2016 (9) TMI 818 - HC - Income Tax

High Court clarifies shares as investment or business in tax assessment

The High Court of Calcutta addressed the issue of whether shares dealings should be classified as investment or business transactions for the assessment ... Shares dealings - treated as investment in shares or business transaction - Held that:- We are inclined to think that neither the assessing officer nor the CIT (Appeals) insisted upon the assessee to produce evidence from its records to show that the transactions were intended to be investments and not mere dealing in shares. The substance of the matter was not thus adverted to. Stress was laid on the treatment given in earlier years which is not of much importance because a wrong view taken in the earlier years is not binding on the revenue in the subsequent years. Mr.Khaitan, learned Senior Advocate appearing for the assessee submitted that there is evidence to show that shares were held for a period between 18 and 39 months. We are unable to find any evidence in that regard except that the shares of McDowell and Macmillan were according to him held for the period between 18 and 39 months. It is nobody’s case that the gains being subject matter of discussion arose out of sale of those shares. On the contrary, the case of the assessee himself is that “the transactions this year are mere change of investment portfolios from bad performing sectors to good performing sectors.” Bad performing shares could not have yielded profit to the assessee as rightly pointed out by the assessing officer. For the aforesaid reasons we are inclined to think that the matter should go back to the assessing officer. The questions quoted above need not be answered at this stage because we have directed remand of the matter. Therefore, orders passed by the learned Tribunal, CIT (A) and the assessing officer are all set aside. The matter is remanded for reconsideration after giving an opportunity of hearing to the assessee in accordance with law. Issues:1. Determination of whether shares dealings should be treated as investment or business transactions.2. Assessment of income from shares transactions as business profit under section 28 of the Income Tax Act.Analysis:The High Court of Calcutta dealt with an appeal against the judgment and order of the Income Tax Appellate Tribunal regarding the assessment year 2007-2008. The primary issue raised was whether the shares dealings by the assessee should be considered as investment or business transactions. The court emphasized that the intention behind the transactions is crucial in making this determination, which can be ascertained from circumstantial evidence, including the assessee's Books of Accounts. Referring to a previous Supreme Court decision, the court highlighted that the distinction between investment and trading lies with the assessee, who should be able to provide evidence from their records to support their claim.In this case, the assessee contended that all transactions were on an investment account, but the assessing officer viewed it as business income. The CIT (Appeals) disagreed with the assessing officer, noting the consistent treatment of shares as investments by the assessee in previous years. However, the court observed that neither the assessing officer nor the CIT (Appeals) properly examined the evidence to determine the nature of the transactions. The court also noted the lack of substantial evidence regarding the holding period of shares, which is crucial in distinguishing between investment and trading activities.As a result, the court decided to remand the matter back to the assessing officer for reconsideration. The orders of the Tribunal, CIT (A), and assessing officer were set aside, and the assessee was granted an opportunity to present their case properly. The court refrained from answering the questions raised initially, as the matter required further examination. Ultimately, the appeal and application were disposed of, emphasizing the importance of substantiating the nature of transactions to determine the tax treatment accurately.