2010 (10) TMI 15 - HC - Income Tax

Sale of shares - capital gain versus business profit - AO held that transaction in the nature of adventure in the nature of trade - Though the assessee had purchased/sold other shares and units of mutual funds, this solitary transaction had been disputed by the Assessing Officer mainly because the assessee had purchased the shares in question from borrowed funds obtained on high rate of interest, which also forms the basis for the conclusion arrived at by the Assessing Officer that the transaction in question is an adventure in the nature of trade or business rather than a normal investment. - Held that - merely because the shares had been purchased from borrowed funds obtained on high rate of interest would not change the nature of the transaction from investment to one in the nature of an adventure in the nature of trade .

Issues Involved:
1. Classification of income from the sale of shares as long-term capital gain or business income.
2. Whether the orders passed by the Income Tax Appellate Tribunal and the Commissioner of Income Tax (Appeals) were contrary to the evidence and material on record and hence perverse.

Detailed Analysis:

Issue 1: Classification of Income from Sale of Shares
The primary issue revolves around whether the profit from the transaction of purchase and sale of shares amounting to Rs.1,73,32,347/- should be treated as long-term capital gain or business income. The Assessing Officer (AO) contended that the transaction was an "adventure in the nature of trade" and thus should be classified as business income. The AO's reasoning was based on several factors:
- The shares were purchased from Maniram Consultants and not directly from the company.
- The shares were sold immediately after repayment of a loan, indicating a lack of intention for long-term investment.
- The interest payment on the borrowed capital was deducted from business income rather than from the sale proceeds.

The Commissioner (Appeals) and the Tribunal, however, concluded that the transaction should be treated as long-term capital gain. They based their decision on the following findings:
- The assessee had held the shares for fourteen months, which qualifies for long-term capital gain.
- The assessee treated the investment as capital gain in previous years, and this was accepted by the revenue authorities.
- The shares were not shown as stock in trade but as an investment.
- After selling the shares, the assessee invested the proceeds in NABARD bonds under section 54EC of the Act, indicating a capital realization intent.

Issue 2: Orders Contrary to Evidence and Material on Record
The second issue was whether the orders passed by the Tribunal and the Commissioner (Appeals) were contrary to the evidence and material on record and hence perverse. The AO argued that the transaction was an adventure in the nature of trade due to:
- The high-interest rate (30%) on the loan taken for purchasing shares.
- The shares were held by Maniram Consultants as security and not physically possessed by the assessee.
- The large quantity of shares purchased and sold within a short period.

The Commissioner (Appeals) and the Tribunal found these arguments unconvincing, noting:
- The assessee had provided complete details, including the names and addresses of the parties involved, and had discharged the initial onus of proof.
- The AO had not been able to prove any nexus between the assessee and the other parties to suggest a syndicate or collusion.
- The transaction was not repetitive, and the assessee had not indulged in frequent trading of shares, which would indicate a business activity.

Conclusion:
The High Court upheld the findings of the Commissioner (Appeals) and the Tribunal, noting that both appellate authorities had recorded concurrent findings of fact based on the evidence on record. The Court found no legal error or perversity in the conclusions reached by the Tribunal. It was held that the transaction in question was rightly treated as long-term capital gain and not as an adventure in the nature of trade. Consequently, the appeal was dismissed, and no substantial question of law was found to arise from the Tribunal's order.

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