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Facts
The appeal pertains to AY 1993-94 and concerns the classification of gains from the sale of shares as business income versus capital gains. The Assessing Officer (AO) treated the entire gain as business income, while the assessee contended it should be treated as capital gains.
Held
The Tribunal held that the assessee has the right to decide whether shares are held as investment or stock-in-trade. Following the CBDT circulars and the facts of the case, the Tribunal directed the AO to treat the gains from the sale of shares as long-term capital gains, as offered by the assessee.
Key Issues
Whether gains arising from the sale of shares should be treated as business income or capital gains, and whether the AO correctly disallowed the classification of such gains as long-term capital gains.
Sections Cited
144, 234A, 234B
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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE
O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order of the ld. CIT(A) – 52, Mumbai, dated 30/07/2024 pertaining to AY 1993-94.
The grievance of the assessee read as under:- “1. The Ld. CIT (A) has erred in directing the Assessing Officer to tax sum of Rs. 82,37,284/-as income on account of dividend and interest. 2. In facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addition made by the Assessing Officer as 'business income' in respect of gain aggregating to Rs. 1,98,99,186/- arising on sale of shares of Grasim Industries and Ambuja Cement instead of taxing the same as 'Capital Gains'. 3. In facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addition made by the Assessing Officer of Rs. 16,56,000/- in respect of alleged profit on sale of shares of Reliance Petro Chemicals Ltd.
4. The Ld. CIT(A) has erred in directing the Assessing Officer to levy interest u/s. 234A and 234B of the Act.
5. The Ld. CIT(A) and the Assessing Officer have failed to appreciate that the appellant could not pay tax due to legal impossibility arising out operation of law. 6. In the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in not entertaining the additional grounds filed by the appellant challenging the following : a) Addition of Rs. 13,77,00,000/- on account of interest accrued on 17% NTPC Bonds. b) Addition of Rs. 65,00,000/- on account of interest accrued on 13% NLC Bonds c) Not granting deduction in respect of interest expenditure of Rs. 13,61,09,436/- d) Levy of interest u/s. 234A and 234B without appreciating that TDS was deductible in respect of certain income.
The order passed by the Assessing Officer is as not as per the provisions of the Income Tax Act and illegal and bad in law.
The order passed by the CIT(A) is in violation of principles of natural justice and the provisions of the Act.
9. The appellant craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal.”
3. At the very outset, the ld. Counsel for the assessee stated that he is not pressing Ground Nos. 1, 4, 5, 6, 7, 8 & 9. Therefore, all these grounds are dismissed as not pressed.
4. The surviving grounds read as under:- “2. In facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addition made by the Assessing Officer as 'business income' in respect of gain aggregating to Rs. 1,98,99,186/- arising on sale of shares of Grasim Industries and Ambuja Cement instead of taxing the same as 'Capital Gains'.
3. In facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the addition made by the Assessing Officer of Rs. 16,56,000/- in respect of alleged profit on sale of shares of Reliance Petro Chemicals Ltd.”
5. Briefly stated, the facts of the case are that the original assessment in the first round was framed u/s 144 of the Act vide order dated 19/03/1996. The assessment was challenged before the ld. CIT(A) and 3 the ld. CIT(A) order dated 28/02/2001, decided the issues and remitted the matter back to the files of the AO. Subsequent to the order of the ld. CIT(A) giving effect was passed on 20/07/2001.
6. In the second round, the ld. CIT(A) framed order on 20/05/2003 which was challenged before the Tribunal and the Co-ordinate Bench in set aside the issues and allowed the appeal of the assessee for statistical purposes. 7. The issues raised vide Ground No. 2 relates to the treatment of the capital gains as business income. This issue emanates from the assessment order in the first round of litigation dated 19/03/1996 wherein the AO has discussed the shareholding of the assessee in certain companies which have been considered in AY 1992-93 as on 31/03/1992. The shareholding of the assessee in these companies after the date of notification i.e., 08/06/1992 has been compiled by the custodian and the shareholding can be understood from the following chart:-
7.1. From the above chart, the AO found that there is reduction in the shareholding as under:-
8. The reduction in shareholding is treated as unaccounted sales and addition of Rs.1,34,44,208/- was made. Before the ld. CIT(A), it was strongly contended that 7850 shares of Grasim were sold on 09/04/1992 from which the assessee earned long-term capital gains of Rs. 31,30,923/-. Similarly on the sale of shares of Gujarat Ambuja Cement, long-term capital gain was earned at Rs.1,53,27,369/-. It was brought to the notice of the ld. CIT(A) that the assessee has shown much higher gains than the profit computed by the AO in the impugned shares. The ld. CIT(A) observed that the AO has estimated income at Rs. 1,34,44,208/- whereas the assessee has shown profit of Rs.1,84,59,292/- . However, the ld. CIT(A) found that the assessee has shown the profit as long-term capital gains. The ld. CIT(A) accordingly directed the AO to consider the same and to re-compute the income as per law. While giving effect to the order of the ld. CIT(A), the AO did not accept the claim of the assessee that the profits arising from the sale of shares of Grasim and Gujarat Ambuja cement resulted into long-term capital gains. The AO was of the opinion that the assessee has not filed any proof regarding acquisition of assets as well as whether the assets have been held as investments or stock-in-trade. The AO concluded by holding that the assessee has not proved that the asset in question was 5 capital asset hence question of considering the sale of said asset as long term capital gain does not arise. The AO accordingly treated the entire addition as profits and gains of business.
We have carefully perused the order of the authorities below from the first round of litigation. The details of purchase and sales of two shares giving rise to long term capital gains is as under:-
SR. PURCHASE SALE AMOUNT SCRIP NAME DATE PROFIT NO. (QTY) (QTY) DEBIT CREDIT GRASIM IND. 03-04-1991 7,850 18,17,883 1 LTD 09-04-1992 7,850 51,68,048 33,50,165 26-10-1990 25,000 26,69,156 03-01-1991 500 47,243 GUJ. 2 AMBUJA 21-03-1991 15,000 19,62,394 CEMENTS 05-04-1991 10,000 13,90,000 27-04-1992 50,500 2,26,17,814 1,65,49,021 TOTAL 58,350 58,350 78,86,676 2,77,85,862 1,98,99,186
Whether the assessee is holding shares as investment or stock-in- trade, has been explained by the CBDT in its Circular which reads as under:- Circular No. 6 of 2016, dated February, 2016. Government of India Ministry of Finance Department of Revenue Central Board of Direct Taxes North Block, New Delhi, the 29th of February, 2016 Sub: Issue of taxability of surplus on sale of shares and securities - Capital Gains or Business Income - Instructions in order to reduce litigation - reg.- 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 taxpayers 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.
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.
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.”
From the above circular, it is clear that it is the assessee who decides whether the shares are held as investment or stock-in-trade and if the assessee decides that the shares are held as investments, the AO has to assess the gains as such. From the above charts it can be seen that the assessee has earned long term capital gains on sale of shares of Grasim Industries Ltd. and Gujarat Ambuja Cement. The said capital gains from two companies were included in the aggregate long term capital gain of Rs. 2,70,97,356/- earned by the assessee during the year which can be seen from the copy of computation of income. From the 7 above chart it can be seen that the shares of Grasim Industries Ltd. were purchased on 03/04/1991. The assessee has purchased 60000 shares. Copy of the contract note placed on record evidence the said purchases. Out of the said holding, the assessee sold 7850 shares during the year which is also evidenced from copy of the contract notes. Similarly, purchase of shares of Gujarat Ambuja Cements are also evidenced by the copies of the contract notes on record. Interestingly, the residual investment in the shares of the aforementioned companies have been sold in the subsequent assessment years where the capital gains offered by the assessee have been accepted as such.
Considering the facts of the case in totality in light of the CBDT Circular, we do not find any merit in the action taken by the lower authorities. We accordingly direct the AO to treat the gains from sale of shares as long term capital gains as shown by the assessee. Ground No. 2 is accordingly allowed.
Ground No. 3 relates to the addition made by the AO at Rs. 16,56,000/- in respect of alleged profit on sale of shares of Reliance Petro Chemicals Ltd.
The assessee disputes the taxability of Rs.16,56,000/- as profit during the year under consideration. It is the say of the ld. Counsel for the assessee that the said addition has been wrongly worked out by the AO. The assessee was holding 19,75,500 shares of Reliance Petro Chemicals Ltd. (RPCL) on 31/03/1992 and after date of notification i.e., 08/06/1992 as per information received from the custodian, the shares were 16,85,700 shares. The assessee had originally acquired debentures of RPCL which were later converted into 19,75,500 shares, out of which assessee sold 5,68,300 shares during the accounting year relevant to AY 1992-93 and holding as on 31/03/1992 was only 14,07,200 shares and since there was no change in holding, therefore, no question of any profit arose.
The aforestated contention of the assessee was dismissed as the AO was of the opinion that the assessee has only filed details of sale of RPCL shares along with contract notes and not submitted any proof that the figure adopted by the AO is not correct. The details of purchase of RPCL debentures and its conversion can be understood from the following chart:-
SR. NO. SCRIP NAME QTY PARTICULARS Reliance Petrochemicals Ltd- 'C"- 1 1,31,700 RPL C-Deb. Purchased In A.Y. 1992-93 DEBENTURE Reliance Petrochemicals Ltd- RPL-C Deb. Converted into Equity Shares in 2 19,75,500 Shares ratio of 15:1 on 01-12-1991 Reliance Petrochemicals Ltd- RPL Shares were sold and Capital gains offered in 3 Shares - 5,68,300 A.Y. 1992-93 Reliance Petrochemicals Ltd- 4 14,07,200 Closing Stock of RPL Shares as on 31- 03-1992 Shares Reliance Petrochemicals Ltd- RPL Shares were not sold during A.Y. 1993-94 5 14,07,200 Shares therefore closing stock is same as on 31-03-1993 15.1. Thereafter, the contract notes are on record from pages 147 onwards. Vide reply dated 25/07/2024, addressed to the ld. CIT(A)-52, Mumbai, the assessee has explained the breakup of the capital gains of Rs. 1,83,60,885/- which includes capital gains on sale of 5,68,300 shares of RPCL amounting to Rs. 16,56,000/-.
The assessee raised an additional ground of appeal
in AY 1992-93, which reads as under:- “Additional ground of appeal
1. The ld. CIT(A) ought to have assessed following income under various heads derived by the assessee based on actual transactions duly reflected in the books of accounts. a. Business loss – Rs.3,64,30,126/- b. Income from capital gains – Rs.1,83,60,885/-