Smt. Sadhana Nabera vs. ACIT (ITAT Mumbai)

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

The assessee, a director and shareholder in a company engaged in share trading, returned income of Rs. 78,89,499 earned by her on transfer of shares as a “short-term capital gain”. The AO took the view that as there were voluminous transactions, the assessee was engaged in share trading and the income was assessable as “business income”. This was upheld by the CIT (A). On appeal, HELD dismissing the appeal:

(i) The legal principles are well settled viz. that:

(a) Whether a transaction of sale and purchase of shares is a trading or investment transaction is a mixed question of law and facts,

(b) It is possible for an assessee to be both an investor as well as dealer in shares,

(c) Whether a particular holding is by way of investment or of stock-in-trade is a matter within the knowledge of the assessee and it is for the assessee to produce evidence from the records as to whether he maintained any distinction between shares held as investment and those held as stock-in-trade,

(d) The treatment in the books by an assessee is not conclusive and if the volume, frequency and regularity at which transactions are carried out indicate systematic and organized activity with profit motive then it becomes business profit not capital gain,

(e) Purchase with intention to resale can constitute capital gains or business profit depending on circumstances like quantity of purchase and nature of activity,

(f) No single fact has any decisive significance and the question must be answered depending on the collective effect of all relevant material brought on record.

(ii) These principles have to be applied to the following facts:

(a) The assessee entered into transaction of purchases and sale of shares of about 32 companies totalling Rs.1,87,83,440 which were sold for Rs.2,69,71,368. Though most transactions were effected by actual delivery, the holding period was less than 6 months. Most of the gain was earned in shares held for a period for short periods;

(b) In the earlier years the assessee has nil or small long term capital gain which indicates that holding investments for a longer period is not the main intention except few scrips which are carried over without any transactions year after year. Accordingly to the extent of investment activity in shares one can see that the assessee has invested in some 5 to 6 companies scrips which have been carried over from year to year in which there are no frequent or large number of transactions and these investments in shares can be considered as assessee’s proper “investments”;

(c) Purchase and sale of shares in short period indicates that the assessee purchased the shares with a motive to earn profit in short period;

(d) The assessee undertook daily transactions without delivery in a few select scrips;

(e) The assessee borrowed funds to purchase shares;

(f) The dividend received was meager;

(g) The assessee’s group companies were involved in share trading.

(iii) These facts indicate that the intention of the assessee was to gain profits by dealing in short term period only. Consequently, the income from sale of shares was assessable as “income from business” and not “short-term capital gains”;

(iii) The decision in Gopal Purohit 122 TTJ 97 (affirmed in 228 CTR 582 (Bom)) is distinguishable because there the assessee had consistently been investing in shares and the ratio of sales to investment was very less and the LTCG was more than the STCG. Similarly Janak S. Rangwalla 11 SOT 627 (Mum) is also distinguishable on facts.