Share transfer receipts taxed as business income; alternative capital gains charge failed where gift exclusion applied.

Share-transfer receipts were treated as business income because the later binding view held the assessee to be a dealer in shares, so the earlier capital gains basis fell away. On the alternative assumption that capital gains arose, section 52(2) could not be invoked on the facts as understood, and the transfers were also covered by the statutory exclusion for gifts under section 47(iii). The addition therefore failed and the transfers were not taxable as capital gains.

---

---

Issues: (i) Whether the income from the transfer of shares was assessable as business income and not as capital gains. (ii) Whether, on the alternative assumption that capital gains arose, section 52(2) of the Income-tax Act, 1961 was attracted and the transfers were excluded by section 47(iii) of the Income-tax Act, 1961.

Issue (i): Whether the income from the transfer of shares was assessable as business income and not as capital gains.

Analysis: The earlier basis on which the transfers had been treated as giving rise to capital gains had been displaced by the later binding view that the assessee was a dealer in shares and that income from similar share transactions constituted business income. Once the receipts were held to fall under the head of business income, the foundation for a capital gains assessment disappeared.

Conclusion: The income was assessable as business income and not as capital gains.

Issue (ii): Whether, on the alternative assumption that capital gains arose, section 52(2) of the Income-tax Act, 1961 was attracted and the transfers were excluded by section 47(iii) of the Income-tax Act, 1961.

Analysis: In the alternative, the later Supreme Court ruling on section 52(2) meant that that provision could not be invoked on the facts as understood. Further, even on the assumption that capital gains were otherwise chargeable, the transfers were treated as falling within the statutory exclusion for gifts, so section 47(iii) operated to exclude them from capital gains taxation.

Conclusion: Section 52(2) did not justify the addition and section 47(iii) applied to exclude the transfers from capital gains.

Final Conclusion: The referred question did not require substantive answer in the circumstances and, in any event, the answer was in favour of the assessee and against the Department.

Ratio Decidendi: Where share transactions are held to constitute business activity, the receipts cannot be assessed as capital gains, and an alternative capital gains charge fails if the statutory preconditions for section 52(2) are absent or if the transfer is within the exclusion for gifts under section 47(iii).

---