Objective tests to classify shares gains as STCG vs. biz profits laid down
The assessee offered gains from sale and purchase of securities as “capital gains”. The AO assessed it as business profits on the ground that in the earlier years, it was offered as such. The CIT (A) & Tribunal accepted the assessee’s plea on the ground that the securities were shown as “investments” in the accounts and in the earlier years, the STCG was offered as business profits as there was no difference in the tax rate. On appeal by the department, HELD reversing the Tribunal:
There was a dispute whether in the earlier years, the gains were offered as business profits or as capital gains and the Tribunal had not given a clear finding. The Tribunal ought to examine the issue holistically keeping in mind the parameters/tests laid down in CIT vs. Rewashanker A. Kothari 283 ITR 338 (Guj) and CBDT’s Circular No.4/2007 dated 15th June 2007 on when income from transactions in securities should be treated as “business profits” and when as “capital gains”:
(a) Whether the initial acquisition of the subject-matter of transaction was with the intention of dealing in the item or with a view to finding an investment?;
(b) Why and how and for what purpose the sale was effected subsequently?;
(c) How the assessee dealt with the subject-matter of transaction during the time the asset was with the assessee. Has it been treated as stock-in-trade or as an investment in the balance sheet?
(d) How the assessee returned the income from such activities and how the department dealt with the same in the preceding and succeeding assessments?;
(e) Whether the deed of partnership or memorandum of association, if the assessee is a firm or a company, authorises such an activity?
(f) Most importantly, what is the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned?