Sale of shares held as investment is to be treated as capital gain

Chandan Infratech Ltd Vs ITO (ITAT Ahmedabad)

Held that the sale of SIL shares held by the assessee as investment is to be treated as short term capital gain and not as business income.

Facts-

The assessee is engaged in the business of consultancy service, trading, and investment in securities. During the course of assessment proceedings, AO noticed that the assessee had sold shares of Sintex Industries Limited (SIL). AO held that the assessee traded in shares of SIL and earned huge profit and claimed the same as a capital gain. Show cause notice was issued to the assessee and was required to explain why the STCG of Rs. 22.36 crore should not be taxed as business income, since there was no business activity by the assessee other than these sale of SIL shares.

CIT(A) confirmed the same. Being aggrieved, the assessee preferred the present appeal.

Conclusion-

Held that 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.

FULL TEXT OF THE ORDER OF ITAT AHMEDABAD

The present appeal has been filed by the Assessee against the order dated 29.03.2016 passed by the Commissioner of Income Tax (Appeals)-6, Ahmedabad, as against the Assessment order passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2011­12.

2. The brief facts of the case is the assessee is a Limited Company and is engaged in the business as consultancy service, trading and investment in securities. For the Assessment Year 2011-12, the assessee filed its return of income on 30/09/2011 declaring total of Rs. 22,42,98,580/- which comprised of income from property of Rs. 7,35,000/- and short term capital gain of Rs. 22,36,30,580/- which has arisen on sale of shares held by the assessee as investment. The return was processed u/s. 143(1) of the Act and then selected for scrutiny assessment.

3. During the course of assessment proceedings, the Assessing Officer found that the assessee had sold shares mainly in one company namely Sintex Industries Limited (for short SIL). As on 01/04/2010, the assessee was holding 1,91,693 shares of SIL purchased before 31/03/2009. During the month of March 2010 assessee has purchased 32,76,952 shares of SIL and the same were sold between14/07/2010 to 19/07/2010. This clearly shows the assessee has traded in shares of SIL and earned huge profit and claimed the same as capital gain. Therefore, a show cause notice dated 19.02.2014 was issued to the assessee and was required to explain why the Short Term Capital Gain (STCG) of Rs. 22.36 crore should not be taxed as business income, since there was no business activity by the assessee other than these sale of SIL shares.

4. The assessee replied that it had made investment in shares of Sintex Industries Ltd. company only with a motive to hold it as investment and the shares had never been converted into stock-in-trade. The assessee was properly maintaining two portfolios of shares held by the assessee one as investment and another as stock-in-trade. What are the sale of shares held as investment is offered for capital gains or loss, and similarly the sale of shares held as stock-in-trade is offered as business income/loss. The assessee further submitted that Schedule-5 of the balance sheet of the assessee company clearly shows that the assessee was holding 51,93,393 equity shares of Sintex Industries Ltd. as its long term investment which were purchased from the Assessment Year 2008­09 of Rs. 11,41,393 shares. During the Assessment Year 2009-10, 7,65,000 shares were purchased and during the Assessment Year 2010-11 32,87 shares were purchased. Thus the assessee consistently classified these shares as investment in its balance sheet. The assessee company also received dividend out of the above shares amounting to Rs. 6,77,458/-.

5. The assessee’s replied was considered by the Assessing Officer and held that the transaction carried out by the assessee are in the nature of trade not as an investment. Mere classification of shares transaction as investment in the books of accounts is not conclusive. The assessee has claimed certain shares to be investment, though these transactions were only in the nature of trade. It is also evident that for the purpose of claiming benefit of lower rate of tax u/s. 111A. Therefore the profits on sale of shares is to be treated as business profit and chargeable at maximum rate instead of the asessee’s claim it as Short Term Capital Tax which is chargeable at lower rate of tax. Thus the Assessing Officer determined the total income as Rs. 19,34,10,140 and demanded tax thereon.

6. Aggrieved against the same, the assessee filed an appeal before the Ld. CIT(A) and submitted that the assessee company had right from the very beginning maintaining two separate portfolios in respect of shares and securities, one in respect of the business of trading in shares and another in respect of investment. The shares which are purchased for the purpose of trading falls in the basket of “business of trading in shares,” while the shares which are acquired for the purpose of investment are held in the portfolio of investment. It is the settled position of law as held by the Hon’ble Bombay High Court in the case of Gopal Purohit (2010) 34 DTR 52. It was further submitted that this aspect of maintaining two separate portfolios has been duly accepted by the department in the scrutiny assessment made for all the Assessment Years up to Assessment Year 2010-11. Thus for the present Assessment Year 2011-12, the Assessing Officer is not justified in treating the transaction of disposal of shares held as investment as “trading in shares” and thereby treating the short term capital gain as “income from business”. On principle of consistency of approach, the Assessing Officer grossly erred in treating the surplus on sale of investments as income from the sale. In support of the same, the assessee relied upon various judgments of the Hon’ble Supreme Court and various High Courts. The assessee further submitted that it is an undisputed fact that as on 31/03/2010, the assesse company was holding 51,93,393 shares of Sintex Industries Ltd. as investment Out of the above said shares, the assessee company had sold of 32,76,952 shares in the month of July, 2010 and claimed as Short Term Capital Gain of Rs. 22,36,38,580/-. The STCG, which is arising on transfer of shares held as “investment” is chargeable to tax at the special rate prescribed u/s. 111A of the Act. However, the assessing officer erroneously treated the above transactions business income of the assessee. The Assessing Officer failed to note the shares which are acquired with motive to hold it as investment are kept in “investment portfolio” and the same is reflected in the books of accounts and the balance sheet. The assessee further reiterated that when the assessee acquired the shares, its intention at all point of time was to hold it as an investment. With a view to safeguarding the investment held by the assessee and in order to see that value of its investment does not erode due to volatile conditions of the share market at times, depending upon the situation, the assessee has disposed of a part of its investment. Further the value of shares does not get eroded in long run which being its investment. Because of the favourable market conditions, the transaction of sale of shares held as investment has resulted in surplus. Such surplus does not partake the character of “business income” because what has been sold by the assessee is not stock-in-trade. Further, it is submitted that, if the assessee retained the investment for a few months more and sold the same in April, 2011, the surplus arising from such transaction would be long term capital gain and in that event, the assessee would be getting exemption u/s. 10(38) on sale of such shares. This method of retaining the investment for a period of few more months would have been more beneficial to the assessee in terms of incidence of tax, because of exempt u/s. 10(38) of the Act. However, the assessee has sold the shares and claimed Short Term Capital Gain of Rs. 22.36 crores and paid tax thereon. This clearly shows the bona fide of the assessee in paying the short term capital gain tax which it is legally bound to pay by the assessee. For the Assessment Year, 2008-09, the Assessing Officer has accepted the profit on sale of shares held as investment as capital gain while passing the assessment order u/s. 143(3) of the Act.

7. The Ld.CIT(A) after considering the above submissions of the assessee, dismissed the assessee’s appeal as follows:

7.4 Thus it can be seen that the appellant has regularly purchased and sold the share of Sintex in large quantity at various rate ranging from 74.49 to 317.12/- and many times holding period of share was also less than 1 months. It is seen that the appellant bought 32,87,000 Sintax share in the month of March 2010 @ 270.73/- to 289.02 and sold 3,46,699 Sintax share in the month of April 2010 @ 312.39/- to 313.48/-. Thereafter 12,07,351 and 3,52,343 shares were sold in the month of June and July 2010 respectively. Since the appellant was not following FIFO method so true picture of the transaction was not shown therefore the holding period was shown more than 2 years.

7.5 From the foregoing it is evident that the intention of the appellant at the time of purchase of the shares, is to earn large profit and not to hold the stock as investment. The appellant has only dealt in the share of Sintex as others investment is in private limited company. The book treatment given by the appellant is sham as most of the shares were purchases in the month of April and sold also in the same financial year and it appears that the appellant was having some inside information and was acting on the same.

7.6 The Appellant, as found out by the AO has resorted to borrowed funds for investments in shares. The investments are made out of the borrowed funds which facts is born out based on the records. The frequency of transactions in the case of the Appellant is too high. This fact is evident from the statement of short term capital gains furnished during the course of the appellate proceedings. Considering the above facts it is clear that the appellant was frequently involved in the sale and purchase of the specific share and on the same date involved in the huge transaction of purchase and sale of the same shares which clearly indicate the profit motive and nature of trade and .adventure thus the same cannot be treated as investment. It is fact that the appellant arbitrarily showing the profit from sale of share as capital gain or business loss at its will therefore the same cannot be accepted. Therefore the A.O. is justified in treating the profit from sale of share as business income. The ground is dismissed.

7.7 The appellant has also taken the alternative ground that the Long Term Capital Loss of Rs. 1,94,90,83/- on sale of Long Term Capital Assets should be reduced from the business income of sale of share as assessed by the AO. I have carefully considered the contention of the appellant. As per the IT act an exception to intra head set off is loss under the head ‘Capital gains’, which may arise from transfer of any capital asset. Long-term capital loss arises from transfer of shares or units where holding period is more than 12 months and in respect of other assets holding period is more than 36 months prior to sale. Transfer of assets held for less than prescribed period results in short-term capital loss. Long-term capital loss cannot be set off against short-term capital gains. Further, loss incurred from speculation loss (e.g. from shares or commodities) cannot be set off against any other income. LTCL can only be set off against LTCG and cannot be set off against STCG which means that STCL can be set off against LTCG). Loss from an exempted source cannot be set off against taxable Income- If income from a particular source is exempt from tax, then loss from such source cannot be set off against any other income which is chargeable to tax. For example, agricultural income is exempt from tax, hence, if the taxpayer incurs loss from agricultural activity, then such loss cannot be adjusted against any other taxable income. As far as inter-head adjustment is concerned Capital loss, whether long term or short term, can be set off only against capital gains income. Loss under the head Capital Gains (LTCL or STCL) cannot be set-off against any other head. Thus the alternative ground is dismissed.

8. Aggrieved against the same the assessee is in appeal before us raising the following Grounds of appeal:

1. The learned Commissioner of Income Tax (Appeals) – 6, Ahmedabad [“the CIT(A)”] erred in fact and in law in confirming the order of Income Tax Officer, Ward-1(3), Ahmedabad [“the AO”] which is in fact bad in law and on contrary to the facts of the case. It is submitted that the same may be cancelled or suitably modified.

2. The learned CIT (A) erred in fact and in law in confirming the action of the AO of treating the short term capital gain of Rs. 22,36,38,580 as Income chargeable under the head “Profits and gains from Business or profession” and thereby computing tax at higher rate of 30% as against tax rate of 15% as provided under section 111A of the Income Tax Act, 1961.

3. The learned CIT (A) erred in fact and in law in confirming the action of the AO of treating shares held by appellant as stock-in-trade instead of the fact that shares were held by appellant were in nature of ‘Investment’ which are subject to tax as per provisions of section 111A /112 of the Income Tax Act, 1961,

4. The learned CIT (A) erred in fact and in law in confirming the action of the AO by holding that true picture of transactions were not shown on the ground that appellant was not following FIFO method for calculating gain or loss for sale of shares.

5. Without prejudice to grounds mentioned above, the learned CIT (A) erred in fact and in law in confirming the action of the AO for not allowing set-off of loss on sale of shares amounting to Rs. 1,94,90,583 while treating short term capital gain of Rs. 22,36,38,580 as the business income.

6. The learned CIT(A) erred in fact and in law in confirming the action of AO in charging interest u/s. 234B & 234C of the Act.

7. The learned CIT(A) erred in fact and in law in confirming the action of the AO in initiating penalty proceeding u/s 271(l)(c) of the Income Tax Act, 1961.

9. The Ld. Counsel Mr. Milin Mehta appearing for the assessee in support of its Ground nos. 1 to 3 submitted that the assessee company had Opening Stock of 51,93,393 shares of Sintex Industries Ltd. The Assessing Officer accepted sale 19,06,393 shares sold out of the stock as capital gain. However the Assessing Officer treated the remaining sale of shares namely 32,76,952 shares as “business income” due to high value of transaction. The Assessing Officer failed to consider that the assessee consistently classified these shares as investment in the balance sheet which has been accepted by the Assessing Officer for the Assessment Year 2008-09 while passing regular assessment order u/s. 143(3) of the Act. Thus the Assessing Officer cannot step into the shoes of the assessee to determine the nature of purchase of shares either as “investment” or “stock-in-trade”.

9.1. In this connection, the assessee relied upon Jurisdictional High Court judgment in the case of Pr.CIT vs. Bhanuprasad D Trivedi (HUF) (Guj.) reported in (2017) 87 taxmann.com 137 wherein it was held that the intention at the time of purchase is of paramount importance. The assessee also further relied upon the judgment of Deepaben Amitbhai Shah vs. DCIT (Guj.) reported in (2017) 397 ITR 687. The assessee also further relied upon in the case of CIT vs. Gopal Purohit (Bom) reported in (2010) 228 CTR 582. The assessee also further relied upon in the case of CIT vs. M.G. Share & Stock (P) Ltd. (2014) (Delhi High Court) reported in (2014) 52 taxmann.com 365 and submitted the sale of shares held as “Investment” and offered to tax as STGC cannot be charged as “Business Income”.

9.2. The Ld.Counsel further relied upon the decision of the Co­ordinate Bench in the case of Jank S. Rangwalla vs.ACIT (2007) 11 SOT 627 (Mum) wherein it was held that the mere holding of large magnitude of shares as investment on year to year and the transaction of sale would not form the basis to determine the nature of the transaction.

9.3. Regarding Ground no. 4 namely computation of Gain/Loss as per First In First Out (for short FIFO). The Ld. A.R. submitted the Assessing Officer considered the entire sale transaction as business income and concluded that the assessee has not followed FIFO to determine the profits whereas the assessee is following FIFO method for accounting of shares. In fact the Short Term Capital Gain working given by the assessee as clearly adopted the FIFO method which was not considered by the lower authorities.

10. Per contra, the Ld.D.R. appearing for the Revenue strongly supported the order of the lower authorities and pleaded to confirm the addition made by the lower authorities.

11. We have given our thoughtful consideration and perused the materials available on record including the Paper Book field by the assessee. It is an undisputed fact that the assessee is maintaining its shareholding in two separate portfolios namely one as “investment” and another as “stock-in-trade”. It is also undisputed fact by the Revenue that 51,93,393 equity shares of Sintex Industries Ltd. was held by the assessee as “investment” which is reflecting in the balance sheet of the assessee. The assessee acquired the above shares with its intention to hold the same as an investment. With a view to safeguarding the investment made in SIL shares and also to see the investment does not erode due to volatile conditions of the share market at all times and depending upon the favourable situation, the assessee disposed of a part of its investment in SIL Shares. Considering the market conditions during 14/07/2010 to 19/07/2010, the assessee sold SIL shares which was held as “investment” and resulted in short term capital gain to the assessee. Thus, the sale of shares and consequential short term capital gain does not partake the character of “business income” as held by the Assessing Officer. As rightly stated by the assessee, the above shares, if the assessee retained and sold in April, 2011, the above transaction would be long term capital gain, which is also exempt u/s. 10(38) of the Act. This submission of the assessee cannot be ignored. In such a situation, the assesse is not bound to pay tax, as the same exempt from payment of any taxes on sale of such shares as long term capital gain. But the assessee with a view to safeguarding the investment held by it and also in order to see the value of its “investment” dos not erode due to volatile conditions of the share market. The assessee has chosen to sale the shares as short term capital gain during the favourable market conditions. It is not the case that the assessee has not paid the short term capital gain. This clearly shows the bona fide intention of the assessee in promptly paying the short term capital gain taxes. Which is legally bound to pay by the assessee. We also note that the assessee was indulging in sale of shares for the assessment year 2008-09 wherein regular assessment is completed by the Assessing Officer on 16.04.2010 accepting the short term capital gain as offered by the assessee. Similarly, for the Assessment Year 2010-11, the regular assessment u/s. 143(3) was completed on 18.02.2013 accepting the return filed by the assessee. Thus, the assessing Officer cannot take a different stand for the present assessment year 2011-12.

11.1. The method of maintaining two portfolios is fully recognized under the accounting parlance and CBDT Circular No. 4 of 2007 dated 15/06/2007 recognized the same. This issue has been clarified by the Jurisdictional High Court in the case of Pr.CIT vs. Bhanuprasad D Trivedi (HUF) cited (supra) wherein it is held as follows:

3. Insofar as the first question is concerned, the Tribunal while confirming the view of the CIT (Appeals) referred to and relied upon the decision of Supreme Court in case of CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 as also the CBDT circular dated 15.06.2007 highlighting that whether a particular holding of shares, by way of investment or forms part of the stock-in-trade, is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are stock-in-trade and those which are held by way of investment. The Tribunal also referred to the recent circular of CBDT dated 29.02.2016 in which the guidelines have been provided for dealing with such an The principal intention being to reduce the litigation of the similar nature.  One of the directives of the said circular is that the assessee itself irrespective of the period of holding the listed shares and securities. One of intentions is that in  respect of listed shares and securities held by the assessee for a period of more  than 12 months before transfer, if the assessee desires to treat the income from  transfer of the shares as capital gain, the Assessing Officer would not dispute the  same. Relying on such materials, the Tribunal confirmed the view of the CIT (Appeals) making following observations:

“12. Considering the facts in hand, in the light of the aforementioned circular at the Board, in our considered opinion, the intention of the assessee at the time of the purchase of shares is paramount. If the assessee has clear intention of being an investor and showing the shares of investment we do not find any reason to disturb the intention of the assessee. The assessee under consideration is investor and therefore, any gain arising out the transfer of shares should be treated as capital gains be it short term or long term.”

4. The CIT (Appeals) and the Tribunal having applied such parameters on the facts of the case and having come to the conclusion that the assessee’s stand that the shares were held by way of investment and therefore the sale thereof should result in long term capital gain instead of business income, calls for no interference.

12 It is further noticed the CBDT has come up with subsequent Circular No. 6 of 2016 dated 29.02.2016 which reads as under:

Circular No. 6 of 2016 dated 29.2.2016 which will govern the field. The said Circular reads as under:

“Sub-section (14) of section 2 of the Income-tax Act, 1961 (‘Act’) defines the term “capital asset” to include property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock-in-trade or personal assets subject to certain exceptions. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in- trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past.

2. Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes (‘CBDT’) has also, through instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.

3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the tax payers find it difficult to prove the intention in acquiring such shares/securities. In this background, while  recognizing that no universal principal in absolute terms can be laid down to  decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further instructs that the Assessing  Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or business income, shall take  into account the following:

(a) Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income.

(b) 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;

(c) In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.

4. It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/Short Term Capital loss or any other sham transactions.

5. It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities.”

13. It is clear from Clause 3(b) of the above CBDT circular 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. The Assessing Officer 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 Assessing Officer. 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.

13.1. This view of ours is supported by the Jurisdictional High Court in the case of Deepaben Amitbhai Shah vs. DCIT cited (supra) wherein held as follows:

When assesses had made investment in shares as investor, income arising to assessee on sale of those shares would be assessable as ‘capital gains’, and not as ‘profit and gains of business or profession’

13.2. This view is further supported by the Hon’ble Bombay High Court in the case of CIT vs. Gopal Purohit cited (supra) wherein held as follows:

Section 45, read with section 28(i) of the Income-tax Act, 1961 – Capital gains – Chargeable as – Whether where Tribunal had a pure finding of fact that assessee was engaged in two different types of transactions, first set of transactions involving investment in shares and second set of transactions involving dealing in shares (without delivery) for purposes of business, it had correctly held that delivery-based transactions should be treated as those in nature of investment transactions and profit received therefrom should be treated either as short-term or as long-term capital gain, depending upon period of holding and profit from other transactions should be treated as business income – Held, yes

14. Similarly, Delhi High Court in the case of CIT vs. M.G. Share & Stock (P) Ltd. cited (supra) wherein held as follows:

Section 28(i), read with section 45, of the Income-tax Act, 1961 – Business Income -Chargeable as (Business income v. Capital gains/Share dealings) – Assessment year 2006-07 – Assessee was a sub-broker and maintaining two separate portfolios in respect of shares, one as investment and other as stock-in-trade – Revenue emphasised that all shares held should be treated as stock-in-trade and income earned should be treated as business income – However; it was found that shares were not transferred from one portfolio to other; investment portfolio had shares of a few companies and transactions were infrequent while transactions in trading portfolio were of thousands of shares in 199 companies – Whether, it would not be justified to treat short term gains related to investment portfolio also as business income – Held, yes [Para 8][In favour of assessee]

14.1. Respectfully following the above judicial precedent, 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 no.1 to 3.

14.2. Having answer the grounds of appeal no. 1 to 3 in favour of the assessee, the remaining grounds namely ground nos. 4 to 7 is consequential in nature and does not require separate adjudication by us.

15. Thus, the appeal filed by the Assesee is hereby allowed.

Order pronounced in the open court on 13-07-2022