2014 (9) TMI 97 - HC - Income Tax

STCG on sale of shares Income from business or not Held that - Assessee was maintaining two separate portfolios, one of shares held as investment and the other of shares held as stock-in-trade - business income from trading in shares can result in good profit in one year, but lower or marginal in another year because of the inherent risks involved in the business AO has accepted that the assessee had maintained two separate portfolios; investment, and stock-in-trade portfolio for the shares - There is no allegation that the shares were transferred from one portfolio to other - The portfolios have been in existence since the AY 2004-05 onwards - The nature and extent of the transactions in the two portfolios have been noticed - Investment portfolios had shares of a few companies and transactions were infrequent. Transactions in the trading portfolio were of thousands of shares in 199 companies the order of the Tribunal is upheld Decided against Revenue.

Summary

Issues: Whether short term capital gains on sale of shares should be assessed as income from business.

Analysis:
The judgment pertains to an appeal by the Revenue against an order of the Income Tax Appellate Tribunal regarding the assessment year 2006-07. The primary issue raised is the classification of short term capital gains of Rs. 68,06,698/- on the sale of shares as income from business. The respondent-assessee, a registered sub-broker with SEBI, had declared total income of Rs. 89,47,150/-, including income from trading in shares, long term capital gains, and short term capital gains.

The Revenue contended that since the assessee was a sub-broker dealing in shares, the shares held should be treated as stock-in-trade, and the income earned should be classified as business income. However, the respondent had maintained two separate portfolios: one for shares held as investments and the other for shares held as stock-in-trade. The assessment order acknowledged this distinction and accepted the long term capital gains from the sale of investments.

The Commissioner of Income Tax (Appeals) and the Tribunal analyzed various factors such as the magnitude of purchases and sales, frequency of transactions, ratio of sales to purchases in the investment and trading portfolios, period of holding, and dividend earnings. They observed limited activity in the investment portfolio compared to the trading portfolio, with a significant number of transactions and trading volume in the latter. The turnover percentages in the investment and trading portfolios for the assessment years 2004-05, 2005-06, and 2006-07 were also considered.

The judgment emphasized that the nature and extent of transactions in the two portfolios supported the respondent's position. The Assessing Officer acknowledged the existence of separate portfolios since the assessment year 2004-05 and noted the infrequent transactions and limited turnover in the investment portfolio compared to the trading portfolio. The Tribunal found no grounds to interfere with the impugned order, highlighting the inherent risks and variability in profits associated with trading in shares.

Ultimately, the Court dismissed the appeal, affirming the Tribunal's decision not to treat the entire short term gains as business income. The judgment underscored the importance of maintaining separate portfolios and considered the factual circumstances and turnover ratios to support the classification of income from short term capital gains as distinct from business income.