2021 (2) TMI 539 - AT - Income Tax

Correct head of income - Income from sale of shares - income from capital gains or business income - HELD THAT - Transaction of purchase and sale of share is in respect of one script only. Purchases are made in instalments and thereafter they have been sold in instalments. Hence, it is not a case of repetitive purchase and sales. Shares purchased in earlier years have been held as investment . Own funds are used for purchase of shares and not borrowed funds. The main object of the assessee is investment and the objective of trading is only with reference of commodity.Assessee has declared short term capital gains and paid taxes accordingly, even though it has brought forward business loss. In light of the aforesaid reasoning we hold that profits on sale of shares in given facts and circumstances of the case, ought to be taxed under the head 'capital gains . Appeal filed by the assessee is allowed.

Issues Involved:
1. Classification of income from the sale of shares as "income from capital gains" or "business income".
2. Entitlement to set off business loss of the previous assessment year against the income arising from the sale of shares.

Issue-wise Detailed Analysis:

1. Classification of Income from Sale of Shares:

The primary issue was whether the income from the sale of shares should be assessed as "income from capital gains" or "business income". The assessee, a company engaged in trading and consultancy, declared the income from the sale of shares as short-term capital gains. However, the Assessing Officer (A.O.) reclassified this income as "business income" based on the CBDT Circular No.4/2007, which states that the classification of shares in the books of accounts as 'investment' or 'stock in trade' cannot solely determine the nature of the income. The A.O. concluded that the assessee's transactions were in the nature of trading.

The CIT(A) upheld the A.O.'s decision, emphasizing that the assessee did not specify in its audit report or balance sheet notes whether the purchase and sale of shares were for investment purposes. The CIT(A) noted that the main objective of the assessee, as per its Memorandum of Association, was to engage in share trading activities, thus supporting the A.O.'s classification of the income as "business income".

Upon appeal, the Tribunal analyzed the assessee's intention and treatment of shares in its books. The Tribunal noted that the assessee classified its investments in shares as "investments" in the balance sheet and utilized surplus funds for purchasing shares without borrowing. The Tribunal referred to several judicial precedents, including the Hon'ble Apex Court's decision in CIT v. H.Holck Larsen, which held that transactions intended to nurse investments and avoid capital erosion should be treated as capital receipts. The Tribunal also considered the broad principles outlined in various ITAT decisions, which emphasize the intention behind the purchase, the frequency of transactions, and the treatment in the books of accounts.

The Tribunal concluded that the assessee's transactions were not repetitive, involved only one script, and were funded by surplus funds, indicating an intention to invest rather than trade. Therefore, the Tribunal held that the profits from the sale of shares should be taxed under the head "capital gains".

2. Set Off of Business Loss:

The additional ground raised by the assessee was whether the CIT(A) erred in not allowing the set-off of business loss from the previous year against the income from the sale of shares if assessed as "business income". The assessee contended that it had carried forward business losses from the previous year, which should be set off against the current year's income if classified as "business income".

The Tribunal noted that neither the A.O. nor the CIT(A) addressed this specific plea. The Tribunal found that the assessee had indeed carried forward business losses from the assessment year 2009-2010, as evidenced by the income tax returns. Given the Tribunal's decision to classify the income from the sale of shares as "capital gains", the issue of setting off business loss became moot. However, the Tribunal acknowledged the assessee's right to seek such a set-off if the income were to be classified as "business income".

Conclusion:

The Tribunal allowed the appeal, holding that the income from the sale of shares should be taxed under the head "capital gains". Consequently, the issue of setting off business loss was not adjudicated, as it was contingent on the classification of the income as "business income".

Order Pronounced:
The appeal filed by the assessee was allowed, and the order was pronounced on February 8, 2021.

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