Capital gains — Merely because the assessee was dealing in a large number of tra

Capital gains — Merely because the assessee was dealing in a large number of transactions in shares cannot be the sole criterion to treat the profit from shares as business income — as held by MumTrib in Nagindas P. Sheth (HUF) v ACIT; ITA No. 961/Mum/2010 : Assessment Year 2006–2007, 13 April 2011

Decided on: 5 April 2011 — In favour of: The Assessee.

The assessee (HUF), earning income from business, capital gains and other sources, offered income from sale of shares as short-term capital gains (STCG). The AO observed that the assessee made 158 share transactions during the previous year under consideration and thus the intention of the assessee was only to trade in shares to make a profit. Any investor would be principally interested in holding the shares so as to earn dividend income, whereas the regularity and frequency of the transactions shows that the assessee has no such intention. Further, an investor would normally open one or two demat accounts whereas the assessee chose to go about in a much more professional manner by choosing several brokers, each one jointly and severally contributing to the kitty of the assessee in earning income from the sale of shares. AO thus concluded that the assessee was deeply involved in the share trading activity and the income on sale of shares on a short-term basis was treated as income from business. In an appeal filed by the assessee, the CIT(A) held that profit on the sale of shares held for less than 30 days was business profits while other profits were STCG. Being aggrieved, both the assessee and the revenue has filed the cross appeals.

The issue is whether the profit arising out of the purchase and sale of shares is assessable to tax under the head “capital gains” or “business income”.

The issue as to whether profit arising out of the purchase and sale of shares is assessable to tax under the head “capital gains” or “business income” is a vexed question depending on the facts and circumstances of each case, based upon the principles set out by various judicial precedents.

In the instant case the assessee was holding the shares in its books as an investor and did not have any office or administration set up and the source of the acquisition of shares was out of its own funds and family funds. There was not a single instance where the assessee had squared-up transactions on the same day without taking delivery of the shares. Further, both for the earlier year and subsequent year the AO accepted in the scrutiny assessment proceedings that the assessee is an investor. Thus, merely because the assessee transacted in 158 shares, that should not be taken as a sole criterion to come to the conclusion that the assessee is a trader in shares. The transactions of purchase and sale of shares deserves to be considered as investment and profit thereon has to be assessed to tax under the head “capital gains”.