The Kolkata Bench of the Income Tax Appellate Tribunal friday held that any income earned by an assessee in respect of sale and purchase of shares in investment portfolios should be treated as “capital gains”, and the same cannot be taxable under the head “Business Income.”
The assessee in the present case is a Private Limited Company engaged in business of shares trading and shares investment on long term basis. For the year 2006-07, the assessee earned certain amount as Short term capital gain with STT, without STT and Long term Capital gain without STT. The Assessing Officer passed an order by treating all these income as business income. The assessee submitted that it has maintained separate records in its stock held as ‘stock-in-trade’ and held as ‘investment’ in its books of account. The main business is to make investment on long term basis in shares and securities.
However, the Assessing officer was of the view that the business had been carried on its share trading business transactions in a systematic and organized manner with a view to minimizing risk and maximized gain. The assessee has done numerous transactions of buying and selling shares/units of mutual funds which are running into 270 proximate for short term capital gains and about 100 approximate for long term capital gains. This regular activity of the assessee constitutes the business. The assessee has carried out large number transactions with large voluminous some of the transactions were completed within a short period of time. The assessee till the assessment year 2004-05 was only in the trading of share and securities as apparent from the financial statement that there was no investment in AY 2004-05.
On appeal, the Commissioner of Income Tax (Appeals) accepted the plea of the assessee. Aggrieved by this, the Revenue approached the Tribunal. The Tribunal find that assessee has declared its capital gains income which AO treated as business income on the ground that numerous transactions with large voluminous were made by assessee in systematic and organized manner. So it should be treated as business income, however, L’d CIT(A) has treated the income earned by assessee as capital gains by observing that assessee has maintained two separate portfolios – for investment and – for stock-in-trade.
The Bench also pointed out that find that the CBDT in its Instruction No.1827 dated 31.08.1989 has laid down certain criteria to determine whether an activity of purchase and sale of shares is in the nature of trading activity or investment activity. One of the criteria laid down is the treatment given in the books of accounts which is indicative of assessee’s intention whether to hold the shares with a view to earning dividend and long term appreciation or with a view to carrying on as business. The Tribunal further find the intention of the assessee to maintain two independent portfolios i.e.one for investment purposes and one for trading purposes when he converted his stock in trade into investment on dated 1.4.2004.
In view of the above findings, it was concluded that in the absence of any material to the contrary and on appreciation of cumulative factors prevent as culled out above, the surplus is chargeable to capital gains only and assessee is not to be treated as trader in respect of sale and purchase of shares in investment portfolios.