2017 (6) TMI 351 - HC - Income Tax

Addition u/s 68 - assessee had sold certain shares, the very purchasers were found to be bogus - Held that - As facts recorded by the Tribunal would suggest, the shares were purchased by the assessee during the period relevant to the Assessment Year 2005-2006. The return for the said year was scrutinized by the Revenue. The Assessing Officer did not disturb the investment. It would therefore later on not be open to the Assessing Officer to make addition with the aid of Section 68 of the Act when such shares were sold on the premise that the purchasers themselves were bogus. - Decided in favour of assessee Treatment to the income earned by the assessee on sale of shares - capital gain or business income - ITAT holding the share transaction as investments - Held that - Clause (b) of circular of the CBDT dated 29.2.2016 thereof in particular provides that in respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. In other words, the Revenue would not pursue this issue if the necessary ingredients are satisfied, only rider being the stand taken by the assessee in a particular year would be followed in the subsequent years also and the assessee would not be allowed to adopt a contrary stand in such subsequent years. Tribunal took the relevant facts into consideration and referred to the circular of the CBDT dated 29.2.2016 and correctly held that the return should be taxed as capital gain, be it long term or short term, as the case may be, and not as a business income.- Decided in favour of assessee

Summary

Issues:
1. Addition made under Section 68 of the Income Tax Act, 1961
2. Treatment of income earned from the sale of shares

Analysis:

Issue 1: Addition made under Section 68 of the Income Tax Act, 1961
The first issue revolves around the addition made by the Assessing Officer under Section 68 of the Income Tax Act, 1961, concerning the sale of shares by the assessee. The Tribunal noted that the shares were purchased during the relevant period for the Assessment Year 2005-2006, and the revenue had accepted the genuineness of these purchases during scrutiny. Therefore, the Tribunal held that no additions could be made under Section 68 when the shares were later sold, even if the purchasers were found to be bogus. The High Court agreed with the Tribunal's decision, stating that it was not open for the Assessing Officer to make such additions based on the earlier accepted genuine purchases.

Issue 2: Treatment of income earned from the sale of shares
The second issue concerns the treatment of income earned by the assessee from the sale of shares. The assessee argued that the shares were investments, resulting in long term capital gains. On the other hand, the Revenue contended that the frequency of transactions and other factors indicated the assessee was engaged in the business of buying and selling shares, warranting taxation as business income. The Tribunal considered relevant facts and a circular issued by the CBDT, which provided guidelines for distinguishing between capital gains and business income from the sale of shares. The circular emphasized reducing litigation and maintaining consistency in approach. The Tribunal accepted the assessee's position, applying the circular's principles, and the High Court upheld this decision, dismissing all related appeals.

In conclusion, the High Court upheld the Tribunal's decisions in both issues, emphasizing the importance of following established guidelines and principles to determine the tax treatment of income from share transactions, thereby reducing litigation and ensuring consistency in tax assessments.