2022 (9) TMI 776 - HC - Income Tax

Correct head of income - Gain on sale of shares - business income OR short term capital gains - period of holding of shares rules of consistency - HELD THAT - It is an undisputed factual position that the assessee has been keeping the shares in the investment portfolio which has been accepted in all the previous years and some of the shares which have been sold during the assessment year under consideration were treated as short term shares where the opening investment shares from that of the previous year and such shares were accepted in the previous year to be under the investment portfolio of the assessee companies. We have also noticed from the chart produced by assessee that the frequency of the transactions is very meagre and the volume of the transaction was within the net worth of the assessee company by utilising their own funds. Further we find that for the assessment year 2004-05, in a scrutiny assessment the assessing officer has treated the investment kept by the assessee in the investment portfolio as an investment in shares and the income thereon was computed under the head of short-term capital gains. We are of the clear mind that the rules of consistency has to be maintained in the case of the assessee for the assessment year under consideration and the assessee rightly relied upon the decision of the Hon ble Supreme Court in Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT - Decided in favour of the assessee.

Issues Involved:
1. Classification of the gain from shares as business income vs. short-term capital gains.
2. Application of Section 94(7) of the Income Tax Act.
3. Consistency in tax treatment across assessment years.

Detailed Analysis:

Classification of Gain from Shares:
The primary issue was whether the gain of Rs. 2,52,87,056/- from shares held as investments should be classified as business income or short-term capital gains. The Tribunal had reversed the Commissioner of Income Tax (Appeals) [CIT(A)]'s decision, which had classified the gain as short-term capital gains. The Tribunal concluded that the transactions were in the nature of trade due to the magnitude and frequency of transactions, despite agreeing that volume alone does not alter the nature of transactions. The Tribunal's decision was influenced by the substantial increase in short-term capital gains in the assessment year 2005-06 compared to previous years.

Application of Section 94(7) of the Income Tax Act:
The Assessing Officer (AO) disallowed the loss claimed by the assessee on the sale of mutual fund units to the extent of the dividend received, citing Section 94(7) of the Act. The section, as amended, required the units to be held for more than 9 months from the record date to avoid disallowance. The CIT(A) had allowed the assessee's claim, noting that the investments were bona fide and consistently treated as capital gains in previous years. The Tribunal, however, upheld the AO's disallowance, focusing on the amended holding period requirements.

Consistency in Tax Treatment:
The assessee argued for consistency in tax treatment, citing the Supreme Court decision in Radhasoami Satsang Versus Commissioner of Income Tax, which emphasizes maintaining consistency unless there is a change in law or a mistake in previous assessments. The CIT(A) supported this view, allowing the gains to be treated as capital gains. The Tribunal, however, dismissed this argument, noting the significant increase in short-term capital gains in the assessment year under consideration.

Judgment Analysis:

Tribunal's Decision:
The Tribunal held that the transactions were business activities due to the high volume and frequency of transactions in the assessment year 2005-06. It dismissed the plea for consistency, focusing on the substantial increase in short-term capital gains and the short holding periods of certain transactions.

High Court's Reversal:
The High Court reversed the Tribunal's decision, emphasizing the following points:
1. Consistency: The High Court underscored the importance of consistency in tax treatment, aligning with the CIT(A)'s view and the Supreme Court's precedent in Radhasoami Satsang.
2. Nature of Transactions: The High Court noted that the assessee had consistently treated the shares as investments in previous years, and the transactions were reflected as such in the books of accounts.
3. Volume and Frequency: The High Court observed that while the volume of transactions had increased, it did not necessarily alter the nature of the transactions. The assessee's net worth and investment in blue-chip companies supported the classification as capital gains.
4. Section 94(7) Compliance: The High Court found that the CIT(A) had correctly applied the provisions of Section 94(7), considering the bona fide nature of the investments and the timing of transactions relative to the amendment.

Conclusion:
The High Court allowed the appeal, ruling in favor of the assessee. It held that the gains should be classified as short-term capital gains, not business income, and emphasized the need for consistency in tax treatment. The substantial question of law was answered in favor of the assessee, and the Tribunal's decision was overturned.

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