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Profit on selling of shares allotted in IPO is not business Income

Started by vips, August 19, 2008, 06:54:17 PM

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I read article  "Controversies" in Ahmedabad Chartered Accountant's Journal . It was by Mr K D Shah CA.
He has mentioned one judgment of Kruti Marketing Ltd v. Asstt CIT (2001) 118 Taxman 194 (Ahmd) where it is held that, the allotment of shares in IPO is not to be considered as purchase. The citation mentioned is wrong. I have been trying to contact Mr K D Shah to get the correct the judgment, but not able to speak to him.

Any one help me with correct citation of this judgment or rather similar judgment ?

Please help.


Hi vips,

Welcome to the forum. I haven't seen the A'bad CA journal and so am not aware of the context in which the author has discussed the case. However, on the point whether an allotment of shares is a purchase or not, there is a judgement of the A'bad Special Bench in AMP Spg & Wvg Mills 100 ITD 142 (Ahd) (SB). They have referred to the judgement of the SC in Gopal Jalan A 1960 SC 250.

If you could tell us the context of your query, we may be able to help more.




Hi probal

Thanks for the reply and specially the judgment you quoted. Unfortunately, my appeal is with the same CIT who represented the department in the case AMP Spn. and Weaving Mills Ltd. and got the judgment in favor of department.

Basically, my client is a ship breaker. He had done investment in IPO during the year. His investment in IPO was under High Networth category. He had taken loans from group companies and family members to apply in the IPOs. Almost each  of his application were above Rs.5 Crores. After getting the allotment, he had immi. sold the stocks. He also did some buying and selling transactions from which he earned Short Term capital gain. 

Department has taken a criteria that, gains earned from shares which were held for more then 30 day is to be treated as Short Term and gain from shares held less then 30 days as adventure in nature of trade.

I have piled up many judgments include Janak Rangwalla. Please see you if u can guide me  with some idea and judgments.

Thanks and Regards


Hi Vipul,

I have been researching the law but without much luck. Gopal Jalan refers to an English judgement in Re VGM Holdings (1942) 1 AER 224 where also it was held that an allotment of shares is not a "purchase" or "sale". There is also brief discussion on the subject in Kanga & Palkhivala, 8th Edn, Vol. I, page 1139 and another English judgement in Kirby vs. Thorn 183 ITR 503 has been referred to therein.

Janak Rangwala 11 SOT 627 turns on the basis that the dept had accepted the gains to be on capital account in the earlier years and that a different view could not be taken in the current year. I don't suppose that would be your fact situation.

I think our case boils down to this:

(a) The assessee is not a regular dealer in shares (he is a ship breaker);

(b) Investment in an IPO is ordinarily on investment account;

(c) It is a one-time tranasction;

(d) The fact that loans were taken does not detract from the investment motive (Is there anything to show that the borrowing was meet a temporary funding gap i.e. that he had his own resources but could not access it temporarily and therefore had to reort to short-term borrowings? It would also help if the loans were repaid before the sale of the shares.

(e) The investment was intended for the long-term though events happened which prompted an immediate sale  (Courts have underlined the intention to invest for the long-term as an important indicia). Anything to show the events?

Does the past or the future show similar transactions? If not, that may be used as a talking point that the assessee is not a regular dealer.




The thing is that if you say that in almost all the cases or even in a majority of cases, the Assessee had immediately sold the shares on listing, it shows the intent of the assessee in dealing and not investing in shares.
It may be given the character of ' adventure in the nature of trade'.   
So it can be held to be Business income.


See Neerja KumarMangalam Birla (Mum ITAT) where it was held that even single transaction can be held to be Business Income