ITAT Mumbai laid down principles to determine whether income from shares is “business” income or “capital gains”

Management Structure & Systems Vs. ITO (ITAT Mumbai)

The assessee, engaged in management consultancy, offered profits of Rs. 1.03 crores earned by it on sale of shares as long-term and short-term “capital gains” depending on the period of holding. The AO took the view that as the assessee was regularly dealing in shares throughout the year, the assessee was engaged in the “business” of trading in shares and that the profits were asses sable as “business income“. This was confirmed by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

(i) Though there is no fixed formula to determine whether the activity of purchasing and selling shares can be treated as a trading activity or as investment activity, certain guiding principles have been laid down in CBDT’s Circular No. 4/2007 dated 15.6.2007 (Given Below) as well as in Gopal Purohit 122 TTJ 87 (Mum) (affirmed in 228 CTR 582 (Bom)), Saranath Infrastructure 120 TTJ 216 (Luck) and other judgements. These principles of law have to be applied to the following facts:

(a) As per the books of account, the assessee has treated the entire investment in shares as an “investment” and not as “stock-in-trade”;

(b) The assessee is not a share broker nor he is having a registration with any Stock Exchange;

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