? - principle of consistency - contention of the Revenue is that the intention of the assessee was to earn profit and not long-term appreciation or earning of dividend - HELD THAT - As a corollary to the guideline where the assessee has treated the holding of shares as investment and not stock-in-trade, the income derived from transfer of such shares has to be considered as capital gain, either long-term or short-term depending upon the period of holding. CBDT has also directed in the said Circular that for listed shares and securities held for a period of more than 12 months, the stand once taken by the assessee in a particular year shall remain applicable in subsequent assessment years also. Therefore, the principle of consistency was acknowledged by the CBDT in this Circular. Further this Circular was issued with a view to reduce litigation and uncertainty. Therefore, the principle of consistency has to be followed in the case of shares held for less than 12 months as well. The assessee had shown the sale of shares held for less than 12 months as STCG in the past year which was accepted by the Department in the scrutiny assessment. As the facts were identical, the Revenue was not correct in changing its stand without any valid reason to treat the STCG disclosed by the assessee as business income in the current year. Further, no reason has been given by the Department for changing its stand for the treatment of the gain arising from sale of shares. The principle of consistency has be applied in respect of listed shares and securities held for a period of less than 12 months as well so as to reduce litigation and uncertainty. Hon ble Gujarat High court has held in the case of Deepaben Amitbhai Shah ( 2016 (8) TMI 1003 - GUJARAT HIGH COURT that when the assessee had made investment in shares as investor, income arising to assessee on sale of those shares would be assessable as capital gains and not as business profit. It was also held in the case of Dhruv H. Patel ( 2014 (12) TMI 1237 - ITAT MUMBAI that the intention of the assessee to apply in shares to IPO was to get higher allotment of shares and there was no repetitive purchase and sale of the same script. Under the circumstances merely because assessee had used borrowed capital to apply for such shares, it cannot be a ground to treat the gain arising on sale of shares allotted through IPO as business income. Thus we are of the considered opinion that the Revenue was not correct in treating the gain arising on sale of shares allotted through IPO as business income. Following the principle of consistency, the same should be treated as STCG. Appeal filed by the assessee is allowed.

Summary

Issues:
Nature of gain on sale of shares - Short Term Capital Gain (STCG) or business income

The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) for the Assessment Year 2016-17, where the Short-Term Capital Gain (STCG) of Rs. 1,37,46,867/- in respect of shares purchased through IPO was treated as business income by the Assessing Officer (AO). The assessee contended that the shares were held as 'Investment' and not as 'stock-in-trade', and all transactions were delivery-based. The assessee had consistently shown income derived from the sale of shares as STCG in previous years. The Revenue argued that the intention of the assessee was to maximize profit through an adventure in the nature of trade. The Income Tax Appellate Tribunal (ITAT) considered the facts and materials on record, noting that the shares were disclosed as 'investment' in the balance sheet and were sold within a short period after allotment. The ITAT observed that the Department had accepted STCG in the preceding year for similar transactions. The ITAT referred to a CBDT Circular emphasizing the principle of consistency in treating gains from listed shares held for less than 12 months. Relying on legal precedents, the ITAT held that the gain on the sale of shares allotted through IPO should be treated as STCG, following the principle of consistency. The appeal filed by the assessee was allowed, and the order was pronounced on 07/06/2024.

In this case, the primary issue was whether the gain arising from the sale of shares allotted through an IPO should be treated as Short Term Capital Gain (STCG) or business income. The ITAT analyzed the facts and contentions presented by both parties. The assessee argued that the shares were held as investments and not for trading purposes, supported by the consistent disclosure of income as STCG in previous years. The Revenue contended that the intention of the assessee was profit maximization through a trade-like activity. The ITAT considered the CBDT Circular, legal precedents, and the principle of consistency in determining the nature of the gain. Ultimately, the ITAT held that the gain should be treated as STCG, aligning with past practices and legal interpretations. This decision highlights the importance of consistency and intention in determining the tax treatment of gains from share transactions.

The ITAT emphasized the significance of the principle of consistency in tax assessments, especially regarding the treatment of gains from share transactions. By referring to legal precedents and the CBDT Circular, the ITAT established that the nature of the gain should be determined based on the intention of the assessee and past practices. The decision underscores the need for tax authorities to maintain consistency in their approach to similar transactions to reduce litigation and uncertainty. The judgment provides clarity on the distinction between Short Term Capital Gain and business income in the context of share transactions, ensuring fair and consistent application of tax laws.