Tests laid down to determine whether income from shares is “business” income or “capital gains”

Management Structure & Systems

vs.

ITO

(ITAT Mumbai)

The assessee, engaged in management consultancy, offered profits of Rs. 1.03 crores earned by it on sale of shares as long-term and short-term “capital gains” depending on the period of holding.

The AO took the view that as the assessee was regularly dealing in shares throughout the year, the assessee was engaged in the “business” of trading in shares and that the profits were assessable as “business income“. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

(i) Though there is no fixed formula to determine whether the activity of purchasing and selling shares can be treated as a trading activity or as investment activity, certain guiding principles have been laid down in CBDT’s Circular No. 4/2007 dated 15.6.2007 as well as in Gopal Purohit 122 TTJ 87 (Mum) (affirmed in 228 CTR 582 (Bom)), Saranath Infrastructure 120 TTJ 216 (Luck) and other judgements. These principles of law have to be applied to the following facts:

(a) As per the books of account, the assessee has treated the entire investment in shares as an “investment” and not as “stock-in-trade”;

(b) The assessee is not a share broker nor is he having a registration with any Stock Exchange;

(c) Almost 83% of the capital gain is from shares that were held for a long period of time;

(d) There were no derivative transactions by the assessee;

(e) There were no transactions without delivery;

(f) The assessee used his own surplus funds for investing in shares and not borrowed any money;

(g) In the preceding years, the assessee consistently declared the gain/profit on the sale of the shares as ‘Capital Gains’ and the same has been accepted by the A.O. Though the rule of res judicata is not applicable to income-tax proceedings, in the absence of change in facts, there should be consistency in the approach of the Revenue;

(h) The assessee received substantial dividend on the investments.

(ii) The intention of the assessee cannot be read from his mind but it reflects in his conduct and the way he treats the transactions. Considering the totality of the facts, the transactions of sale and purchase of shares cannot be treated to be trading in shares nor as an adventure in the nature of the trade but is assessable as ‘capital gain’.

Note: In J. M. Share & Stock Brokers and Gopal Purohit 228 CTR 582 (Bom), the assessee had separate portfolios for trading and investment. See Also Sarnath Infrastructure 120 TTJ 216 (Luck) where the legal principles have been succinctly summarized.

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