SHRI NAMAN JAYESHBHAI SHAH,AHMEDABAD vs. THE ACIT CIRCLE-1(3), AHMEDABAD

We have carefully considered the facts of the case and the materials brought on record. The only dispute involved in this appeal is the nature of gain arising on sale of shares allotted to the assessee in IPO i.e. whether it is STCG or business income. It is found from the balance sheet of the assessee that the shares were disclosed as ‘investment’. It is also found that the shares were allotted to the assessee in IPO and after allotment the shares were sold mostly within a period of one month. As the holding period of all the shares was less than 12 months, the gain arising on sale of these shares was disclosed as STCG by the assessee. In the preceding A.Y. 2015-16 also, the assessee had disclosed STCG of Rs.23,42,561/- on sale of such shares which was accepted by the Department in the order u/s 143(3) of the Act dated 28.11.2017. In the current year, however, the Department has taken a different view and treated this gain as business income.

The contention of the Revenue is that the intention of the assessee was to earn profit and not long-term appreciation or earning of dividend. It is precisely for the reason that there was no intention for long-term appreciation that the shares were sold within 12 months and gain was shown as STCG. The earning of profit is always the intention whether the gain is treated as business income or capital gain. When the Act provides for a mechanism for disclosure of Short-Term Capital Gain, where the holding period is less than 12 months; the Revenue cannot take a plea that the intention was not long-term appreciation or earning of dividend. It is the intention of the assessee that (ShriNamanJayeshbhai Shah vs. ACIT) A.Y.– 2016-17- 5 – matters. Though the principle of res judicata is not applicable to Income Tax proceedings, still the treatment given by the Department to similar gains in the preceding year has to be taken into consideration.

The CBDT vide Circular No. 6/2016 dated 29.02.2016 has stipulated that “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”. As a corollary to this guideline where the assessee has treated the holding of shares as investment and not stock-in-trade, the income derived from transfer of such shares has to be considered as capital gain, either long-term or short-term depending upon the period of holding. The CBDT has also directed in the said Circular that for listed shares and securities held for a period of more than 12 months, the stand once taken by the assessee in a particular year shall remain applicable in subsequent assessment years also. Therefore, the principle of consistency was acknowledged by the CBDT in this Circular. Further this Circular was issued with a view to reduce litigation and uncertainty. Therefore, the principle of consistency has to be followed in the case of shares held for less than 12 months as well. The assessee had shown the sale of shares held for less than 12 months as STCG in the past year which was accepted by the Department in the scrutiny assessment. As the facts were identical, the Revenue was not correct in changing its stand without any valid reason to treat the STCG disclosed by the (ShriNamanJayeshbhai Shah vs. ACIT) A.Y.– 2016-17- 6 – assessee as business income in the current year. Further, no reason has been given by the Department for changing its stand for the treatment of the gain arising from sale of shares. The principle of consistency has be applied in respect of listed shares and securities held for a period of less than 12 months as well so as to reduce litigation and uncertainty.

Hon’ble Gujarat High court has held in the case of Deepaben Amitbhai Shah (supra) that when the assessee 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 business profit. It was also held in the case of Dhruv H. Patel (supra) that the intention of the assessee to apply in shares to IPO was to get higher allotment of shares and there was no repetitive purchase and sale of the same script. Under the circumstances merely because assessee had used borrowed capital to apply for such shares, it cannot be a ground to treat the gain arising on sale of shares allotted through IPO as business income.

Following the ratio of the above decisions as well as the facts as discussed above, we are of the considered opinion that the Revenue was not correct in treating the gain arising on sale of shares allotted through IPO as business income. Following the principle of consistency, the same should be treated as STCG.

In the result, the appeal filed by the assessee is allowed.