Mahendra C Shah vs. Addl CIT (ITAT Mumbai)

DATE: (Date of pronouncement)
DATE: May 25, 2011 (Date of publication)

Click here to download the judgement (mahendra_loan_stcg_biz_profits_shares.pdf)

Despite borrowing, shares gain can be STCG & not business profits

The assessee offered income from Futures and Options, speculative business, short-term capital gains (STCG) and LTCG from transactions in shares. The AO held that the STCG was assessable as “business income” on the ground that (i) the assessee was carrying on business in F&O and speculative transactions, (ii) a majority of the transactions were settled in a short span of 30 days, (iii) more than 30% of the profit is from transactions where the purchase and sales took place within the period of one month, (iv) the frequency of transactions was huge, (v) the assessee had borrowed funds for purchase of shares and claimed the interest as a deduction which was almost 30% of the STCG and (vi) the assessee had the infrastructure to trade. The CIT (A) confirmed the AO (though for the next AY he took the reverse view). On appeal by the assessee, HELD allowing the appeal:

(i) The question whether the surplus on the sale of shares is to be assessed as capital gains (short term or long term) or as business income has to be decided according to the cumulative effect of several facts and circumstances such as (a) the intention of the assessee, (b) the nature of the commodity sold, (c) whether the assessee has used his own funds or borrowed funds, (d) the treatment given to the asset in the books of account, (e) the consistent stand taken by the revenue authorities in respect of the sale proceeds of the asset in the earlier years, (f) the frequency and volume of the transactions, (g) the period of holding the shares and (h) whether the assessee took or gave delivery of the shares;

(ii) On facts, the gains had to be treated as STCG because:

(a) the assessee has shown the shares as investment in the Balance Sheet;
(b) In the earlier years and subsequent year, the AO has accepted u/s 143(3) the STCG and LTCG offered by the assessee;
(c) The shares offered as LTCG were held for long periods of time;
(d) the fact that the assessee is also carrying on substantial F&O transactions as speculation business is not relevant because as per CBDT circular accepted in Gopal Purohit 34 DTR 52 (Bom), a person can have two portfolios, one for investment and the other as stock-in-trade;
(e) The fact that the assessee borrowed for the purpose of buying shares is not conclusive that the assessee intended to do business in shares and not merely invest in them if the interest is capitalized as cost of the shares & not claimed as a revenue expenditure (Shanmugam 120 ITD 469 (Pune) followed). The fact of borrowing cannot be held against the assessee if there are other predominating factors in favour. Also as the assessee has own funds, it can be presumed that the shares were bought out of those funds.

For more see ITO vs. Radha Birju Patel (ITAT Mumbai) & the cases referred to therein. On borrowings for shares, see CIT vs. Niraj Amidhar Surti (Guj)

Leave a Reply

Your email address will not be published. Required fields are marked *