2017 (5) TMI 1113 - HC - Income Tax

Income derived from the sale of equity shares - business income or Long Term Capital Gain - Held that - The equity shares were held by the assessee company since 1988-89 as a long term investment i.e. for a period of more than one year prior to the assessment in question and that the said equity shares were transferable through recognised stock exchange meaning thereby that they were listed shares. The Government of India Ministry of Finance Department of Revenue vide Circular No.6 of 2016 of the Central Board of Direct Taxes 29th February, 2016 referring to the earlier circular No. 4 of 2009 dated 15th June, 2007 has laid down that in order to reduce litigation, the sale of listed shares would be treated as capital gain if they are held by the assessee for a period of more than 12 months immediately preceding the date of these transfers. Thus the said equity shares not only for one year but for more than 16 years and that the shares were listed shares, the income derived from their transfer has rightly been treated as Long Term Capital Gain and not as business income.

Summary

Issues: Classification of income from sale of equity shares as business income or Long Term Capital Gain.

Analysis:
The High Court judgment pertains to an appeal by the Revenue against the Income Tax Tribunal's order concerning the assessment year 2005-06. The central issue in contention is whether the income derived from the sale of equity shares should be classified as business income or Long Term Capital Gain. The Tribunal's findings indicated that the assessee company had held the equity shares since 1988-89 as a long-term investment, exceeding one year prior to the assessment year under consideration, and these shares were transferable through a recognized stock exchange, signifying that they were listed shares.

The judgment references Circular No.6 of 2016 issued by the Government of India Ministry of Finance Department of Revenue, which builds upon Circular No. 4 of 2009. This circular stipulates that to streamline the process and reduce disputes, the sale of listed shares should be treated as capital gain if held by the assessee for over 12 months preceding the transfer. Given the assessee's holding of the equity shares for more than 16 years and their listing, the income derived from the share transfer was appropriately categorized as Long Term Capital Gain rather than business income.

In light of the aforementioned circular and the undisputed fact that the assessee had held the listed equity shares for a significant period, the High Court found no merit in the Revenue's appeal and dismissed it. The judgment underscores the importance of the duration of holding listed shares in determining their tax treatment, aligning with the provisions outlined in the circulars issued by the Central Board of Direct Taxes to streamline such assessments and minimize disputes.