2014 (8) TMI 645 - HC - Income Tax

Income from sale of shares Business income or STCG Held that - The Tribunal rightly was of the view that merely because the dividend has not been received from shares held as investments, the nature of shares cannot be treated as stock-in-trade - assessee has maintained investment portfolio as well as trading portfolio - The shares in the investment portfolio have been held in Demat account - profit on sale of shares will be assessable under the head short term capital gain and not as business income Following the decision in Gopal Purohit Vs. JCIT 2010 (1) TMI 7 - BOMBAY HIGH COURT - the profits earned on sale of shares held as investment will be assessable under the head short term capital gains and not as business income - The shares held as investment were kept in a separate portfolio the shares related to only three companies - Shares of State Bank of India were also purchased and kept in the investment portfolio account and not treated as stock in trade - These shares were sold after a gap of 4 months or more Decided against Revenue.

Summary

Issues:
1. Classification of income from sale of shares as "business income" or "short-term capital gains."

Analysis:
The case involved a substantial question of law regarding the classification of income from the sale of shares by the respondent-assessee for the assessment year 2005-06. The Assessing Officer initially treated the profit from sale and purchase of shares as "income from business" due to the shares being held as "stock-in-trade." However, the respondent-assessee argued that the income should be assessed as "short-term capital gains" based on maintaining separate portfolios for investments and stock-in-trade, as accepted in previous assessment years.

The Commissioner of Income Tax (Appeals) sided with the Revenue, emphasizing the short holding period of shares and the absence of dividends received on the shares sold. The Commissioner referred to specific transactions involving shares of NTPC, Dena Bank, and State Bank of India to support the decision.

The Tribunal, in its order, highlighted the respondent-assessee's practice of maintaining dual portfolios for investments and stock-in-trade. It analyzed the resolutions of the Board of Directors regarding the purchase of shares and the treatment of shares in the investment register, concluding that the shares in question were held as investments and not as stock-in-trade. The Tribunal also noted the receipt of dividends from shares held as stock-in-trade and upheld that the profits from the sale of shares held as investments should be considered "short-term capital gains" and not "business income."

The High Court affirmed the Tribunal's decision, emphasizing the respondent-assessee's consistent practice of segregating investments and stock-in-trade, supported by the turnover amount and the relatively small investment in shares compared to the total turnover. The Court concluded that the order did not warrant interference and ruled in favor of the respondent-assessee, dismissing the appeal by the Revenue.