2013 (1) TMI 315 - HC - Income Tax

Short Term capital gain and long term capital gain treated as business income - ITAT confirmed the CIT(A )s order in deleting the addition - assessee is engaged in sale and purchase of shares and maintains two separate portfolios - Held that - CIT(A) relying upon CBDT circular No.4/2007 dated 15.06.2007 & CIT Vs. Associated Industrial Development Co. 1971 (9) TMI 3 - SUPREME COURT & CIT Vs. H.Holck Larsen 1986 (5) TMI 30 - SUPREME COURT stated that it is possible for a tax payer to have two portfolios i.e. an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock in trade which are to be treated as trading assets. It is not the case that the assessee started these activities in the year under consideration. The practice is supported by earlier years also which is not disputed. The department has earlier accepted the assessee s practice and treatment under heads of capital gains and business. Assessee s separate activities in share are further supported and endorsed by the fact that separate de mat accounts, bank accounts are being maintained and separate trading account and investment accounts are maintained in the books. Under these circumstances it confirms that the assessee was dealing in different activities of trading and investment - no interference with the decision of the Tribunal is called for - no substantial question of law arises.

Summary

Issues:
1. Classification of short term and long term capital gains as business income.
2. Interpretation of CBDT circular regarding maintaining separate investment and trading portfolios.

Issue 1: Classification of short term and long term capital gains as business income
The case involved an appeal by the revenue against an order passed by the Income Tax Appellate Tribunal regarding the classification of short term and long term capital gains as business income for the assessment year 2007-08. The assessee was engaged in the sale and purchase of shares with two separate portfolios - an investment portfolio and a trading portfolio. The assessing officer treated both short term and long term capital gains as business income, leading to additions in the assessment. However, the Commissioner of Income Tax (Appeals) allowed the appeal of the assessee, which was further challenged by the revenue before the Tribunal.

Issue 2: Interpretation of CBDT circular regarding maintaining separate investment and trading portfolios
The Tribunal considered the CBDT circular No.4/2007, which emphasized the possibility for a taxpayer to maintain two portfolios - an investment portfolio and a trading portfolio. The circular guided assessing officers in determining whether shares were held as investment or stock-in-trade. The Tribunal, after concurring with the views of the CIT(Appeals), held that the assessee was allowed to maintain two types of portfolios, supported by the practice in earlier years and separate accounts maintained for trading and investment activities. The Tribunal concluded that the short term and long term capital gains in the present case were from the investment account and not related to the trading account, upholding the decision of the CIT(Appeals.

In conclusion, the High Court dismissed the appeal, stating that no question of law arose for consideration as the short term and long term capital gains were determined to be from the investment account and not business income. The judgment highlighted the importance of maintaining separate investment and trading portfolios as per the CBDT circular and previous practices recognized by the revenue and the Tribunal.