Most of the people in the industry got confused at the time of taxation of share trading. Whether to tax it under head of business income or as capital gains? Hence today I am covering this topic through my article hoping it will help you to clear your doubts.

We faced some of the following cases many a times during our day to day transactions:

• Where assessee held shares from seven to eleven months, earned dividend and entered into a few transactions of sale of such shares during relevant year even though he held a huge number of shares, income arising from sale of shares would be taxable as short-term capital gain.

[CIT v. Vinay Mittal [2012] 22 151 (Delhi)]

• Where assessee-company’s main business was investment in shares & securities, shares could not be treated as business assets but income from sale of shares was liable to capital gains.

CIT v. Trishul Investments Ltd.(2008) 305 ITR 434 (Mad.)

Taxability of income arising from sale of shares whether taxable as business income or short term capital gain – Guiding principles Asst. CIT v. Om Prakash Arora [2011] 16 3w6 (ITAT-Delhi)

Following principles, can be applied on the facts of a case to find out whether transaction(s) in question are in the nature of trade or are merely for investment purposes:

1) What is the intention of the assessee at the time of purchase of the shares (or any other item). This can be found out from the treatment it gives to such purchase in its books of account. Whether it is treated as stock-in-trade or investment. Whether shown in opening/closing stock or shown separately as investment or non-trading asset.

2) Whether assessee has borrowed money to purchase and paid interest thereon. Normally, money is borrowed to purchase goods for the purposes of trade and not for investing in an asset for retaining.

3) What is the frequency of such purchases and disposal in that particular item ? If purchase and sale are frequent, or there are substantial transactions in that item, it would indicate trade. Habitual dealing in that particular item is indicative of intention of trade. Similarly, ratio between the purchases and sales and the holdings may show whether the assessee is trading or investing (high transactions and low holdings indicate trade whereas low transactions and high holdings indicate investment).

4) Whether purchase and sale is for realizing profit or purchases are made for retention and appreciation in its value ? Former will indicate intention of trade and latter, an investment. In the case of shares whether intention was to enjoy dividend and not merely earn profit on sale and purchase of shares . A commercial motive is an essential ingredient of trade.

5)How the value of the items has been taken in the balance sheet ? If the items in question are valued at cost, it would indicate that they are investments and where they are valued at cost or market value or net realizable value (whichever is less), it will indicate that items in question are treated as stock-in-trade.

6)How the company (assessee) is authorized in memorandum of association/articles of association ? Whether for trade or for investment? If authorized only for trade, then whether there are separate resolutions of the board of directors to carry out investments in that commodity and vice versa.

7)It is for the assessee to adduce evidence to show that his holding is for investment or for trading and what distinction he has kept in the records or otherwise, between two types of holdings. If the assessee is able to discharge the primary onus and could prima facie show that particular item is held as investment (or say, stock-in-trade) then onus would shift to revenue to prove that apparent is not real.

8) The mere fact of credit of sale proceeds of shares (or for that matter any other item in question) in a particular account or not so much frequency of sale and purchase will alone will not be sufficient to say that assessee was holding the shares (or the items in question) for investment.

9) One has to find out what are the legal requisites for dealing as a trader in the items in question and whether the assessee is complying with them. Whether it is the argument of the assessee that it is violating those legal requirements, if it is claimed that it is dealing as a trader in that item ? Whether it had such an intention (to carry on illegal business in that item) since beginning or when purchases were made ?

10) It is permissible as per CBDTs circular no. 4/2007, dated 15.06.2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.

11) Not one or two factors out of above alone will be sufficient to come to a definite conclusion but the cumulative effect of several factors has to be seen.

15 Case Laws on Share Trading – Business income or Capital gain – Guiding principles

1 Assessee Intention during purchase of shares is paramount to determine Tax Liability
2 Business income or capital gains cannot be decided by merely looking at frequency of transaction in shares
3 Business income or capital gains on Purchase & sale of shares- ITAT adopts 30 days theory
4 Classification of Shares when all such shares been bought in regular course business?
5 Gain on Sale of Mutual Fund is Capital Gain: ITAT Delhi
6 Gain on Sale of Shares cannot be treated as business income for Mere Sale of Share in Short Span of time
7 Gains on shares held in investment portfolio not assessable as business profits
8 Holding period for purposes of computation of capital gain is relevant only in relation to shares held as investment
9 Income from frequent Sale/Purchase of shares within small duration is business Gain
10 Income from Share Trading in the nature of business cannot be treated as ‘Capital Gain’
11 Income from shares is capital gain if shares been held as investment with intention of Investment
12 Income from shares transaction is capital income and not depends on frequency, magnitude of transaction
13 Mere Short period of holding shares does not imply that intention was only to trade in security
14 Merely holding shares for a short period will not convert capital gain into business income
15 Nature of profit from sale of shares depends on intention of acquisition of shares irrespective of its treatment in books

Extract From the Books of CA Agarwal Sanjay ‘Voice of CA’  titled ‘Capital Gains Under Income Tax Act, 1961’ –

Download E-Book on Capital Gain Under Income tax Act,1961

Republished with Amendments

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April 2021