2016 (12) TMI 1549 - AT - Income Tax

Income from sale of shares - lower authorities treating the short term capital gain and long term gain arising out of sale of shares as business income - taxing the same at normal rate of income-tax, instead of special rates prescribed u/s 111A / 112 of the Act and also denied benefit of exemption u/s 10(38) - Held that - It is an undisputed fact that in AY 1999-2000 the assessee included its shares as part of investment and since then the assessee has been consistent in approach by showing the same under the head investment and claiming the income from sale of shares as assessable under the head Income from capital gains . But the AO breached the consistency approach in the year before us despite the fact that in all earlier and subsequent years the stand of the assessee has been accepted. This approach is not permissible under the law. On the other hand, the assessee has offered the impugned income as assessable under the head capital gains in accordance with law and facts and in line with its consistent approach. Thus, after taking into account all the facts and circumstances of the case, and especially in view of the circulars of the Board, we do not find legality in the actions of the lower authorities in assessing the impugned income under the head business . Thus, the impugned income arising from sale of shares is directed to be assessed under the head capital gains , i.e. short term capital gain or long term capital gain, as the case may be. The AO is also directed to provide all consequential benefits as have been mentioned in grounds of appeal, after verifying requisite facts, viz. granting of exemption u/s 10(38) wherever applicable, charging of tax on special rate prescribed u/s 111A/112 and setting off of brought forward short term capital losses of AY 2009-10, in accordance with law and facts of this case. - Decided in favour of assessee.

Summary

Issues Involved:
1. Classification of gains from sale of shares as business income versus capital gains.
2. Levy of interest under sections 234B and 234C of the Income Tax Act, 1961.
3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Classification of Gains from Sale of Shares:
The primary issue in this case was whether the gains from the sale of shares should be classified as business income or capital gains. The assessee argued that the shares were held as investments, and therefore, the resultant gains should be treated as capital gains. The AO, however, treated these gains as business income, citing the frequent and short-term nature of the transactions. The CIT(A) upheld the AO's decision.

The Tribunal noted that the assessee had consistently shown these shares as investments in the balance sheet and had been assessed under the head 'capital gains' in previous years. The Tribunal referred to various judgments and CBDT circulars, emphasizing the principle of consistency and the possibility of having two portfolios—one for investment and one for business. The Tribunal concluded that the AO and CIT(A) erred in treating the gains as business income and directed that the gains be assessed under the head 'capital gains', allowing the assessee all consequential benefits, such as exemption under section 10(38), special tax rates under sections 111A/112, and set-off of brought forward short-term capital losses.

2. Levy of Interest under Sections 234B and 234C:
The assessee contested the levy of interest under sections 234B and 234C, arguing that the CIT(A) did not dispose of this ground. The Tribunal did not provide a detailed analysis on this issue, as the primary focus was on the classification of gains. However, it implied that the correct classification of gains would impact the computation of interest.

3. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee also disputed the initiation of penalty proceedings under section 271(1)(c). Similar to the issue of interest, the Tribunal did not delve deeply into this matter. The resolution of the primary issue regarding the classification of gains would inherently affect the penalty proceedings.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing that the gains from the sale of shares be assessed under the head 'capital gains'. This decision was based on the principle of consistency and the assessee's historical treatment of shares as investments. The AO was instructed to provide all consequential benefits, including exemptions and special tax rates, and to verify the facts for the set-off of brought forward short-term capital losses. The issues of interest and penalty were implicitly addressed through the resolution of the primary issue.