Gain from sale of shares held as investment portfolio taxable as capital gains

Brief Facts:

• A search & seizure action was conducted u/s 132 of the Act in group cases of Atul Shah on 07-02-2008 including the assessee. A notice u/s 153A of the Act was issued to the assessee on 01-08-2008.
• In response to notice, the assessee filed return of income u/s 153A in which she declared income under the head “Capital Gains” as STCG of Rs. 1,40,01,808/-. However, the A.O. passed assessment order treating such short-term capital gain as “Business Income”.
• The A.O. concluded that in the absence of utilization of own funds for purchase of shares and in the absence of separate de-mat account maintained for purchase and sale of shares in investment account vis-à-vis trading account, the gain arising on sale of shares are required to be treated as ‘business income’.
• The assessee preferred appeal before the CIT (A) who confirmed the action of the A.O. The assessee preferred further appeal with Tribunal.

Submission by assessee:

• The assessee maintains two portfolios: (i) investment portfolio where the shares are acquired with long term perspective are shown as capital investment (ii) trading portfolio where the assessee purchases shares with short-term perspective and is solely driven by profit motive. The gains/ loss arising on shares held in investment portfolio are reported under the head ‘capital gains’ whereas profit and loss arising on sale of shares listed in trading portfolio are reported as ‘business income/loss’ of the assessee on a consistent basis.
• The learned AR for the assessee submitted that there are long line of judicial precedents which approves the dual manner of treatment of income as shown by the assessee under the respective heads. Prominent case laws on this score includes CIT vs. Gopal Purohit 228 CTR 582 (Bom.)
• It was pointed out that CBDT Circular has also adopted the guidelines evolved by judicial precedents as can be seen in CBDT Circular No. 4 of 2007 dated 15-06-2007.
• Further, the utilisation of borrowed funds on standalone basis cannot be determinative of the nature of income resulting from sale of shares acquired from participation of borrowed funds as held in plethora of judicial decisions. A reference in this regard was made to the decision of the Hon’ble Gujarat High Court in the case of CIT vs. Neeraj Amidhar Sur [2011] 238 CTR 294 (Guj).
• The total number of transactions of purchase in the investment portfolio is only “5” and sale is barely “7”. It was contended that frequency and repetition in the impugned scrip is prima facie absent justifying the intention of assessee to purchase the shares as capital asset.
• The assessee has maintained separate ledger account for its capital investment transactions vis-à-vis trading transactions and therefore declared intention of the assessee of capital investment ought not to have been displaced simply to seek higher rate of tax.

Submission by Revenue:

• The transactions have been entered within a short period of less than one month and the assessee does not have sufficient own funds at its disposal and has employed borrowed funds from outsiders on which interest has also been paid.
• It was further observed by the A.O. that the assessee has also dealt in other shares which are reported as share trading business by the assessee. In this background, the benefit of concessional rate of tax on STCG was denied to the assessee.

Tribunal’s Verdict:

• The law as considerably evolved on the point and continuing. The courts have laid down several tests for ascertaining the nature of transaction. The CBDT itself has also laid down parameters by way of circular no. 4 dated 15-06-2007.
• The cumulative effect of all factors needs to be weighed and a mere involvement of borrowed funds in some instances would not per se denude the transactions of its character of capital assets.
• In the absence of any straight jacket formula available despite plethora of judgements, the lack of regularity and isolated instances of capital transactions would vindicate the stand of assessee that income/loss from seven transactions have been rightly regarded as capital gains.
• While maintenance of capital and trading transactions as a separate category in books can be insisted upon in practice to ascertain the underlying intentions, the maintenance of separate D-mat account separately is not necessarily in conformity with usage of share trade and thus cannot be insisted upon.
• We thus find merit in the plea of assessee and in result, the appeal of the assessee is allowed.

Read complete order: Swatiben Anilbhai Shah vs. DCIT