2023 (3) TMI 725 - HC - Income Tax

Ruling upholds classification of share sale proceeds as long-term capital gains, reversing CIT(A) and rejecting business income characterisation

HC upheld tribunal's conclusion that gains on sale of shares were long-term capital gains, not business income. Tribunal correctly found investment nature ... Long-term capital gains vs business income - investment portfolio vs trading portfolio - mixed funds and appropriation presumption - principle of consistency in tax treatment - retrospective application of beneficial CBDT circulars - onus of proof for claiming tax exemptionLong-term capital gains vs business income - investment portfolio vs trading portfolio - The profit of Rs. 4,32,09,144 arising from sale of shares in six companies is to be treated as long term capital gains and not business income. - HELD THAT: - The Tribunal separately examined the transactions in respect of the long term shares (distinguishing them from short term dealings) and found that the shares in question were purchased in earlier years and largely held as investments; there was no material to show that those transactions formed part of a systematic trading activity. The High Court accepted the Tribunal's factual findings that the long term shares had been acquired in preceding years, the investment amounts were small relative to the assessee's capital and profits, and the revenue did not establish that the transactions constituted an organised business of trading in those scrips. On this basis the Tribunal's conclusion that the identified sum should be taxed as long term capital gains was upheld. [Paras 20, 21, 23, 26, 33]Held for the assessee: the Rs. 4,32,09,144 is long term capital gains.Mixed funds and appropriation presumption - onus of proof for claiming tax exemption - The fact that transactions were routed through a cash credit (mixed) account did not, without further material, justify a conclusion that borrowed funds were used for the investments. - HELD THAT: - CIT(A) had inferred use of borrowed funds from the flow through a cash credit account; the Tribunal found the account to be mixed/composite and noted absence of evidence that borrowings specifically funded the investments. Given the undisputed facts that the investments were small relative to the assessee's capital/reserves and annual profits, the High Court held that the revenue had not discharged the burden of proving that borrowed funds were used, and a presumption of borrowings cannot be drawn solely from the account being a cash credit account. [Paras 21, 23]Held that no automatic presumption of borrowed funds use arises from routing through a cash credit account; Tribunal's finding in favour of the assessee is justified.Investment portfolio vs trading portfolio - long-term capital gains vs business income - The CIT(A)'s adverse inferences based on alleged thin trading, lack of dividends and phenomenal appreciation were not sufficient to convert the long term share disposals into business income where genuineness of transactions was not doubted. - HELD THAT: - CIT(A) treated certain scrips as penny/illiquid stocks and drew inferences that the motive was trading rather than investment. The Tribunal and the High Court noted that neither the Assessing Officer nor CIT(A) doubted the genuineness of the transactions and that adverse inferences on thin trading or absence of dividends, without more, could not displace the finding that the disposals were of investment assets held over from earlier years. Accordingly, the Court declined to sustain CIT(A)'s characterization on those grounds. [Paras 24]CIT(A)'s findings on penny stocks/dividend absence were not a proper basis to recharacterise the long term disposals as business income; reversed.Principle of consistency in tax treatment - long-term capital gains vs business income - The revenue cannot depart from the department's earlier consistent acceptance of the transactions as investments and capital gains in absence of fresh material warranting a different view. - HELD THAT: - The assessee had treated the relevant shares as investments in earlier assessment years and those treatments were accepted by the department. The Court emphasised that while departure from a prior consistent view is permissible if fresh material exists, no fresh material was placed before the authorities to justify reversing the earlier consistent treatment. The Tribunal's reliance on consistency of prior assessments, taken together with absence of new evidence, supported upholding the characterization of the long term disposals as capital gains. [Paras 25, 26, 27]Held that absent fresh material, the department's departure from earlier consistent treatment was not justified; consistency favours assessee.Retrospective application of beneficial CBDT circulars - investment portfolio vs trading portfolio - Beneficial CBDT circulars clarifying treatment of listed and unlisted shares can be relied upon by the assessee and, insofar as they are favourable, may be given retrospective effect. - HELD THAT: - The Court reviewed CBDT Circulars (2007 and 2016) which acknowledge that an assessee may maintain separate investment and trading portfolios and instruct that where listed shares held over 12 months are treated by the assessee as capital assets the assessing officer should not dispute that stand; further guidance was given for unlisted shares. The High Court held that such clarificatory directions, being at least partially beneficial to taxpayers, can be applied retrospectively and may be invoked by the assessee, and that the circulars reinforce the acceptability of treating the long term disposals here as capital gains. [Paras 28, 29, 31, 32]Held that the CBDT circulars may be relied upon by the assessee and the beneficial instructions can have retrospective application; they support the assessee's position.Final Conclusion: The appeal is dismissed. The High Court upholds the Tribunal's classification of the specified Rs. 4,32,09,144 as long term capital gains for Assessment Year 2005 06, finds no basis to treat those receipts as business income, accepts the Tribunal's conclusions on mixed account/funds and consistency, and holds that beneficial CBDT circulars may be invoked by the assessee. Issues Involved:1. Whether the profit of Rs. 4,32,09,144/- on the sale of shares should be treated as long-term capital gains or business income.2. Whether the principle of consistency should be applied in treating the transactions.3. The relevance and application of CBDT Circulars on the treatment of income from the sale of shares.Summary:Issue 1: Treatment of Profit as Long-Term Capital Gains or Business IncomeThe assessee filed its return of income declaring a total income of Rs. 3,41,56,466/-. The case was selected for scrutiny, and the Assessing Officer (AO) issued a show-cause notice questioning the treatment of profits from the sale of shares as long-term capital gains instead of business income. The AO concluded that the transactions were systematic, frequent, and organized, indicating a business activity rather than investment. The AO relied on various judicial precedents to support this conclusion.The assessee contended that the shares were held as investments, consistently shown in the balance sheet, and the profits were shown as capital gains. The CIT(A) upheld the AO's decision, noting that the transactions were conducted in a systematic manner, and the funds used were borrowed, indicating a business activity. The CIT(A) also noted that the shares were thinly traded and illiquid, and the companies had not declared dividends, further supporting the conclusion that the transactions were business activities.The Tribunal, however, segregated the transactions and concluded that the long-term capital gains on which STT was paid should be treated as capital gains, not business income. The Tribunal noted that the total investment in shares was less than Rs. 50 lakhs, while the capital and reserve of the assessee were significantly higher, indicating that the investments were made from the assessee's own funds and not borrowed funds. The Tribunal found no evidence to support the AO's conclusion that the transactions were business activities.Issue 2: Principle of ConsistencyThe Tribunal emphasized the principle of consistency, noting that the department had accepted the treatment of similar transactions as investments in previous years. The CIT(A) acknowledged this but argued that a different view could be taken if fresh material justified such a departure. However, the Tribunal found no fresh material to warrant a different treatment for the assessment year under consideration.Issue 3: Application of CBDT CircularsThe Tribunal referred to CBDT Circular No. 4 of 2007 and Circular No. 6 of 2016, which clarify the distinction between shares held as stock-in-trade and shares held as investments. The Circulars emphasize that an assessee can have both an investment portfolio and a trading portfolio, and the income from each should be treated accordingly. The Circulars also state that if the assessee treats the income from the transfer of listed shares held for more than 12 months as capital gains, the AO should not dispute this treatment. The Tribunal concluded that these Circulars, being beneficial to the assessee, should be applied retrospectively.ConclusionThe Tribunal's decision to treat the profit of Rs. 4,32,09,144/- as long-term capital gains was upheld, applying the principle of consistency and the beneficial CBDT Circulars. The appeal by the revenue was dismissed, and the substantial questions of law were answered against the revenue.