Shares sale: Capital gains, not business income. Tribunal rules in favor of assessee.

The Tribunal ruled in favor of the assessee, determining that the Long Term Capital Gains and Short Term Capital Gains/Losses on the sale of shares should be treated as capital gains rather than business income/loss. The Tribunal emphasized the assessee's investment intent, consistency in treatment in previous years, and adherence to CBDT Circular guidelines. The decision overturned the First Appellate Authority's ruling and directed the Assessing Officer to accept the capital gains treatment.

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Issues Involved:
1. Treatment of Long Term Capital Gains on sale of shares as business income.
2. Treatment of Short Term Capital Gains and Short Term Capital Loss on sale of shares as business income and business loss respectively.

Issue 1: Treatment of Long Term Capital Gains on Sale of Shares as Business Income

The primary issue in this case is the treatment of Long Term Capital Gains (LTCG) on the sale of shares amounting to Rs. 5,14,30,041/-. The Assessing Officer (AO) treated these gains as business income rather than capital gains, which the assessee claimed as exempt under Section 10(38) of the Income Tax Act. The AO's decision was based on the frequency and nature of transactions, concluding that the assessee was engaged in trading activities rather than investment.

The First Appellate Authority upheld the AO's decision, noting the magnitude and frequency of transactions, the low average holding period, and the assessee's main business in derivatives trading. The authority also mentioned that principles of res judicata do not apply to tax proceedings, thus supporting the AO's stance.

However, the assessee argued that the shares were held as investments, not as stock-in-trade, and were valued at cost, not market value. The assessee contended that the intention was to invest in shares for dividend and appreciation, not for trading. The assessee also highlighted that in previous assessment years, similar gains were accepted as capital gains by the department, emphasizing the principle of consistency.

The assessee relied on the CBDT Circular No. 6 of 2016, which states that if shares are held for more than 12 months and the assessee treats the income as capital gains, the AO should not dispute this treatment. The Tribunal found merit in the assessee's arguments, noting that the department had accepted similar treatment in previous years and that the assessee's activities were consistent with investment rather than trading.

Issue 2: Treatment of Short Term Capital Gains and Short Term Capital Loss on Sale of Shares as Business Income and Business Loss Respectively

The second issue pertains to the treatment of Short Term Capital Gains (STCG) of Rs. 2,57,89,560/- and Short Term Capital Loss (STCL) of Rs. 7,57,10,331/-. The AO treated these as business income and business loss, respectively, based on the same rationale applied to the LTCG.

The assessee argued that the shares were held as investments and not as stock-in-trade, and that the transactions were delivery-based. The assessee also pointed out that the shares were purchased using own funds, not borrowed funds, further indicating an investment intent. The assessee emphasized the principle of consistency, as similar transactions were treated as capital gains/losses in previous years.

The Tribunal noted that the assessee had consistently shown shares as investments in the balance sheet and that the department had accepted this treatment in previous assessment years. The Tribunal also acknowledged the CBDT Circular, which supports the assessee's stance.

Conclusion:

The Tribunal concluded that the assessee was not engaged in trading activities in equity shares and securities. The Tribunal set aside the order of the First Appellate Authority and directed the AO to treat the income from the sale and purchase of shares as short term and long term capital gains, in line with the assessee's claims. The appeal of the assessee was allowed, and the order was pronounced in the open court on 27th July, 2016.

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