Income from shares – whether capital gains or income from business or profession

Brief about the case

The assessee was a medical practitioner with professional income and income from capital gains as returned income. The A.O. contended the income from capital gains to be the income from business or profession as he noticed that the professional receipts turned to be equivalent to merely 1/37^th of the gains from share transactions.

The assessee appealed to CIT(A) which decided in favour of the assessee stating that he had consistently been declaring income in past and future years under the head LTCG/ STCG and also consistently reflecting the impugned investments in the financial statements under the head ‘Investments’ and valuing the same at ‘cost price’ unlike on ‘cost price or market price whichever is less’ as is done by a trader .Further, while earning LTCG more than 74% of the shares were held for more than 18 months and in 11% cases shares were held for more than 36 months. Moreover 69% of the LTCG was earned on account of bonus and split shares being received against original investments.

The matter was furthermore taken to the ITAT which ordered the case for reconsideration by the Assessing Officer (AO) on the assumption that additional evidence had been filed, or was sought to be led by the assessee.

The question sought to be urged before the Delhi High Court is whether in the circumstances of the case the nature of the remand ought to have been limited, given that the CIT(Appeals) considered all materials on record and held that the sum of Rs.1,97,17,460/-, reported during assessment year 2007-08, constituted capital gains. The High court pronounced that the AO shall proceed to deal with and decide as to which shares are to be treated as short term capital gain. The remand directed by the ITAT is limited to enquiry on this aspect

Facts of the case:

• The assessee was a medical practitioner with professional income as Rs.1,39,097/- and income from capital gains as Rs. 1,97,17,460/- as returned income.
• The assessee’s primary submission was that in the concerned assessment year, 57 transactions recording sale of shares of various companies held by him, for periods ranging from 366 days to over 1150 days were involved.
• AO however rejected this contention and treated the entire amount as business income, thus applying a higher rate of tax.
• The assessee’s appeal to the CIT(Appeals) however succeeded considering the intention of the assessee from various angles such as the expenditure, length of holding, volume, and frequency of share sale and purchase transaction, whether the shares were acquired through borrowed funds or funds of the assessee, and whether separate accounts were maintained for the purpose and the duration of holding.

• The ITAT felt that there was no clarity as to whether additional evidence had been produced during the course of CIT(Appeals)’s proceeding. According to ITAT the CIT(A) without verifying from the AO, has accepted that additional evidence were furnished during the appellate proceedings, therefore the AO wasdirected to reassess.
• The Delhi High court however, we notice that the CIT (Appeals) had recorded that 29% of the transactions reported by the assessee could be treated as short term capital gain. In these circumstances, the remand directed by the ITAT is limited to enquiry on this aspect.

Contention of the Revenue

• The Revenue urged that the AO had taken note of the previous years’ assessment which reported capital gains thereby indicating the fact that the assesssee’s primary activity was share trading and not medical profession.
• Oberserving the dis-proportionate ratio between the medical earnings and the share transactions earnings the findings of the AO should not have been interfered with and the remand directed by AO should be upheld.
  

Contention of the Assessee

• The income from shares was in the nature of capital gains and no business of shares was conducted.
• The assessee’s primary submission was that in the concerned assessment year, 57 transactions recording sale of shares of various companies held by him, for periods ranging from 366 days to over 1150 days were involved
• The appellant’s counsel urged that all material was produced in the course of the assessment proceedings
• The fact was emphasized that of all the share transactions which yielded substantial income, 69% was on account of sale of bonus shares and split shares
• Furthermore, given that there was no linkage between the borrowings and the amounts used for acquisition of shares.
  

Held by High Court

• The Delhi Court concluded that the income derived from sale of shares was not business income but capital gains, as opined by CIT(A) relying on the binding decisions in the cases of CIT V. Associated Industrial Development Company (P) Ltd. (1971) 82 ITR 586 (SC), Raja Bahadur Kamakhya Narayan Singh V. CIT (1970) 77 ITR 253 (SC) and CIT V. Holck Larsen (1987) 160 ITR 67 (SC) considering all the factors in detail.
• The ITAT apparently was mistaken in its assumption that some additional evidence was led before the CIT (Appeals).
• Furthermore, it was not pointed out during the course of the hearing as to what was the additional material or evidence reiterated before the CIT (Appeals) by the assessee, which necessitated the remand.
• However, the Court noticed that the CIT (Appeals) had recorded that 29% of the transactions reported by the assessee could be treated as short term capital gain. In these circumstances, the remand directed by the ITAT is limited to enquiry on this matter.