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2023 (3) TMI 725 - HC - Income TaxGain on sale of shares - long-term capital gain or profits and gains of business - distinction between investment and stock-in-trade - material significance of intention at the time of purchase of the shares -period of holding of the shares - tribunal held that the sum should be assessed as long-term capital gains - HELD THAT - Tribunal was fully justified in coming to the conclusion that not only capital and reserve of the assessee was several times more than the investment in shares in respect of which STT was paid, but even the profit of one year was several times more than the investment. Therefore, in our view, the fact situation has been clearly brought on record by the tribunal which was failed to be taken into consideration by the CIT(A). Therefore, the conclusion arrived at by the tribunal in this regard cannot be faulted. Consequently, we hold that the CIT(A) would not have drawn a presumption that merely because the fund flow was from a cash credit account, it pre-supposes that borrowed funds were utilised for the purchase of shares especially when it is a specific case of the assessee that it is a mixed account which has not been shown to be wrong by the revenue. Correctness of the observations of the CIT(A) that the shares were thinly traded and highly illiquid and that the companies have not declared dividends - It is only when the genuineness of the transactions is doubted, there would be an occasion to examine whether the shares were penny stocks or not, what was the percentage of appreciation, the period during which the appreciation took place and was the appreciation beyond the normal person s expectations etc. Thus, in the absence of any doubt raised either by the assessing officer or by the CIT(A) as regards the genuineness of the transactions, the CIT(A) could not have held that the transaction was in the nature of business transaction as the companies have not declared dividend. Such finding rendered by the CIT(A) in our opinion was rightly reversed by the tribunal. Principle of consistency - The gains from the remaining long-term shares of the sixth company sold during the previous year relevant to the assessment year 2006-2007 was treated as business income by the assessing officer which order was reversed by the CIT(A) and affirmed by the tribunal by order dated 11.02.2011. The assessing officer once again for the assessment years 2007-2008 and 2008-2009 sought to treat the same as business income which was reversed by the CIT(A) and the tribunal dismissed the revenue s appeal by the orders dated 11.05.2011 and 18.08.2011 and those orders have attained finality. Therefore, for the solitary year, the year under consideration, a departure from the consistent manner in which the department viewed the transactions, cannot be disturbed. In the absence of any doubt raised by the department with regard to the purchase of shares treated as investment for the preceding years and the subsequent years, a departure cannot be made by the department for the year under consideration. Circular No. 4 of 2007 dated 15.06.2007 was issued with regard to the distinction between shares held as stock-in-trade and shares held as investment and the tests for such a distinction were laid down. Effects of the circulars issued by the CBDT dated 29.02.2016 and 02.05.2016 - Circulars dated 29.02.2016 was with regard to the issues of taxability of surplus on sale of shares and securities-capital gains of business income-instruction in order to reduce the litigation. The need for issuing such a circular arose on account of a disputes on the applications of the principles laid down by the courts mentioning different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. In terms of the circular the assessee s precluded from taking a contrary stand in the subsequent years. If that be so, the same embargo can also be placed on the department, by holding that the department cannot take a different view in the subsequent years in the absence of any fresh materials warranting such departure. Reading the circular in its entirety will show that on account of dispute which had arisen while interpreting the directions issued by the courts and tribunal the Board thought fit to issue appropriate instructions to the field formation. Therefore, it is to be understood that the circular would be retrospective in operation. In any event, as rightly contended by the learned senior advocate for the assessee in the event the matter is remanded for fresh consideration to the assessing officer either by the CIT(A) or by the tribunal nothing prevents the assessee from referring to the circulars and the theory of prospectivity or retrospectivity loses its significance. Thus, we hold that the circulars can be referred to by the assessee and they being at least partially beneficial to the assessee has to be held to be retrospectively applicable in so far as the instructions/clarifications which enure in favour of the assessee s.
Issues Involved:
1. Whether the profit of Rs. 4,32,09,144/- on the sale of shares should be treated as long-term capital gains or business income. 2. Whether the principle of consistency should be applied in treating the transactions. 3. The relevance and application of CBDT Circulars on the treatment of income from the sale of shares. Summary: Issue 1: Treatment of Profit as Long-Term Capital Gains or Business Income The assessee filed its return of income declaring a total income of Rs. 3,41,56,466/-. The case was selected for scrutiny, and the Assessing Officer (AO) issued a show-cause notice questioning the treatment of profits from the sale of shares as long-term capital gains instead of business income. The AO concluded that the transactions were systematic, frequent, and organized, indicating a business activity rather than investment. The AO relied on various judicial precedents to support this conclusion. The assessee contended that the shares were held as investments, consistently shown in the balance sheet, and the profits were shown as capital gains. The CIT(A) upheld the AO's decision, noting that the transactions were conducted in a systematic manner, and the funds used were borrowed, indicating a business activity. The CIT(A) also noted that the shares were thinly traded and illiquid, and the companies had not declared dividends, further supporting the conclusion that the transactions were business activities. The Tribunal, however, segregated the transactions and concluded that the long-term capital gains on which STT was paid should be treated as capital gains, not business income. The Tribunal noted that the total investment in shares was less than Rs. 50 lakhs, while the capital and reserve of the assessee were significantly higher, indicating that the investments were made from the assessee's own funds and not borrowed funds. The Tribunal found no evidence to support the AO's conclusion that the transactions were business activities. Issue 2: Principle of Consistency The Tribunal emphasized the principle of consistency, noting that the department had accepted the treatment of similar transactions as investments in previous years. The CIT(A) acknowledged this but argued that a different view could be taken if fresh material justified such a departure. However, the Tribunal found no fresh material to warrant a different treatment for the assessment year under consideration. Issue 3: Application of CBDT Circulars The Tribunal referred to CBDT Circular No. 4 of 2007 and Circular No. 6 of 2016, which clarify the distinction between shares held as stock-in-trade and shares held as investments. The Circulars emphasize that an assessee can have both an investment portfolio and a trading portfolio, and the income from each should be treated accordingly. The Circulars also state that if the assessee treats the income from the transfer of listed shares held for more than 12 months as capital gains, the AO should not dispute this treatment. The Tribunal concluded that these Circulars, being beneficial to the assessee, should be applied retrospectively. Conclusion The Tribunal's decision to treat the profit of Rs. 4,32,09,144/- as long-term capital gains was upheld, applying the principle of consistency and the beneficial CBDT Circulars. The appeal by the revenue was dismissed, and the substantial questions of law were answered against the revenue.
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