Section 68 – Cash credits – Capital gain or business income – Profits from sale of shares – Genuineness of purchase accepted by Department – Profits from sale cannot be treated as unexplained cash credits – Profit from sale of shares to be taxed as short/long term capital gains

Section
68 – Cash credits – Capital gain or business income – Profits from sale of
shares – Genuineness of purchase accepted by Department – Profits from sale
cannot be treated as unexplained cash credits – Profit from sale of shares to
be taxed as short/long term capital gains

For the A.
Y. 2006-07, the Assessing Officer made additions to the income of the assessee
u/s. 68 of the Income-tax Act, 1961 on the ground that the assessee had sold
certain shares and the purchasers were found to be bogus. The second issue
was  in respect of the treatment of the
income earned by the assesse on the sale of shares. The assesse contended that
the shares were in the nature of his investment and the income earned to be
treated as long term capital gains. The Department contended that looking to
the pattern of holding the shares, the frequency of transactions and other
relevant considerations, the assessee was trading in shares and the income was
to be taxed as business income.

The
Commissioner (Appeals) dismissed the appeal filed by the assessee. The Tribunal
found that the purchase of the shares was made during the month of April, 2004
and they were sold in the months of May, June and July, 2005, that the
purchases thus made during the Financial Year 2004-05 had been accepted in the
relevant A. Y. 2005-06 and that in the assessment made u/s. 143(3) r.w.s. 147
the purchases of the shares were accepted as genuine. The Tribunal therefore
held that no additions could have been made u/s. 68 when the shares were in the
later years sold and deleted the addition. On the second issue, the Tribunal
took the relevant facts into consideration and referred to the circular dated
29/02/2016, of the CBDT and held that the income was to be taxed as capital
gains, be it long term or short term, as the case might be, and not as business
income.

On appeal
by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and
held as under:

“i)   Circular dated 29/02/2016, issued by the CBDT
provides that in respect of listed shares and securities held for a period of
more than 12 months immediately preceeding the date of their transfer, if the assessee
desires to treat the income arising from the transfer thereof as capital gains
that shall not be disputed by the Assessing Officer and the Department shall
not pursue the issue if the necessary ingredients are satisfied, the only rider
being that the stand taken by the assessee in a particular year would be
followed in the subsequent years also and the assessee would not be allowed to
adopt a contrary stand in such subsequent years.

ii)   The circular dated 29/02/2016 applied to the
assessee. The Tribunal was right in deleting the addition made u/s. 68 upon
sale of shares when the Department had accepted the purchases of the shares in
question as genuine and in holding that the share transaction as investment and
directing the Assessing Officer to treat the sum as short/long term capital
gains and not business income.”