2023 (9) TMI 1313 - AT - Income Tax

Correct head of income - profit arising from sale of shares - LTCG/STCG or Business income - intention of the assessee - HELD THAT - CBDT Circular No. 6/2016 instructing the Assessing Officers and in the concluding para, the Board has reiterated that the principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares. The intention of the assessee is paramount. If the assessee has decided to hold the shares as investment and the conduct of the assessee is in line with his intention, then the profits arising from sale of such investment shall be taxed as capital gains, long term or short term. Even the Board has recognized the fact that a taxpayer may have dual portfolio one as investment in shares and the other, as stock in trade of shares. Resolution of the Board of Directors mentioned elsewhere squarely lays down the intention of the assessee that since the holding in shares were of several years, therefore, the same should be held as investment. The intention of the assessee can also be gathered from the Balance sheet and Financial Statement of Accounts. Shares held by the assessee as investment are chargeable to tax under the head Capital Gains and shares held by the assessee as stock in trade are chargeable to tax as Business Income . Based upon the CBDT Circular, when the ld. CIT(A) accepted the long term capital gain, then we fail to understand why the ld. CIT(A) hesitated in not accepting the short term capital gain on the same set of facts. On a specific query from the Bench, in respect of the stand taken in subsequent years, the ld. counsel for the assessee pointed out that profits on sale of shares in subsequent years have been accepted as capital gains. This is also in line with the aforementioned CBDT Circular. As relying on SUKARMA FINANCE LIMITED 2015 (5) TMI 225 - DELHI HIGH COURT and M/S EXPRESS SECURITIES PVT. LTD. 2013 (10) TMI 1182 - DELHI HIGH COURT gains arising out of sale of shares should be taxed as LTCGs and STCGs as declared by the assessee. Accordingly, the appeal of the assessee is allowed and that of the Revenue is dismissed.

Summary

Issues Involved:
1. Classification of income from sale of shares as "Business Income" or "Capital Gains".
2. Acceptance of Long Term Capital Gains (LTCG) and Short Term Capital Gains (STCG) by the CIT(A).

Summary:

Issue 1: Classification of Income from Sale of Shares

The core issue was whether the profit from the sale of shares should be treated as "Business Income" or "Capital Gains". The Assessing Officer (AO) argued that since the assessee was engaged in trading securities, the profits should be classified as "Business Income". The assessee contended that the shares were held as investments and profits should be treated as "Capital Gains". The CIT(A) accepted the assessee's claim for LTCG but treated STCG as "Business Income".

Issue 2: Acceptance of LTCG and STCG by CIT(A)

The CIT(A) accepted the LTCG of Rs. 5,04,52,174/- as declared by the assessee, drawing support from CBDT Circular No. 6/2016. However, the CIT(A) treated the STCG of Rs. 3,70,97,670/- as "Business Income" because the CBDT Circular specifically addressed LTCG.

Tribunal's Findings:

The Tribunal held that the intention of the assessee is paramount. If the shares were intended to be held as investments, profits from their sale should be taxed as "Capital Gains". The Tribunal noted that the Board of Directors had resolved to treat shares as investments from 31.03.2014. This intention was reflected in the balance sheet where shares were shown under "Non-Current Investments".

The Tribunal referenced CBDT Circular No. 6/2016, which recognizes the difficulty in distinguishing between stock-in-trade and investments and aims to reduce litigation. The Circular allows for dual portfolios: one for investments and one for trading.

The Tribunal found that the CIT(A) had no basis to differentiate between LTCG and STCG on the same set of facts. The Tribunal referenced decisions from the Hon'ble Delhi High Court in similar cases (Express Securities Pvt Ltd and Sukarma Finance Ltd), which supported the assessee's position.

Conclusion:

The Tribunal concluded that the gains from the sale of shares should be treated as LTCG and STCG as declared by the assessee. The appeal by the assessee was allowed, and the appeal by the Revenue was dismissed. The order was pronounced on 25.09.2023.