Backdrop:- Characterization of income earned from sale of shares has generally been a matter where divergent positions have been taken by taxpayers and the Assessing Officers (AOs). Recently, the Mumbai Income-tax Appellate Tribunal (Tribunal) has delivered two decisions on this issue. These two decisions provide a fair idea of the parameters which are considered by the judicial authorities to decide the characterization of income from sale of shares.
Issue before Tribunal
In both cases before the Tribunal, the same issue was involved: whether the gains from sale of shares are to be assessed as capital gains as declared by the taxpayer in its return of income or business income as assessed by the AO?
Observations and Ruling of the Tribunal
After considering the various judicial precedents and Circular no. 4/2007 dated 15 June 2007 issued by the Central Board of Direct Taxes, the Mumbai Tribunal has held that the income from sale of shares earned by the taxpayer is to be assessed as capital gains in the case of Management Structure & Systems Pvt. Ltd and as business income in the case of Smt. Sadhana Nabera.
The Tribunal has cited the following reasons for reaching this conclusion:
Management Structure & Systems Pvt. Lt.
Income to be assessed as ‘capital gains’
|Smt. Sadhana Nabera
Income to be assessed as ‘business income’
|• The taxpayer had treated the entire investment in shares as investment and not as stock in trade in its books of account.
• The taxpayer was neither a share broker nor did it have a registration with any Stock Exchange
• Some of the shares were held for more than five years by the taxpayer.
• The taxpayer had not undertaken any derivative transactions.
• All the transactions were completed with delivery
• The taxpayer had not borrowed any money for investing in shares and had used its own surplus funds.
• The taxpayer had received substantial dividend from its investments.
• In the earlier years, the taxpayer had declared its income from sale of shares as capital gains and the same had been accepted by the AO. Although the rule of res judicata is not applicable to income-tax proceedings, it is a well accepted principle that if there is no change in facts, there should be consistency in the approach of the Revenue authorities.
|• Holding period of the shares by the taxpayer was from one day to a maximum of 180 days.
• Purchase of shares during the year and selling them frequently in a short period indicates the motive to earn profit in short period.
• The taxpayer had long-term capital gains or loss in only two years out of a band of six years whereas it had short-term capital gains in all the years.
• Some of the transactions by the taxpayer were completed without delivery and shares were sold on the same day as purchase.
• The taxpayer had borrowed money for investing in shares apart from its own surplus funds.
• The taxpayer?s group companies were involved in share trading.
• The dividend income received by the taxpayer was not substantial.