2022 (8) TMI 346 - AT - Income Tax

Income from share sale classified as Short Term Capital Gain, not business income. Tribunal emphasizes consistency and intention at purchase.

The Tribunal allowed the appeal, holding that income from the sale of shares should be classified as Short Term Capital Gain, not business income. ... Correct head of income - Gain on sale of shares - nature of purchase of shares either as “investment” or “stock-in-trade” - STCG v/s business income - period of holding of shares - assessee is maintaining its shareholding in two separate portfolios namely one as “investment” and another as “stock-in-trade” - HELD THAT:- It is clear from Clause 3(b) of the CBDT Circular No. 6 of 2016 dated 29.02.2016 made it clear 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. As it can be seen from the assessment order, the assessee is consistently taking the same stand of that the shares held as “investment” is offered for capital gains or loss. AO has not given any clear cut finding that the shares held as “stock-in-trade” were sold by the assessee and claiming capital gain. When this basic foundation is not being doubted by the AO - The action of the A.O. treating the sale of shares held as “investment” by the assessee and offered the same for short term capital gain cannot be treated as business income. For the only reason that the assessee is not carrying out any business activity during this assessment year except the sale of shares. Thus we hold that the sale of SIL shares held by the assessee as investment is to be treated only as short term capital gain and not as business income and thus we allow the grounds of appeal of assessee. Issues Involved:1. Classification of income from sale of shares as Short Term Capital Gain (STCG) or Business Income.2. Consistency in the treatment of shares as investment or stock-in-trade.3. Application of First In First Out (FIFO) method for calculating gains or losses.4. Set-off of Long Term Capital Loss (LTCL) against business income.5. Charging of interest under sections 234B and 234C.6. Initiation of penalty proceedings under section 271(1)(c).Detailed Analysis:1. Classification of Income from Sale of Shares:The core issue was whether the income from the sale of shares in Sintex Industries Limited (SIL) should be treated as Short Term Capital Gain (STCG) or as Business Income. The assessee argued that the shares were held as investments and thus the income should be classified as STCG, which is taxed at a lower rate under Section 111A. The Assessing Officer (AO) contended that the frequent and high-volume transactions indicated a trading activity, thus classifying the income as business income taxable at a higher rate. The Tribunal noted that the assessee consistently maintained two separate portfolios for investment and trading, which was recognized in previous assessments. The Tribunal held that the sale of shares held as investments should be treated as STCG, not business income, relying on precedents such as Pr.CIT vs. Bhanuprasad D Trivedi (HUF) and CIT vs. Gopal Purohit.2. Consistency in Treatment of Shares:The assessee maintained that it had consistently classified shares as investments in its balance sheet, which was accepted by the AO in previous years. The Tribunal emphasized the importance of consistency and the intention at the time of purchase, as supported by CBDT Circular No. 4 of 2007 and Circular No. 6 of 2016. The Tribunal found no reason to deviate from the established treatment of shares as investments, thereby supporting the assessee's classification of income as STCG.3. Application of FIFO Method:The AO argued that the assessee did not follow the FIFO method, which distorted the true picture of transactions. The assessee countered that it had indeed followed the FIFO method for accounting shares. The Tribunal did not find sufficient evidence from the AO to dispute the assessee's claim and thus did not address this issue in detail, given the primary decision on the classification of income.4. Set-off of Long Term Capital Loss (LTCL):The assessee sought to set off LTCL against the business income assessed by the AO. The Tribunal clarified that LTCL can only be set off against Long Term Capital Gains (LTCG) and not against business income, as per the Income Tax Act. Consequently, the Tribunal dismissed the alternative ground for set-off of LTCL.5. Charging of Interest under Sections 234B and 234C:The assessee contested the charging of interest under sections 234B and 234C. The Tribunal noted that this issue is consequential to the primary decision on the classification of income. Since the primary grounds were decided in favor of the assessee, the interest charges would need to be recalculated accordingly.6. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee also challenged the initiation of penalty proceedings under section 271(1)(c). The Tribunal did not separately adjudicate this issue, given its decision on the primary grounds, which would inherently affect the penalty proceedings.Conclusion:The Tribunal allowed the appeal filed by the assessee, holding that the income from the sale of SIL shares should be treated as Short Term Capital Gain and not as business income. The Tribunal emphasized the importance of consistency and the intention at the time of purchase, supported by various judicial precedents and CBDT circulars. The remaining grounds were deemed consequential and did not require separate adjudication. The appeal was thus allowed in favor of the assessee.