In CIT v. Mohan Vallabhdas Bhatiya, the division bench of the Bombay High Court held that under the Income Tax Act, the income arising out of the purchase and sale of shares and mutual funds are taxable under the head “Capital Gains” and not under the head business income.
The bench was hearing an appeal against the order of the Income Tax Appellate Tribunal wherein the Tribunal found that the gains from the purchase and sale of shares and mutual funds are to be treated as Long Term Capital Gains. The Revenue was of the view that considering the volume and frequency of the transaction, it can be seen that the assessee carries on business as a trader in shares and the income must be treated as the business income of the assessee.
The bench noted that the assessee was consistently showing gains on account of his investment portfolio and offering them to tax under the head ‘capital gains’. Further, during the previous assessment years, the Revenue has consistently accepted the claim of the assessee with regard to the gain made on its investment portfolio is taxable under the head Capital gain except for the subject Assessment Year.
The Revenue contended that there were borrowed funds in the year under consideration and therefore, the gains claimed to have been made on investments are in fact.
Rejecting the above contentions, “in view of the fact that the Revenue has been consistently taking a view that the income earned on investments is taxable under the head capital gains no difference in facts and /or in law has been pointed out to take a different view for the subject Assessment Year. Moreover, the entire question of the nature of activity carried out by the respondent-assessee i.e. business or investment is a question of fact. Both the CIT(A) as well as the Tribunal have concurrently come to a finding of fact that the income earned on the investment portfolio is chargeable under the head capital gains and not under the head ‘profits from trading of shares’ which is not shown to be perverse.”
Read the full text of the order below.