HC declares Circular 6/2016 on treating shares as stock-in-trade to have retroactive effect

Case Details: CIT v. Century Plyboards (I) Ltd. - [2023] 148 taxmann.com 301 (Calcutta)

Judiciary and Counsel Details

• • T.S. Sivagnanam & Hiranmay Bhattacharyya, JJ.
  • Om Narayan Rai, Adv. for the Appellant.
  • J.P. Khaitan, Sr. Adv. Ms Swapna Das & S. Bhowmik, Advs. for the Respondent.

Facts of the Case

Assessee-company was engaged in the business of manufacture and sale of plywood and related products. During the relevant assessment year, it filed its return of income declaring long-term and short-term capital gains from the sale of shares and units of mutual funds.

During the assessment proceedings, the Assessing Officer (AO) noticed the number of transactions for selling and purchasing such securities. He treated such profit as business profits rather than capital gains. AO rejected the assessee’s reference to CBDT’s circular no. 6/2016, as the dispute was related to AYs prior to the date of issue of such circular.

On appeal, CIT(A) affirmed the treatment done by the AO, which the Tribunal subsequently deleted. Aggrieved by the order, an appeal was preferred to the Calcutta High Court.

High Court Held

The High Court held that the long-term shares were held as investments in the books of account, which the AO accepted in earlier assessment years.

The Court held that Circular no. 6/2016 dated 29.02.2016, issued by the CBDT, relating to the taxability of surplus on the sale of shares and securities as capital gains or business income. The circular clarified that the assessee could have an investment and trading portfolio and thus may have income under the head capital gains and business income.

The Circular clarifies that in respect of listed shares and securities held for a period of more than 12 months if the assessee desires to treat the income arising as capital gains, the same shall not be put to dispute by the Assessing Officer. Also, it was stated that once the assessee takes such a stand in a particular assessment year, it shall remain applicable in subsequent assessment years.

Therefore, the AO cannot take a different view in the subsequent years without any fresh materials warranting such a departure.

Further, the need for issuing such circular arose on account of disputes on the applications of the principles laid down by the courts mentioning different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. Thus, the benefit of the circular should be extended to the assessee, especially when it is a beneficial circular in favour of the assessee.

Therefore, circular no. 6/2016 will be applicable with retrospective effect even though it was issued in later year.