Sale of shares can not be treated as business income merely on the basis of notes to Accounts

Sale of shares can not be treated as business income merely on the basis of notes to Audited Accounts. Five broad tests emphasized by Courts

ABCAUS Case Law Citation:
ABCAUS 2197 (2018) (02) HC

The Challenge/Grievance:
The Revenue was aggrieved by the decision of the ITAT affirming the Appellate Commissioner’s view with respect to the assessee’s claim of capital gain rather than business income as held by the Assessing Officer (AO).

Brief Facts of the Case:
The respondent assessee was engaged in the business of investment and securities and had at the relevant time maintained a distinct portfolio in respect of stock in trade and investment. For the particular year, the assessee acquired shares in certain companies that underwent amalgamation. Those companies, which had investment portfolio containing shares of the companies in which the assessee had holdings, were treated as stock in trade. The assessee shifted some of the shares to its investment account and later sold them during the relevant Assessment Year.

The AO relying upon the judgment of the Supreme Court, rejected the assessee’s claim and held the profits to be business income.

However, the CIT(A) upon re-appraisal of the facts and consideration of the authorities, observed that the AO was primarily influenced by the notes of audited accounts, which stated that during the year the appellant company has acquired the amalgamating companies which were engaged in the trading of shares. The CIT(A) opined that the view taken by the AO was not correct, it was seen that the appellant company had distinct portfolio of shares and mutual funds under two categories i.e investments and stock in trade. During the last few years too, the appellant company had followed the same practice of holding certain shares under the head investments and some shares as stock in trade. Therefore, it was held that the action of the AO treating the entire income as business income was not justified, hence addition made by him on this account was deleted.

The Tribunal observed that there was absolutely no allegation by AO regarding facts as observed by CIT(A). The ITAT opined that AO proceeded to compute sale of shares as business income merely on the basis of notes provided to Audited Accounts. As per the said notes, it was clear that nature of business in respect of amalgamating companies had been held to be purchase and sale of shares, debentures stocks, properties and other similar activities. CIT(A) on the basis of these factual observation deleted the addition. The ITAT accordingly dismissed the ground raised by revenue.

Observations made by the High Court:
The Hon’ble High Court observed that the decision of Revenue as to whether the claim of the assessee with respect to the income reported by it and whether it constitutes business income, is dependent on the entirety of the circumstances.

The Hon’ble High Court observed that the decisions of the Court have emphasized five broad tests whether the income bears the character of business income or capital gain;

(1) Whether the company or concern is authorized in its Memorandum of constituting documents to deal with shares;

(2) Whether the entity had shown the shares under the head “Investment”;

(3) Whether the assessee/entity utilized its own funds and had not borrowed funds for the purpose of acquiring shares;

(4) Whether the nature of infrastructure – whether it is small, represents investment activity rather than the trading activity that would require larger infrastcuture; and

(5) Whether the behaviour of the assessee is such as to disclose income/earning has objective i.e. “obtaining dividend” rather than trading

It was noted that all the tests and the relevant rulings were noticed by both the authorities below, who had applied their mind and held that the AO’s approach in singular fixing scrutiny to the shifting and regulations of some shares to treat as business income, was erroneous. The Hon’ble High Court opined that findings were not only factual but sound, as they were based upon appreciation of facts at two levels and application of the settled law.

Decision/ Conclusion/Held:
No error of law is apparent; no question of law arises.