Sale of shares-Capital Gain or business income ? ITAT explains law in assessee’s favour quoting CBDT Instructions / Circulars and various judgments/case laws
ABCAUS Case Law Citation:
ABCAUS 3029 (2019) (06) ITAT
Important Case Laws Cited/relied upon by the parties:
Ramilaben D.Jain V/s. ACIT 97 Taxmann.com 217
Ratanlal J. Oswal V/s CIT 63 Taxmann.com 57
CIT V/s Gopal Purohit [336 ITR 287
Pr.CIT V/s Vikshit Engineering Ltd. [100 Taxmann.com 436 26/11/2018]
Sanjeev Bajaj V/s CIT P&H, 82 Taxmann.com 80
PCIT Vs. Quest Investment Advisors Private Limited
Equity Intelligence India P. Ltd. V/s ACIT 61 Taxmann.com 256
CIT v. Associated Industrial Development Co. (P.) Ltd.  82 ITR 586 (SC)
CIT V/s Pooja Investment P. Ltd. 45 Taxmann.com 298
The assessee was aggrieved by the order of Commissioner of Income-Tax (Appeals) in treating the short-term capital gains (STCG) as business income on the alleged ground that the assessee was engaged in the business of trading in shares by holding that the transactions carried out were voluminous and the period of holding was meagre.
During assessment proceedings, it transpired that the assessee earned substantial Short-Term Capital Gain on sale of shares which was offered under the head Capital Gains. The said income, in the opinion of the Assessing Officer (AO) was assessable as Business Income in view of the fact that the transactions were voluminous & period of holding was meager.
The assessee defended the same by submitting that the said activity was assessable under the head Capital Gains only as assessed as well as accepted by revenue in earlier years, following the rule of consistency.
However, the same could not convince Ld. AO, who treated the said income as Business Income. Against the order of the AO, the appeal of the assessee was dismissed by the CIT(A).
The Tribunal observed that the assessee had earned Short-Term Capital Gains from certain share transactions during impugned AY. All these transactions were delivery-based share transactions entered into by the assessee through stock exchanges. The assessee had also earned long-term capital gains on sale of shares during the year, which had been claimed to be exempted u/s 10(36) / 10(38) and the same had been accepted as such by the revenue. The average holding period of the shares was 103 days with number of purchase / sales days to be 213-229 days.
The Tribunal opined that the Hon’ble Supreme Court has approved that there is no bar for the assessee to maintain two separate portfolios-one for investment and one for trading. The majority of the investments had been funded out of assessee’s own capital. The assessee had income from business also which would prima-facie, established that share trading was not the only activity carried out by the assessee during impugned AY.
The assessee had submitted that he was a conventional investor in shares & securities and the gains / loss on shares was always offered under the head Capital Gains only and the same had always been accepted by the revenue in all the earlier years.
The Tribunal opined that although the principle of res-judicata do not apply to Income Tax proceedings, however, facts and circumstances being the same, the revenue is debarred from changing its stand and taking contrary view on identical set of facts and circumstance since there should be finality to the issues. In biew of the recent judgment of the Hon’ble jutisdictional High Court on the rule of consistency, the Tribunal found force in submissions made in this regard.
The Tribunal observed the classification of income from share trading as ‘business income’ or ‘capital gains’ would be dependent upon the facts and circumstances of a particular case and there is only a thin line separating the two view point. The Tribunal noted the following instructions / guidelines/circulars issued by the CBDT so as to bring clarity on the issue:
(i) Instruction No. 1827 dated 31/08/1989
(ii) Office Memorandum dated 13/12/2005
The Tribunal noted that CBDT’s office memorandum dated 13/12/2005 list following Circumstances to be considered by the Assessing Officers in determining whether a person is a trader or an investor in stocks: –
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity;
(ii) Whether, the purchase is made solely with the intention of resale at a profit or for longterm appreciation and/or for earning dividends and interest.
(iii) Whether scale of activity is substantial;
(iv) Whether transaction were entered into continuously and regularly during the assessment year.
(v) Whether purchases are made out of own funds or borrowings;
(vi) The stated objects in the Memorandum and Articles of Association in the case of corporate assessee;
(vii) Typical holding period for securities bought and sold;
(viii) Ratio of sales to purchase and holding.
(ix) The time devoted to the activity and the extent to which it is the means of livelihood.
(x) The characterization of securities in the books of account and balance sheet as stock-intrade or investment.
(xi) Whether the securities purchased or sold are listed or unlisted.
(xii) Whether investment is in sister/related concerns or independent companies.
(xiii) Whether transaction is by promoters of the company. (xiv) Total number of stock dealt in
(xv) Whether money has been paid or received or whether these are only book entries
Further, as per Circular No. 4/2007 it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated a capital asset and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets.
It was further noted that the above instructions were partially been modified with respect to listed securities by CBDT circular No. 6/2016 dated 29/02/2016 which lays down following factors to be considered for listed securities: –
(a) Where the assessee itself, irrespective of the period of holding of the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
(c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.
The Tribunal also noted that the Hon’ble Supreme Court had observed that:
“Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.”
Applying the above principals the Tribunal opined that the share trading activity was not the only activity carried out by the assessee during the year. The majority of the investments had been funded out of own capital. The assessee had earned substantial dividend income during the year. The average holding period is more than 100 days. Further, the long-term gains earned on similar activity had been accepted by the revenue as Capital Gains only. Moreover, latest CBDT Circular No.6/2016, which is clarificatory in nature, applies to listed securities and directs AO not to disturb the stand taken by assessee provided the same is applied consistently.
The Tribunal stated that there could not be any straight jacket formula to distinguish the same and further there cannot be any single decisive factor to determine the same but an overall view has to be taken keeping in mind peculiar facts and circumstances of the case.
Accordingly, the Tribunal held that the impugned gains were rightly offered as Capital Gains. Following the decision of the jurisdictional High Court, the Tribunal reversed the orders of lower authorities, on this ground of appeal.