Treatment Of Shares In Books Of Accounts Determines Taxation, JM Financial’s Set-off Not Colourable Device: ITAT

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) has held that the treatment of shares in books of accounts determines taxation under capital gain or business income, and the method adopted for arriving at the sale consideration does not determine the nature of the transaction.

The bench of Aby T. Varkey (Judicial Member) and Padmavathy S. (Accountant Member) has observed that shares reflected as investments in financials, held for a long time and earning dividend income, are investments, and gain on the sale of investments cannot be construed as business income on the ground that the assessee transferred controlling or business interest.

The appellant/assessee, JM Financial Ltd., made a 49% investment in the joint venture, i.e., JMSSPL, along with Morgan Stanley. For AY 2008-09. The Assessee has assessed Rs. 1,762 crores against returned income of Rs. 1,192 crores, by which the department held the long-term capital gain of Rs. 1731 crore on the sale of JV shares as business income as the Assessee was engaged in share trading business and was also a broker.

The CIT(A) upheld the assessment order holding that the termination of a joint venture was a split of business arrangements to avoid commercial inconvenience accruing in the future as a joint venture.

The assessee claimed the set-off of long-term capital loss from the sale of the group company's shares, which was not allowed by the CIT (A) by holding it to be non-genuine.

The assessee contended that it is an investor and not a trader in respect of shares shown under the heading "investments". Therefore, the gain arising out of the sale of the investments should be taxed under the heading "capital gains". The assessee was not a trader in shares of JMMSSPL, nor were the shares held as stock in trade. The assessee was also not involved in the captive management of the company, and, therefore, the consideration from the sale of shares should be taxed under the heading "capital gain".

The department contended that the assessee could not establish the genuineness of the transaction against the findings given by the CIT (A) in the first round and that the onus was on the assessee to prove that the transaction was not a colourable transaction.

The ITAT noted that shares reflected as investments in financials, held for a long time and earning dividend income, are investments, and gain on the sale of investments cannot be construed as business income on the ground that the Assessee transferred controlling or business interests.

The tribunal rejected the contention of the department in respect of colourable devices for the set-off of losses against capital gain.

Case Title: M/s J.M. Financial Ltd. Versus DCIT

Case No.: I.T.A. No.3987/Mum/2015

Date: 04-08-2023

Counsel For Appellant: K Shivram

Counsel For Respondent: Ankush Kapoor

Click Here To Read The Order