Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital ga

Income tax - Whether profits from sale of shares held as long-term investments are to be taxed as business income or capital gains? - It is capital gain, rules Delhi HC


By TIOL News Service

NEW DELHI, OCT 28, 2010: THE issue before the HC is - Whether profits from sale of shares held as long-term investments by an investment and finance company are to be taxed as business income or capital gains. And the HC decision rules that it is capital gains.

Facts of the case

The assessee is a company engaged in the business of sale and purchase of shares. It filed its return declaring an income of Rs.60,05,375/- in which it included short term capital gain at Rs.38,476/- and long term capital gain at NIL after set-off of long term capital loss of previous years amounting to Rs.2,08,24,174/-. In the course of assessment proceedings, the AO observed that in computation of the income filed, the assessee had shown long term capital gain at Rs.2,08,24,174/-which had been set off against the long term capital loss of the AY 1995-96 amounting to Rs.2,02,45,035/- and of the AY 1996-97 at Rs.5,79,139/-. On a query being raised by the assessing officer as to why sale of investment be not treated as business or trading receipts as the assessee is an investment company having main business of purchase and sale of shares, it was submitted by the assessee that it was registered as an investment and finance company having its main activity of investing its funds in long term securities like shares, debt and equity mutual funds, etc for generating dividend, interest and profit and loss on sale of investments and all the investments of the company are of long term nature and had not been held as stock-in-trade since the FY 1999-2000 in which year all the investments held as stock-in-trade were transferred to the investment portfolio. It was contended on behalf of the assessee that the said practice of taking all its securities under the investment head had since then been followed and the revenue had never raised any query on that score. However, the AO held that the income from the transactions of sale and purchase of shares was business income of the assessee company and were in fact purchased not for investment purposes but for the purpose of sale at a profit are liable to be taxed under the head business income and not under the head capital gain as declared by the assessee company. On the basis of aforesaid reasoning, the AO assessed the tax at Rs.3,25,82,805/- and initiated penalty proceedings u/s 271(1)(c) and directed charge of interest under Section 234B/234D accordingly.

The CIT(A) held that the profit arising on the sale of shares has to be treated as long term capital gains and, accordingly, the addition of Rs.2,65,77,430/- was deleted. The ITAT also decided the issue in favour of the assessee.

On further appeal by the Revenue, the High Court held that,


++ in the case at hand, the assessee had purchased the shares on 27th January, 1996 and the same were held for a span of 7 years and were sold during the year under consideration. The assessee had not involved himself in the business of buying and selling shares after 1st April, 1997. The assessee had not engaged itself as a dealer in debt mutual funds. Nothing has been brought on record to show that the assessee was engaged in the selling of shares. The object incorporated in the Memorandum of Association only refers to the fact that the assessee can deal in shares but, there was no regular activity on that score. The nature of activity, intention and conduct has significance. They play a pivotal role in the entire gamut of transaction;

++ as per the circular issued by the CBDT on 15th June, 2007, a tax payer can have two portfolios, that is, 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. The assessee is entitled to have income from both heads, namely, capital gains as well as business income. On a proper scanning of the facts that have been brought on record, there can be no iota of doubt that the shares that were made by the assessee as an investment gave rise to capital gains. Therefore, the concept of business income does not arise and hence, the findings recorded by the first appellate authority as well as by the Tribunal stand on terra firma.