New Judicial thinking on capital gains & income-tax
By Subhash Lakhotia, Tax and Investment Consultant, Tax Guru : CNBC Awaaz
In the subsequent paragraphs latest judicial thinking of different High Courts is analysed with reference to Capital Gains and the Income-tax Law. These judicial decisions will help in the process of tax planning.
Bifurcation and Apportionment of Sale Consideration between land and factory building: The Delhi High Court in the case of Gadodia Electronics P. Ltd. v. CIT 341 ITR 380 held that where the sale consideration was accepted by the Assessing Authority and the Income-tax Appellate Tribunal referred back question of bifurcation and apportionment of sale consideration between land and factory building. Hence, in such situation the Assessing Officer while re-examining enhancing sale consideration already accepted would not be justified to re-examine the sale consideration and the quantum.
Purchase and Sale of Share not Capital Gain but Business Income: The Andhra Pradesh High Court in the case of P.V.S. Raju and P. Rajyalakshmi v. Additional CIT 340 ITR 75 held that the transaction relating to purchase and sale of shares would constitute business income of the assessee and not Capital Gain and this finding was based on the frequency, magnitude and the volume of the transaction. While deciding this important point the Honourable judges of the High Court were of the opinion that in deciding the question whether the shares of a company held by a person constitute his capital assets or they constitute his stock in trade various factors have to be taken into consideration to find out the exact character of the transaction. It was also held that the magnitude, the frequency and the ratio of sales to purchases and the total holding would be the evidence from which the Income-tax Appellate Tribunal can come to a conclusion to find out the true nature of the activities of the assessee.
Finally it was held that the voluminous share transactions were in the ordinary line of the appellants’ business ; purchase of shares by them was not for the purpose of earning dividend but with the dominant intention of resale in order to earn profits; the profit made by them is not of mere enhancement of value of the shares, but in a profit made in the carrying on of a business scheme or profit making ; huge volume of share transactions, the repetition and continuity of the transactions, give them a flavour of “trade”; the magnitude, frequency and the ratio of sales to purchases on the total holdings is evidence that the appellants had not purchased the shares as an investment, but with the intention to trade in such scrips. Thus, the profits on sale and purchase of share in the instant case was taxable as Business Income and not Capital Gains.
Capital Gains exempted on purchase of residential property before furnishing Income-tax Return under section 139(4): The Punjab and Haryana High Court in the case of CIT v. Ms. Jagriti Aggarwal 339 ITR 610 gave a very interesting decision which may be of benefit to the tax payers having long-term Capital Gain. In this case the brief facts were that the assessee sold her house property for Rs. 45 lakhs and claimed deduction under section 54 of the Income-tax Act, 1961. The assessee was served with a notice under section 142(1) of the Act, as to why the amount deducted be not added to her income as long-term capital gain, as the assessee failed to deposit the amount in the capital gain account scheme and also failed to purchase house property before the due date of filing the return of income. The assessee contested the claim of the Revenue and asserted that she is not liable to deposit the amount in the capital gain deposit scheme and that the due date of filing the return of income is not as specified in section 139(1) but as specified in section 139(4) of the Act. The Assessing Officer declined the claim of the assessee and returned finding that the assessee has concealed her particulars of income and initiated proceedings for penalty as well.
The appeal against the said order was accepted by the Commissioner of Income-tax (Appeals). It was found that the appellant has purchased a new residential property on January 2, 2007, and the due date as per section 139(4) is March 31, 2007, and, thus, the assessee has complied with the provisions of section 54 of the Act. It was held that section 139 includes sub-section (4) as well. The Honourable judges finally opined that it may be noted that the assessee sold her residential house on January 13, 2006, for a sum of Rs. 45 lakhs and purchased another property jointly with Mr. D. P. Azad, her father-in-law on January 2, 2007 for a consideration of Rs. 95 lakhs. The due date of filing of return as per section 139(1) of the Act was July 31, 2006, but the assessee filed her return on March 28, 2007, and that the extended due date of filing of return as per section 139(4) is March 31, 2007. Finally it was held that in the instant case the due date of furnishing the income-tax return as provided in terms of section 139(1) of the Income-tax Act was subject to the extended period provided under section 139(4) of the Income-tax Act, 1961. Hence, the assessee had purchased the property within the time period as contemplated under section 139(4) and thus, the investment in new residential property was made before the date of filing income-tax return and hence, the benefit of such investment was granted to the assessee.
Purchase and Sale of Shares within a short period would be Capital Gain: The Delhi High Court in the case of CIT v. Consolidated Finvest and Holding Ltd. 337 ITR 264 held that in a case where the assessee purchased shares of ONGC and sold such shares by holding it for a short span of time only, it was held by the Honourable judges of the High Court that the surplus would be treated as short-term Capital Gains. In this case the Assessing Officer was of the view that the transaction would be in the nature of business transaction as the assessee itself had stated that it has the basis of investment and dealing in shares and most of the shares were immediately sold after their purchase. Hence, the Assessing Officer treated the income as business income.
Finally, when the matter went to the Honourable judges of the High Court, it was held that the shares of ONGC were purchased by the assessee when it was a manufacturing company and the aforesaid shares were not purchased as a part of any business activity of dealing in shares at the time of such purchase. The assessee was neither in the business of investment nor dealing in shares although it had shares of different companies at the beginning of the relevant previous year. The assessee had acquired those shares in a public issue and had, in fact shown them in the books of account as investment and were booked under the Head Non-Trade and Not Trading Investment. The Honourable judges further were of the view that the intention to acquire those shares in investment can be reflected from the fact that it was holding most of the shares of other companies since long period of time and was not entering into frequent business of sale and purchase of the shares. Hence, it was finally held that the mere fact that certain shares were sold in a short span of time of its acquisition due to stiff and unanticipated rise in the stock market does not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal with them. Hence, it was finally held that the profit arising from the sale of the shares of ONGC during the relevant previous year was to be treated under the Head Capital Gain and not Profit or gain of Business or Profession.
Profit on Sale of Shares treated as Capital Gain as Shares not treated as Stock in trade: The Delhi High Court in the case of CIT v. Jubilant Securities P. Ltd. 333 ITR 445 held that where the assessee maintain two separate portfolio accounts one for the purpose of investment and the other for the purpose of business, in such situation the shares were purchased with predominantly the intention of investment and that the objective was clear that these shares/securities would be investment and would enjoy as the income there from would be enjoyed by the assessee and that these shares were not held as a stock in trade with the intention to trade in them. Hence, it was finally held that the income arising on sale of these shares would be treated as Capital Gain specially because of the fact that right from the very beginning the assessee had been valuing its shares held in the investment account on cost basis and not on the basis of cost or market price which was lower at the end of each relevant accounting year.
The author is Tax and Investment Consultant at New Delhi for lat 40 years. He is also Director of M/s R.N. Lakhotia & Associates LLP & The Strategy Group.E-mail : firstname.lastname@example.org.