2018 (11) TMI 1339 - HC - Income Tax

Profit on sale of shares - capital gain or business income - whether the transactions in question were in the nature of business transactions or holding of shares by the assessee was purely in the nature of investment? - Held that - The Revenue cannot object to legitimate tax planning. Legitimately, if the assessee had claimed set off of loss against the gain in sale of shares, the Revenue cannot frown upon the same simply by pointing out that in the process, the assessee reduced his tax liability. The Tribunal has examined both the transactions extensively. With respect to the first transaction of sale of shares in City Parks Pvt ltd., the Tribunal noted that the shares were gifted by his father who himself had held the shares as investment. The company was unlisted Pvt Ltd Company. There was no material on record to suggest that the assessee had entered into the business venture in the process. Likewise in the second transaction also, the Tribunal noted that the Revenue has, in the preceding and succeeding assessment years, accepted, the sale of shares by the assessee as investment and the proceed was treated as capital gain. With respect to HCL Technologies, when the assessee sold the bonus shares in the later year, the Revenue treated the gain as capital gain. We are broadly in agreement with the view of the Tribunal. There is no material to hold that the assessee was in the business of buying and selling shares. No substantial question of law.

Summary

Issues:
1. Classification of profit on sale of shares as capital gain or business income.
2. Determination of holding period for long-term capital gain.
3. Assessment of involvement in share transactions as a trader or investor.
4. Allegation of motive to evade tax through bonus stripping.

Issue 1 - Classification of profit on sale of shares:
The High Court addressed whether the profit on the sale of shares of a company should be considered as capital gain or business income. The Tribunal noted that the shares were originally received as a gift from the assessee's father, who held them as an investment. The company was unlisted, and there was no evidence of active trading by the assessee. The Court agreed with the Tribunal's findings, emphasizing that no material suggested the assessee was engaged in a business venture regarding these shares.

Issue 2 - Determination of holding period for long-term capital gain:
Regarding the holding period for long-term capital gain, the Court examined a transaction involving the purchase and sale of shares of another company. The Tribunal considered legislative changes and relevant case law, concluding that the transaction was not affected by the applicable provision. The Court upheld the Tribunal's decision, emphasizing that the Revenue accepted similar transactions as capital gains in previous and subsequent assessment years.

Issue 3 - Assessment of involvement in share transactions:
The Court also analyzed whether the assessee's involvement in share transactions should be classified as that of a trader or an investor. The Tribunal rejected the Revenue's contention that the transactions were business ventures, highlighting that the nature of such transactions is a mixed question of law and facts. The Court agreed with the Tribunal, noting the absence of evidence showing the assessee had a structured trading business or infrastructure for share trading.

Issue 4 - Allegation of motive to evade tax:
Lastly, the Court addressed the Revenue's allegation that the transactions were conducted to evade tax through bonus stripping. The Tribunal found no evidence to support this claim, noting the Revenue's acceptance of similar transactions as capital gains in subsequent years. The Court dismissed the Income Tax Appeal, emphasizing that legitimate tax planning, including claiming set off of losses against gains, is permissible, and the Revenue cannot object to it solely based on tax reduction.

In conclusion, the High Court dismissed the Income Tax Appeal, affirming the Tribunal's findings that the transactions were not business ventures and the assessee's actions were in line with legitimate tax planning practices.