2022 (6) TMI 935 - AT - Income Tax

Correct head of income - income arising from sale of shares - to be taxed under the head capital gains or Income from business - HELD THAT - As the undisputed position that emerges is that the aforesaid transactions have been classified by the assessee in the Books of Accounts as investments. Despite the fact that the main object of the assessee was dealing in shares and securities, it is well settled position that the assessee was entitled to maintain separate portfolios i.e., one for investment and other one as trading assets. See GOPAL PUROHIT 2010 (1) TMI 7 - BOMBAY HIGH COURT . CBDT Circular No. 6/2016 dated 29.02.2016, as relied upon by Ld. CIT(A), clearly provide that in respect of listed shares and securities held for a period of more than 12 months, if the assessee desires to treat the income arising thereof as capital gains, the same not be put to dispute by AO - This stand once taken by the assessee in a particular year shall remain applicable in subsequent years also and the taxpayer shall not be allowed to adopt a different/contrary stand in this regard in subsequent years. Considering the same, the adjudication of Ld. CIT(A), in this regard, could not be faulted with. As in the case of CIT V/s NSS Investments P. Ltd. ( 2005 (4) TMI 45 - MADRAS HIGH COURT support the case of the assessee wherein Hon'ble Court dismissed revenue's appeal and held that where shares were never treated by assessee as stock-in-trade and they were held for earning dividend only then the profit on sale of shares in question was to be treated as capital gains instead of business income. Applicability of Sec. 47(v) with respect to transactions of CUBL - We find that Ld. CIT(A) has already verified the documentary evidences submitted by the assessee and thereafter, reached a conclusion that it was a case of transfer of asset by subsidiary company to holding company and therefore, the transaction would be out of purview of capital gain in terms of Sec. 47(v) - These facts remain uncontroverted before us. Upon perusal of assessee's financial statements, we find that the assessee is 100% subsidiary company of IEPL and this transaction was covered u/s. 47(v). This plea was taken by the assessee before Ld. AO which was not dealt with even in the remand proceedings. Therefore, the impugned order, in this regard, could not be faulted with. We order so.

Summary

Issues Involved:
1. Classification of income from the sale of shares as "Capital Gains" versus "Income from Business".
2. Consideration of transactions with the holding company as non-transfer under Section 47(v) of the IT Act.
3. Admittance of new evidence by CIT(A) in violation of Rule 46A.
4. Determination of the sale price of shares for computational purposes.

Detailed Analysis:

1. Classification of Income from Sale of Shares:
The primary issue was whether the income from the sale of shares should be taxed as "Capital Gains" or "Income from Business". The assessee, engaged in share broking and trading, had treated the gains from the sale of shares of Shriram City Union Finance Ltd. (SCUFL) and City Union Bank Ltd. (CUBL) as capital gains, arguing that the shares were shown as investments in the Balance Sheet. The Assessing Officer (AO) contested this, stating that since the assessee's main object was dealing in shares, the gains should be treated as business income, supported by the Supreme Court's decision in CIT vs Sutlej Cotton Mills Supply Agency Ltd. The CIT(A) and ITAT upheld the assessee's stance, relying on CBDT Circular No. 6/2016, which allows listed shares held for more than 12 months to be treated as capital gains if the assessee desires, provided this classification is consistently followed in subsequent years. The ITAT also noted that the decision in CIT V/s Sutlej Cotton Mills was distinguishable as the assessee in that case had a different intention and circumstances.

2. Transactions with Holding Company:
The second issue was whether the transactions with the holding company, M/s. Integrated Enterprises India Ltd. (IEPL), amounted to a transfer under Section 47(v) of the IT Act. The CIT(A) and ITAT concluded that the sale of 7.50 lakh shares of CUBL to IEPL did not amount to a transfer, as the transaction was between a holding company and its 100% subsidiary, thus falling under the exemption provided by Section 47(v). This meant that there was no charge of capital gains on this transaction, rendering the issue of the sale price differential moot.

3. Admittance of New Evidence:
The Revenue argued that the CIT(A) admitted new evidence in violation of Rule 46A without providing the AO an opportunity to examine it. However, the ITAT did not find fault with the CIT(A)'s decision, noting that the evidence substantiated the assessee's claim and was relevant for determining the nature of the transactions and the applicability of Section 47(v).

4. Determination of Sale Price:
Given the conclusion that the transaction with the holding company did not amount to a transfer, the issue of determining the sale price of shares for computational purposes became infructuous and did not require further adjudication.

Conclusion:
The ITAT upheld the CIT(A)'s decision, confirming that the income from the sale of shares should be treated as capital gains and that the transaction with the holding company did not amount to a transfer under Section 47(v). The appeal by the Revenue was dismissed, and the order pronounced on 08th June 2022.