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treatment of short term gains on shares as business income

Started by murali Krishnamurthy, January 23, 2009, 09:47:15 AM

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murali Krishnamurthy

My client is both an investor and a trader in shares / mutual funds for the past several years and is continuing as such even till date. He maintains a "stock register" where all the transactions are recorded and whichever are treated as relating to "trade" are marked as "T" and balance are treated as investments. The gains on the sale of shares/ mutual funds relating to trade are shown as "Business Income" and the gains on sale of shares/mutual funds relating to investments are shown as "Capital Gains",whether LTCG or STCG. This has been the practice since inception and the department has not contested this practice and accepted the method of accounting.

For the assessment year 2006-07, the AO treated the STCG on sale of shares / mutual funds as business income, despite showing the stock register, the ledger, explaining the intention, etc. The AO relied only on the Board Circular and also followed the directions of the Addl.CIT u/s 144A, to whom the assessee approached in this context.

An appeal is being filed against the impugned assessment.

Is the action of the AO justified? Kindly clarify the correct legal position with case law.


I think the Supplementary Board Circular by CBDT itself said that a person can be both a Trader and an investor.
The thing is that was there an assessment in the earlier years?
If the position of the assessee was accepted by the Officer in the earlier years, then the A.O. cant change his position.
You can see Janak Rangawala MUMbai ITAT.
Also there was an earlier discussion in this regard.

Bhavesh Savla
.Keep Smiling. 

ashutosh majumdar

I think you have an excellent case. There is a recent judgement in JM Share and Stock Brokers where it was held (copy is there on the site):

Tests to distinguish shares held as "stock-in-trade" and as "investments"

Where the assessee was a stock broker but it was consistently following the practice of holding some shaes as 'stock in trade' and other shares as 'investments' and the question arose whether the profits on the sale of shares held as investments constituted a capital gain or business profits, HELD:

(i) The assessee had been consistent in its practice of treating some shares as stock and others as a capital asset. While the shares held as capital asset were valued at cost in the accounts, the shares held as stock-in-trade were valued at the lower of cost or market value;

(ii) There is no bar on a stock broker holding shares as an investment. The mere fact that the assessee is an expert in share trading does not mean that he cannot hold shares as a capital asset. The magnitude of the transaction does not change the nature of the transaction.

Note: ACIT vs. Motilal Oswal was followed.

See Also: Circular No. 4/2007 dated 15.06.2007 and Taxation of Securities Transactions by CA Gautam Nayak