Business income or capital gains on Purchase & sale of shares- ITAT adopts 30 days theory

Just saw this on taxguru, interesting order. Implications for traders/investors, hence sharing here.

Shankar Realty § Ltd. Vs. ACIT (ITAT Mumbai)

We have observed that the assessee is declaring income from house property as well income from capital gain in the return of income filed with the Revenue. The dispute is within narrow compass wherein the assessee is contending that the income from sale and purchase of shares be treated as capital gains while revenue is contending the same to be business income.

The assessee duly explained before us that no interest bearing borrowed funds were utilized for buying the shares. The assessee has duly explained that the interest of Rs. 20.02 lacs was paid towards borrowed funds which were invested in immovable properties and the said interest expenses were allowed by the revenue by way of deduction under the head “income from house property”.

We have gone through the details of transactions carried on by the assessee relating to the sale and purchase of shares which are placed in paper book page no. 37 to 56. We have carefully gone through these transactions which are large number of transactions entered into by the assessee in shares which were entered into frequently, regularly and in many cases the transactions are squared within a short span of buying of the shares.

No doubt every investment which is made by the tax payer, there is always an intention to make profits but the same cannot be classified as business income merely because it was carried on with profit motive and its classification is to be tested based on motives, frequency, regularity transactions entered into by the tax-payer to come to the conclusion whether the activity is a business activity or an investment to earn capital gains. It is also noted that in majority of the cases the assessee has sold the shares within 90 days of purchase. This is a mixed question of fact and law and is to be decided on the factual matrix of each case. It is also undisputed that the transactions for purchase and sale of shares entered into by the assessee are all delivery based transactions for sale and purchase of shares. After carefully considering the voluminous transactions entered into by the assessee during the year running into several pages of paper book from page no. 37 to 56 and the overall conduct of the assessee, we are of the considered view that gains arising from purchase and sale of shares which are squared within 30 days of purchase by the assessee, the same may be treated as a business income and correspondingly STT paid be allowed as deduction in accordance with law, while the transactions for purchase and sale of shares which are squared after 30 days of its purchase, the same may be treated as income from capital gains. In view of decision of Hon’ble Bombay High Court in the case of CIT v. Pruthvi Brokers & Shareholders (supra), the claim of the assessee raised for the first time before tribunal for grant of deduction towards STT paid is admitted and allowed as business deduction after verification on merits in accordance with law and corresponding STT paid on such shares income of which is held to be business income be allowed by the assessing officer after verification. For the limited purposes we are restoring this matter to the file of the assessing officer to make computation of business income as well capital gains on shares after verification of period of holding of such shares in accordance with our above directions.


Thanks for the info
The next question comes in mind is
If it is treated as business income can we claim all the expenses like rent , depreciation , salary etc or only stt

If business, you can show everything that you incur as expense from salary to rent to depreciation.

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Found another one of these where the AO deemed profits to be business income instead of capital gains. An interesting read. (Spoiler: The verdict was in favour of the assessee as the ‘original intent’ of the purchase was deemed to be to hold the stocks as a ling term investment.)

ITO Vs. M/s Nupur Carpets Pvt. Ltd. (ITAT Kolkata)

We note that the AO treated net ‘surplus’ as business income instead of capital gains on the ground that the assessee carried out business of share trading as evident from large volume of transactions and systematic, organized, repeated and regular activity in shares with a clear intention to earn huge profits. But the facts suggests that the assessee- company was holding shares as investment all along and that the initial intention was evident by way the entries made in books and valuation of shares at ‘cost’ and that the volume of transactions was low and that substantial dividend income earned reflecting the intention. Thus, according to assessee the net surplus was not a business income but on account of capital gain. To decide whether a transaction is in the nature of ‘investment’ or ‘trading’ the crucial test that laid down by various courts is that the ‘intention’ of the assessee at the time of purchase of shares. The AO on the other hand, was on the conduct of the business of the assessee which according to him carried out in a systematic and organized manner involving large volumes of transactions in shares. As seen from the principles laid down by various courts, the main test prescribed is the ‘initial intention’ of the assessee to decide whether an activity amounts to ‘trading activity’ or ‘investment activity’. As seen from the above facts, the assessee is justified in its argument that its original initial intention is to hold the shares as ‘investments’ and not as ‘stock-in-trade’. The intention of the assessee as is evident from the circumstances at the time of purchase of shares/units, is a relevant factor and often a conclusive factor in determining whether a transaction is in the nature of trade or in the nature of investment. The assessee had been keeping its holdings in certain companies from a few months to a few years, which clearly indicates that the motive and intention of the assessee is to earn returns in the form of capital gain apart from dividend income. We note that the sources for acquisition of shares are from share capital, reserves and surplus funds. The assessee has been an investor and not a trader as seen from the intention of the assessee. The treatment given in the books under the head ‘investment’ clearly shows that the assessee’s intention to deal in shares as investment. The conversion of investment into stock-in-trade and continuing the trading under that head and again converting the closing stock under that head into ‘investment’, under consideration amounts to a clear change of intention depending on the circumstances. The assessee maintained separate ledger accounts in respect of conversion of stock-in-trade into investment. By converting the stock-in-trade into investment, it does not alter the character, nature and intention of that particular transaction especially in the context of capital gain versus business income. Subsequent conversion and treatment given in the books of accounts do not alter the character of commercial transaction. Accordingly, the profit that has been attributable to this trading activity corresponding to conversion of stock-in-trade into investment is to be treated as ‘business income’ and accordingly to be taxed. In view of the above findings of CIT(A) that the income from investment is to be taken as ‘capital gains’ and conversion of stock-in-trade to investment is to be taken as ‘trading income’, which is based on facts of the case and need no disturbance. In addition to this, the assessees case under consideration is fully covered by the Jurisdictional ITAT Kolkata, in ITA No. 783/Kol/2009, A.Y 2005-06 (supra). Thus, respectfully following the decision of the Coordinate Bench in assessees own case, vide ITA No.783/Kol/2009, A.Y 2005-06 (supra),in the assessment year 2005-06, whereby the issues were decided in favor of the assessee company, as set out above, therefore we confirm the findings of CIT(A).

There are Cases on either side … The 2016 circular is good one which give clarity on how to deal with Share trading Income. The basic rule we need to follow depends upon intent, disclosures , continuity etc.

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tax was unliked and difficult subject for Einstein also…this posts above shows it…

So can we show it as pgbp income…Mostly all ca say that show it as capital gain as you dont hold current account and dont have any proprietorship registered under your name…i am really tensed with so many interpretation…pls help…