2018 (5) TMI 1439 - HC - Income Tax

Court affirms capital gain treatment for share sale income in landmark tax case

The High Court considered the appeal regarding the categorization of income from the sale of shares as capital gain or business income. The Court upheld ... Treatment of income from transfer of shares as capital gains - business income - intention in holding shares - CBDT circular No. 6 of 2016 - exclusion for sham or non-genuine transactions - binding nature of declared character of sharesTreatment of income from transfer of shares as capital gains - business income - CBDT circular No. 6 of 2016 - intention in holding shares - exclusion for sham or non-genuine transactions - Income arising to the assessee on sale of shares of Vishal Exports Overseas Ltd. (VEOL) is to be treated as capital gain and not business income. - HELD THAT: - The Tribunal placed substantial reliance on CBDT Circular No. 6 of 2016 which permits acceptance of the assessee's declared treatment of share transactions and limits disputes where an assessee opts to treat listed shares as capital assets, subject to the condition that the stand, once taken, remains binding in subsequent years. The exclusion in paragraph 4 of the circular applies only where the genuineness of the transaction itself is in question (for example, bogus claims or sham transactions). The Assessing Officer and the Commissioner (Appeals) based their finding of business income on suspicions of price-rigging inferred from short-term price movements correlated with the assessee's trading pattern. The Revenue did not establish that the transactions were sham or that their genuineness was vitiated. In the absence of a finding that the transactions were non-genuine, the directive in the circular to accept the assessee's declared character of the transactions governs the tax treatment. Accordingly, the Tribunal correctly treated the income as capital gain rather than business income.Tribunal's conclusion that the income from sale of VEOL shares is capital gain is upheld; Revenue's contrary finding of business income is rejected.Final Conclusion: The appeal is dismissed; the Tribunal's judgment treating the income from sale of VEOL shares as capital gain is affirmed, the Revenue having failed to show that the transactions were sham or non-genuine so as to attract the circular's exclusion. Issues:1. Whether the income from the sale of shares should be treated as capital gain or business incomeRs.2. Interpretation of CBDT circular No. 6 of 2016 regarding the treatment of income generated through the sale of shares.3. Application of exclusion clause in the CBDT circular in cases of questionable transactions.Issue 1:The High Court considered the appeal against the judgment of the Income Tax Appellate Tribunal regarding the categorization of income from the sale of shares as capital gain or business income. The Revenue authorities had treated the income as business income due to suspicions of price manipulation by the assessee. However, the Tribunal overturned these decisions and relied on CBDT circular No. 6 of 2016, which provides directives for such cases. The Court noted that the circular allows the assessee to declare their intention in buying and selling shares, with restrictions on changing this position. The exclusion clause in the circular applies to transactions with questionable genuineness, such as sham transactions or bogus claims of capital gain or loss. The Court found that the Revenue's suspicions were not enough to prove questionable transactions, leading to the dismissal of the Tax Appeal.Issue 2:The Court analyzed the CBDT circular in detail, highlighting the directives for determining the nature of income from the sale of shares. The circular allows the assessee to choose whether to treat the income as business income or capital gain based on the holding period of the shares. For shares held for over 12 months, the assessee's choice to treat the income as capital gain should not be disputed by the Assessing Officer. However, once a stand is taken, it must remain consistent in subsequent assessment years. The circular aims to reduce disputes and provide clarity in such cases by accepting the assessee's declaration of intention, except in cases of questionable transactions as specified in the exclusion clause.Issue 3:The Court examined the application of the exclusion clause in the CBDT circular to cases where the genuineness of transactions is questionable. The clause specifies that the directives in the circular do not apply to transactions involving sham transactions, bogus claims of capital gain or loss, or other questionable dealings. In this case, the Court found that the Revenue's suspicions of price rigging did not meet the threshold of questionable transactions as outlined in the exclusion clause. Therefore, the Court upheld the Tribunal's decision to treat the income from the sale of shares as capital gain and dismissed the Tax Appeal.