A two-judge bench of the Bombay High Court has held that the holding of shares for a short period only will not convert capital gain into business income.
Justices M S Sanklecha and Akil Kureshi have held that this would be contrary to be legislative mandate which itself provides that investment held for less than 12 months is to be termed as short-term capital gain.
The assessee-Company, in its return, declared short term capital gain of Rs.9.42 crores. Rejecting return, the Assessing Officer treated the same as business income by finding that all the scrips in respect of which the short-term capital was gained were held for a very short period i.e. purchased and sold during the year.
The assessee claimed that its regular business is to trade in engineering goods, metal and other commodities. It has also made investments in shares over the last 10 to 15 years out of its own funds i.e. without any borrowings and loans.
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The bench pointed out that the law itself provides that such gain may be brought to tax under the head short term capital gain when the shares are held for a period of fewer than 12 months. It was also noted the fact that for earlier years, the Assessing Officer had accepted the claim made under the head short term capital gain in respect of purchase and sale of shares.
While dismissing the appeal filed by the department, the bench observed that the issue of classification of income on the sale of shares as business income or as short-term capital gains is to be decided the facts of each case.
“The tests to be applied for such determination is provided in CBDT Circular No.4 of 2007. We note that the Tribunal kept in mind the tests as provided in the above Circular in the context of the facts and found is that these investments were out of its own funds and not borrowed funds, further it maintained a distinction between trading in shares and investments. Thus, two portfolios one for “Investment” and other for “Trading”. Besides for the earlier years, the Revenue accepted the claim of short-term capital gain. Thus, the income has to be taxed as short-term capital gain. We are of the view that respondent holding the shares for a short period, will not convert the capital gain into business income. This would be contrary to be legislative mandate which itself provides that when the investment is held for less than 12 months, it is to be termed as short-term capital gain,” the bench said.To Read the full text of the Judgment CLICK HERE