IPO shares sale gains treated as short-term capital gains not business income under consistency principle

ITAT Ahmedabad held that gains from sale of IPO-allotted shares should be treated as short-term capital gains rather than business income. The tribunal applied the principle of consistency, noting the assessee had previously treated similar transactions as STCG which was accepted by the department in scrutiny assessment. The Revenue failed to provide valid reasons for changing its stance. The tribunal emphasized that when shares are held as investments rather than stock-in-trade, resulting gains must be classified as capital gains. The decision cited CBDT circular promoting consistency to reduce litigation and referenced Gujarat HC precedent supporting capital gains treatment for investor transactions. Assessee's appeal was allowed.

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Issues:
Nature of gain on sale of shares - Short Term Capital Gain (STCG) or business income

The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) for the Assessment Year 2016-17, where the Short-Term Capital Gain (STCG) of Rs. 1,37,46,867/- in respect of shares purchased through IPO was treated as business income by the Assessing Officer (AO). The assessee contended that the shares were held as 'Investment' and not as 'stock-in-trade', and all transactions were delivery-based. The assessee had consistently shown income derived from the sale of shares as STCG in previous years. The Revenue argued that the intention of the assessee was to maximize profit through an adventure in the nature of trade. The Income Tax Appellate Tribunal (ITAT) considered the facts and materials on record, noting that the shares were disclosed as 'investment' in the balance sheet and were sold within a short period after allotment. The ITAT observed that the Department had accepted STCG in the preceding year for similar transactions. The ITAT referred to a CBDT Circular emphasizing the principle of consistency in treating gains from listed shares held for less than 12 months. Relying on legal precedents, the ITAT held that the gain on the sale of shares allotted through IPO should be treated as STCG, following the principle of consistency. The appeal filed by the assessee was allowed, and the order was pronounced on 07/06/2024.

In this case, the primary issue was whether the gain arising from the sale of shares allotted through an IPO should be treated as Short Term Capital Gain (STCG) or business income. The ITAT analyzed the facts and contentions presented by both parties. The assessee argued that the shares were held as investments and not for trading purposes, supported by the consistent disclosure of income as STCG in previous years. The Revenue contended that the intention of the assessee was profit maximization through a trade-like activity. The ITAT considered the CBDT Circular, legal precedents, and the principle of consistency in determining the nature of the gain. Ultimately, the ITAT held that the gain should be treated as STCG, aligning with past practices and legal interpretations. This decision highlights the importance of consistency and intention in determining the tax treatment of gains from share transactions.

The ITAT emphasized the significance of the principle of consistency in tax assessments, especially regarding the treatment of gains from share transactions. By referring to legal precedents and the CBDT Circular, the ITAT established that the nature of the gain should be determined based on the intention of the assessee and past practices. The decision underscores the need for tax authorities to maintain consistency in their approach to similar transactions to reduce litigation and uncertainty. The judgment provides clarity on the distinction between Short Term Capital Gain and business income in the context of share transactions, ensuring fair and consistent application of tax laws.

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