CIT Vs Century Plyboards (I) Ltd. (Calcutta High Court)
Calcutta High Court has upheld the order of the Income Tax Appellate Tribunal (Tribunal), ruling in favor of Century Plyboards (I) Ltd. and against the Commissioner of Income Tax (CIT). The core dispute revolved around whether the profit of ₹4,32,09,144/- earned by the assessee company from the sale of shares in six companies during the assessment year 2005-2006 should be taxed as long-term capital gains, as claimed by the company, or as business income, as contended by the Assessing Officer (AO).
The AO had argued that the frequent and systematic nature of the share transactions, coupled with the company’s Memorandum of Association allowing business in shares and the engagement of a portfolio manager, indicated a profit motive characteristic of business activity. This view was initially supported by the Commissioner of Income Tax (Appeals) [CIT(A)], who also pointed to the debit balance in the company’s cash credit account, suggesting the use of borrowed funds for these transactions.
However, the Tribunal overturned the CIT(A)’s order for long-term capital gains, particularly those on which Securities Transaction Tax (STT) was paid. The Tribunal observed that the investment in these shares (under ₹50 lakhs) was significantly lower than the company’s capital and reserves, as well as its annual profits. It found no concrete evidence that borrowed funds were specifically used for these investments, even though the transactions were routed through a cash credit account also used for the company’s main plywood business. The Tribunal relied on the principle established in the C.E.S.C. Limited case (Calcutta High Court), which held that if business profits are deposited in a mixed account and the investment is less than the profit, it can be presumed that the investment was made from those profits.
Further supporting this view, the High Court also referred to the Supreme Court’s decision in South Indian Bank Limited, which stated that when an assessee has mixed funds (both interest-free and interest-bearing), investments should be presumed to be made from the interest-free funds if such funds are sufficient. The Revenue’s argument that the assessee should have maintained separate accounts for investments was rejected, as no such statutory requirement was presented. The High Court also noted the consistent treatment of these long-term shares as investments by the Income Tax Department in preceding assessment years (2003-2004 and 2004-2005), emphasizing the principle of consistency in tax assessments unless fresh material warrants a different view. No such fresh material was found in this case.
The High Court also addressed the CIT(A)’s observations regarding the thinly traded and illiquid nature of some shares and the lack of dividend declarations. The court stated that these aspects were irrelevant as the AO had not doubted the genuineness of the transactions. Such an examination would only be warranted if the legitimacy of the transactions was in question. The court also considered Circulars issued by the Central Board of Direct Taxes (CBDT) in 2007 and 2016, which clarify the distinction between shares held as stock-in-trade and those held as investments and emphasize consistency in their treatment. Ultimately, the Calcutta High Court found no grounds to interfere with the Tribunal’s order, dismissing the Revenue’s appeal and answering the substantial questions of law against the department.
The assessee emphasized that the number of transactions or the holding period alone does not define a business activity. Citing several precedents, including CIT v. Trishul Investments Ltd., the company maintained that intention and treatment of the assets—rather than volume or frequency—were decisive factors. The court agreed that even with a profit motive, investments don’t automatically qualify as business activities. The Tribunal had also noted that previous assessments had consistently treated similar gains as capital gains.
