Recently, the Mumbai Bench of the Income-tax Appellate Tribunal (the Tribunal) in the case of ACIT Vs. Naishadh V. Vachharajani (I.T.A. No. 6429/Mum/2009) held that income on sale of shares is assessable under the head “Capital Gains” and not “Business Income” since the intention of the taxpayer was to hold the shares as an investment and not as stock-in-trade.
Further, the Tribunal held that the mere magnitude of transactions does not change the nature of transactions, which are being assessed as income from Capital Gains in the past several years.
Facts of the case
• The taxpayer, a marine consultant, has investment in shares.
• The taxpayer also has income from speculative profit and Future Option trading in shares.
• The taxpayer is maintaining regular books of accounts.
• The taxpayer has paid STT in respect of share transactions as applicable to the investment.
• The taxpayer filed the return of income, showing income from sale of shares as Capital Gains, income from speculation on various scripts as speculative profit and income from trading in futures and option as Future Option trading income.
• The Assessing Officer (AO), however, held that the income arising from purchase and sale of shares to be assessed as business income, in view of the regularity, volume, turnover, period of holding of the shares and the value of the transactions in shares.
• The AO also relied on circular no. 4 of 2007 dated 15.06.2007 to determine the nature of the shares held by the taxpayer.
• The shares on which long term capital gain was offered were held for more than 3-5 years and the same are shown as investment in the balance sheet. Even in respect of short term capital gain, the shares were held for atleast 2-5 months.
• When the AO has accepted the balance sheet of the last year in which these shares were shown as investments, the AO cannot change the opening investments as stock-in-trade during the year, otherwise it would be contrary to the stand taken by the AO in the earlier years.
• It is the intention of the taxpayer which is to be seen to determine the nature of transaction conducted by the taxpayer. Though the investment in shares is in large magnitude, but the same shall not decide the nature of transaction.
• Similar transaction of sale and purchase of shares in the preceding years have been held to be income from capital gains both on Long Term and Short Term basis. The purchase of shares is same as in the preceding years and the same merits to be accepted as Short Term Capital Gains. Also, Mumbai Tribunal in the case of Gopal Purohit v. JCIT  29 SOT 117 (Mum) held that, on the basis of principle of consistency, shares activity treated as investment in earlier years cannot be treated as business in subsequent years if facts are the same. Further, the High Court has upheld the above decision CIT v. Gopal Purohit  ITA No. 1121 of 2009 (Bom) in the month of January 2011.
The AO relied on the specific principle mentioned in the circular. However, the circular has no binding force on the income-tax authorities and needs to be used only as guidance. While applying the principles of the circular, the facts need to be considered in each of the case.
It is well-settled principle that whether the activity of buying and selling of the shares is in the nature of trade and investment is a mixed question of law and fact. In this case, on perusal of the details of share transactions filed with the return of income, the Tribunal observed that, the taxpayer has treated the entire investment in the shares as an investment only and not as a stock-in-trade.
After considering the totality of the facts, the Tribunal observed that, the transactions of sale and purchase of the shares by the taxpayer cannot be treated in the line of trading in the shares nor it can be treated as an adventure in the nature of the trade.
Whether the taxpayer is engaged in the business of dealing in shares or investment in shares is essentially a question of law and fact and it has to be determined with regard to the entirety of the circumstances.
It is pertinent to note that the intention of the taxpayer is to be seen and not the volume of transaction in shares, to determine the nature of investment in shares.