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:
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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.
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