2018 (12) TMI 1332 - HC - Income Tax

Profit arising on the frequent and voluminous transactions initiated with borrowed funds in shares - Long Term Capital Gain OR Business Income - Held that - Circular No. 6 of 2016 dated 29.2.2016 issued by the Central Board of Direct Taxes (CBDT) issued with regard to the issue of taxability of surplus on sale of shares and securities, - whether as capital gain or business income in case of long term holdings of shares and securities i.e in excess of 12 months. It has clarified therein that with a view to reduce litigation and uncertainty in the matter of taxibility, as long term capital gains or business income - the assessee has an option to treat the income from sale of listed shares and securities as income arising under the head Long Term Capital Gains , them the same shall be accepted by the assessing officer. However, the stand once taken by the assessee would not be subject to change and consistently the income on the sale of securities which are held as investment would continue to be taxed as long capital gains or business income as opted by the Assessee. The circular makes no distinction whether the investments made in shares were out of borrowed funds or out of its own funds. Thus, the distinction which has been sought to be made by the Revenue cannot override the above CBDT Circular, which is binding upon it - issue stands concluded in favour of the Respondent by the above CBDT Circular, the above question as proposed does not give rise to any substantial question of law. Hence, not entertained. Treatment to the notional loss incurred on Futures & Option transaction as normal business loss - Held that - This issue stands concluded against the Revenue by the decision of this Court in the case of Commissioner of Income Tax Vs. Bharat R. Ruia (HUF) reported in 2011 (4) TMI 37 - BOMBAY HIGH COURT .

Summary

Issues:
1. Whether profit from transactions with borrowed funds in shares should be treated as Long Term Capital Gain or Business Income.
2. Whether notional loss on Futures & Option transactions should be treated as normal business loss.

Analysis:

Issue 1:
The appeal challenged the order of the Income Tax Appellate Tribunal regarding the classification of income from the sale of shares as either 'Long Term Capital Gain' or 'Business Income' for the Assessment Year 2008-09. The Revenue contended that the profit from frequent and voluminous transactions initiated with borrowed funds in shares should be classified as business income. However, the Tribunal had previously classified the income on the sale of shares as capital gain for the same assessee in earlier years. The Revenue's appeal from the previous order was admitted by the Court. The Circular No. 6 of 2016 issued by the CBDT clarified the taxability of surplus on the sale of shares and securities, allowing the assessee to choose between treating the income as 'Long Term Capital Gains' or 'Business Income.' The circular did not make a distinction based on whether the investments were made from borrowed funds. The Court held that the issue was concluded in favor of the Respondent by the CBDT Circular, and therefore, the question did not give rise to any substantial question of law. Thus, the appeal on this issue was dismissed.

Issue 2:
Regarding the notional loss incurred on Futures & Option transactions, the Revenue's counsel acknowledged that this issue was concluded against the Revenue by a previous decision of the Court. The Court held that this question did not give rise to any substantial question of law and, therefore, was not entertained. Consequently, the appeal was dismissed in its entirety based on the above analysis.

In conclusion, the High Court of Bombay dismissed the appeal under Section 260 A of the Income Tax Act, 1961, challenging the Tribunal's order regarding the classification of income from shares and the treatment of notional loss on Futures & Option transactions.