2015 (8) TMI 220 - AT - Income Tax

Gain from the sale of shares - capital gain OR business income. - assessee trust contends that the gain was capital gain exempt from tax u/s 10(38) - Held that - As held by CIT(A) and not refuted by the Department, that the Trust is expressly prohibited from undertaking any business activity. Moreover, the avowed intention of the Trust has never been disproved and it is only that the alleged intention of carrying on business has been superimposed thereon. This has rightly been rectified by the ld. CIT(A) by making detailed observations regarding the observation of the A.O., that the intention of the Settlors themselves was to carry on business activity, being extraneous, a valid Trust having come into existence and such Trust having not been found to be ingenuine; that the acquisition of shares was not a voluntary purchase made by the assessee Trust, but they were contributed to its corpus at the time of the very inception of the Trust; that the assessee s claim holding pattern by way of diversification of asset was also not repelled by the A.O.; that the fact that a Portfolio Manager was appointed is synchronous with the intent and objective of the creation of the Trust; and that holding the shares of just one corporate entity not being desirable was a decision as per the prudence of the Trust. We, for the above discussion, are ad idem with the ld. CIT(A), in arriving at the conclusion that from the sale of shares undertaken by the assessee during the year under consideration, no business activity stands made out. Therefore, we uphold the action of the ld. CIT(A) in directing the A.O. to treat the gain in question as a capital gain. However, this gain was claimed by the assessee as exempt u/s 10(38) of the Act. As per this provision, any income arising from the transfer of a long term capital asset, being an equity share in a company, shall not be included while computing the total income. This has not been taken into consideration by the ld. CIT(A), though this provision is clearly applicable to the facts of the case. Accordingly, the grievance of the assessee is found to be justified and is accepted as such. We hold that the profit on the transfer of shares is assessable as capital gain exempt u/s 10(38) of the Act. - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Classification of gain from the sale of shares as either business income or capital gain.
3. Eligibility for exemption under Section 10(38) of the Income Tax Act.

Detailed Analysis:

1. Condonation of Delay in Filing the Appeal:
The assessee's appeal was delayed by 18 days. The delay was attributed to the belief that the exemption under Section 10(38) had been granted by the CIT(A), and thus, no appeal was initially filed. The delay occurred when the assessee received the order from the A.O., which demanded tax on the capital gain. The Tribunal found the delay to be bona fide, as the assessee had no reason to appeal earlier. The delay was condoned, as no malafide intention was attributed to the assessee.

2. Classification of Gain from Sale of Shares:
The assessee, a private Trust, reported a profit of Rs. 14.69 crores from the sale of shares, claiming it as long-term capital gain exempt under Section 10(38). The A.O. treated this gain as business income, citing the short duration between the acquisition and sale of shares (seven days). The CIT(A) directed the A.O. to treat the gain as capital gain, not business income. The Tribunal upheld this direction, noting that the Trust's primary objective was to ensure effective succession planning and intergenerational transfer of wealth, not to conduct business. The shares were contributed to the Trust's corpus by the settlor and sold to diversify investments, not as a business activity. The Tribunal emphasized that the Trust's activities aligned with its objectives and were not indicative of business operations.

3. Eligibility for Exemption under Section 10(38):
The Tribunal noted that the gain from the sale of shares, treated as capital gain, was claimed as exempt under Section 10(38), which exempts long-term capital gains from equity shares. The CIT(A) did not consider this exemption. The Tribunal held that the provision was applicable, as the shares were held as investments and not stock-in-trade. Thus, the profit from the sale of shares was assessable as capital gain exempt under Section 10(38).

Conclusion:
The Tribunal dismissed the Department's appeal and allowed the assessee's appeal, concluding that the gain from the sale of shares was capital gain exempt under Section 10(38) and not business income. The delay in filing the appeal was condoned, and the Trust's activities were found to be in line with its objectives, not constituting business operations. The order was pronounced in the open court on 31st July 2015.