• Welcome to itatonline.org Forum.


ITAT issues guidelines for stay of demand.

Main Menu

Business Vs Investment

Started by PANKAJ JAIN, November 21, 2008, 01:21:16 PM

Previous topic - Next topic


Dear All,

After the introduction of exemption or lower rate of tax on capital gains where STT is paid, the AO's are tempted to treat the investment activity as business activity and tax it at the full rate (business income) on one or other pretext.

What is the legal situation in the case where a HNI places his money with investment advisor under POA or PMS.

Can AO treat the same as business income on the ground that the transactions of sale and purchase are numerous?

Is there any decided case, circular or clarification on this issue (i.e.investments made under POA or PMS)?

Thanks and Best regards,


You can refer to 217 CTR (Mad) 206, wherein it was held that even a trader in shares can hold shares as investment and the profit on sale of investment is taxed as capital gains.


You can take a stand that since the very purpose is portfolio investment it means that the shares were purchased with the intention of investments and not for trading.  You can take the help of Fidelity NorthStar 288 ITR 641. where it was held that when the shares were purchased under PMS then only Capital Gains is leviable irrespective of the number of transactions.

Is this the first year for investment? Was there scrutiny for earlier years also. What was the stand taken in earlier years?? You can also take the help of Janak Rangawalla 11 SOT 627 where it was held that if the department in earlier years had accepted the income as Capital gains then they could not take a different stand even if the transactions are numerous.


It has become a very debateable question.Though there has been decision of Mumbai Tribunal in case of J.M.Stock Brokers and that of Lucknow Tribunal In case of sorath Infrastructure in favour of assessee. However recently Ahmedabad Tribunal in an unreported decision has held in favour of revenue considering the frequency of transcation.


Invariably  where all this difference of opinion has arisen in  taxation of scurities penaty u/s 271(1) (c) is intiated. But can we  deetermine penalty  in this case and what would be tax sought to be evaded  for leving penalty. There is no change in total income.  and only clause 271(1) (c)  exp 4 will come in to play. pls discuss


In such cases assessee can also  ask  Ao to recast profit andloss account of securities and  ask him to give benefit of valuataion of opening stokc and  closing stock at cost or market value whihcever is less.


As regards penalty imposition u/s 271(1)(c), on account of change in classification/head of taxation, viz. from capital gains to business income, one may interalia refer to following:

In CIT v. Vamchampigons & Agro. Product [2006] 150 Taxman 370 (Delhi), the assessee had shown the income arising from sale of debentures as capital gain relying on the assessment for the preceding year. The Assessing Officer treated the income as business income and levied penalty for concealment. Before the Commissioner (Appeals), the assessee explained that he was under bona fide belief that, on basis of assessment of preceding year, the income could be offered as capital gain. The Commissioner (Appeals), on the basis of Hindustan Steel Ltd. v. State of Orissa [1972] 82 ITR 26 (SC), held that penalty was not leviable and deleted the same. The Tribunal confirmed the order of Commissioner (Appeals), as simply an addition by change of opinion by itself was not enough to justify levy of penalty which cannot be imposed merely on technical and venial default.

Ahd SB of ITAT in Gujarat Credit 302 ITR 250 AT  and DHC in 163 Taxman 533, Jp ITAT in 12 TTJ 305

In CIT v. SPK Steels (P.) Ltd. [2005] 144 Taxman 469 (MP), the assessee claimed loss on account of sale of shares on account of trading. The Assessing Officer applied Explanation to section 73 and held that the loss was speculation loss and it could not be allowed. He imposed penalty for concealment. The Tribunal held that since the assessee had filed preliminary details of the transaction along with return, it could not be held that the assessee filed inaccurate particulars of his income or concealed any income. It is a case of mistaken view of the matter. Hence, the penalty was cancelled and the Court affirmed the decision of the Tribunal.

CA Kapil Goel