Capital gains or business income - The taxation conundrum
[2013] 35 taxmann.com 249 (Article)
Capital gains or business income - The taxation conundrum
SANJEEVA NARAYAN
CA
Introduction
1. The issue whether the gains arising from sale/dealing of shares are taxable under the head "Capital Gains" or under "Business Income" has been increasingly engaging the attention of the assessees, the tax department and, consequently, of the judiciary. The litigation on the issue has tended to only multiply. The question has attained greater relevance in the cases where an assessees (immaterial of whether it is an individual, firm, company or any other entity) have engaged in a series of frequent transactions and the turnover is high. The question also assumes relevance in cases where an assessee bifurcates his gains (on some rational, systematic and consistent basis by applying criteria such as the period of holding, or the actual/constructive delivery of shares, etc.) into Capital Gains or Business income, i.e., where he maintains a dual portfolio comprising of a trading portfolio and an investment portfolio and, consequently, has income both under the head "Capital Gains" as well as under "Business Income".
This article analyzes the issue with reference to the provisions of the Income-tax Act, 1961, the guidelines/circulars issued by the Central Board of Direct Taxes and the judicial pronouncements on the issue.
Tax treatment in cases of gains from sale/dealing of shares
2. The tax treatment in such cases would depend upon the fact whether the said activity has been undertaken by the assessee as an "investor" with a view to partake in the short/medium/long-term fortune of the investee-companies as opposed to that of a "trader" with a view to benefit from fluctuation in prices? Such a distinction, at a first glance, might seem to be exceedingly simple but in practice is complex and difficult.
2.1 Treatment under the Income-tax Act, 1961 - Income under the head "Profits and Gains of Business or Profession" is to be computed in the manner specified in sections 28 to 44 of the Income-tax Act, 1961 and, correspondingly, trading assets are dealt with under section 28 of the Act. Similarly, Capital Gains are to be computed in accordance with sections 45 to 55A of the Act. "Capital Assets" are defined in section 2(14) of the Act to include property of any kind held by an assessee whether or not connected with the business or profession. Long-term capital assets and gains are defined in section 2(29A)/(29B) and short–term capital assets and gains are defined in sections 2(42A)/(42B) of the Act.
2.2 Treatment in view of guidelines/circulars issued by the CBDT
2.2.1 CBDT's Instruction No. 1827, dated 31-8-1989 - The Central Board of Direct Taxes (CBDT) through Instruction No. 1827 [F. No. 181/1/89-IT(AI), dated 31-8-1989] had initially brought to the notice of the Assessing Officers that there is a distinction between shares held as investment (capital assets) and shares held as stock-in-trade (trading assets). After discussing a number of judicial decisions pronounced on the subject the CBDT had emphasized on fact that "although the tests laid down by the Courts may help determine the issue in particular cases, the decision will ultimately turn on the facts of each case."
2.2.2 CBDT's office memorandum, dated 13-12-2005 – Tests to distinguish between shares held as stock-in-trade and shares held as investments - The CBDT has also issued guidelines on tests for distinction between shares held as stock-in-trade and shares held as investment vide office memorandum, dated 13.12.2005 [F. No. 149/287/2005-TPL]which are reproduced as under:—
"Circumstances to be considered by the Assessing Officers in determining whether a person is a trader or an investor in stocks:-
| (i) | Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity; | |
| (ii) | Whether, the purchase is made solely with the intention of resale at a profit or for long-term appreciation and/or for earning dividends and interest. | |
| (iii) | Whether scale of activity is substantial; | |
| (iv) | Whether transaction were entered into continuously and regularly during the assessment year. | |
| (v) | Whether purchases are made out of own funds or borrowings; | |
| (vi) | The stated objects in the Memorandum and Articles of Association in the case of corporate assessee; | |
| (vii) | Typical holding period for securities bought and sold; | |
| (viii) | Ratio of sales to purchase and holding. | |
| (ix) | The time devoted to the activity and the extent to which it is the means of livelihood. | |
| (x) | The characterization of securities in the books of account and balance sheet as stock-in-trade or investment. | |
| (xi) | Whether the securities purchased or sold are listed or unlisted. | |
| (xii) | Whether investment is in sister/related concerns or independent companies. | |
| (xiii) | Whether transaction is by promoters of the company. | |
| (xiv) | Total number of stock dealt in | |
| (xv) | Whether money has been paid or received or whether these are only book entries". |
The above Memorandum also advised the Assessing Officers that no single criteria listed would be decisive and that the total effect of all these parameters should be considered to determine the nature of an activity.
2.2.3 CBDT's Circular No. 4/2007, dated 15-6-2007 on the issue - The Central Board of Direct Taxes has vide Circular No. 4/2007, dated 15-06-2007 [F. No. 149/287/2005-TPL] after discussing a number of judicial decisions on the subject pronounced by the Supreme Court and the Authority of Advance Rulings emphasized on the fact that "it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated a capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads, i.e., capital gains as well as business income." The said Circular has also advised the Assessing Officers that "the above principles should guide them in determining whether, in a given case, the shares are held by the assessees as investments (and, therefore, giving rise to capital gains) or as stock-in-trade (and, therefore, giving rise to business profits). The Assessing Officers have been further advised that "no single principle would be decisive and that the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-in-trade?" The said Circular has discussed on the following judicial decisions:-
2.2.3.1 JUDICIAL PRONOUNCEMENTS ON THE ISSUE DISCUSSED IN THE ABOVE CIRCULAR
| ♦ | Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment. | |
| CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 (SC) | ||
| ♦ | The High Court, in our opinion, made a mistake in observing whether transactions of sale and purchase of shares were trading transactions or whether these were in the nature of investment, was a question of law. This was a mixed question of law and fact. | |
| CIT v. H. Holck Larsen [1986] 160 ITR 67/26 Taxman 305 (SC) | ||
| ♦ | 13. .............................................................. |
| "(i) | where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction; | |
| (ii) | the substantial nature of transactions, the manner of maintaining books of account, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions; | |
| (iii) | ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend, etc., then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt. |
| ** | ** | ** |
33. We shall revert to the aforementioned principles. The first principle requires us to ascertain whether the purchase of shares by a FII in exercise of the power in the memorandum of association/trust deed was as stock-in-trade as the mere existence of the power to purchase and sell shares will not by itself be decisive of the nature of transaction. We have to verify as to how the shares were valued/held in the books of account, i.e., whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets. The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. It will not be out of place to mention that regulation 18 of the SEBI Regulations enjoins upon every FII to keep and maintain books of account containing true and fair accounts relating to remittance of initial corpus of buying and selling and realizing capital gains on investments and accounts of remittance to India for investment in India and realizing capital gains on investment from such remittances. The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends, etc., the transactions of purchases and sales of shares would yield capital gains and not business profits."
Fidelity Northstar Fund, In re [2007] 288 ITR 641/158 Taxman 372 (AAR – New Delhi)
2.3 CBDT's guidelines/instructions vis-à-vis Judicial pronouncements - The above guidelines/instructions/circulars issued by the CBDT also need to be viewed in the context of judicial pronouncements. These Judicial pronouncements have been briefly given hereunder:—
| ♦ | It is fairly clear that where a person in selling his investment realizes an enhanced price, the excess over his purchase price is not profit assessable to tax. But it would be so, if what is done is not a mere realization of the investment but an act done of making profits. The distinction between the two types of transactions is not always easy to make. Whether the transaction is of one kind or the other depends on the question whether the excess was an enhancement of the value by realizing a security or a gain in an operation of profit making. If the transaction is in the ordinary line of the assessee's business there would hardly be any difficulty in concluding that it was trading transactions, but where it is not, the facts must be properly assessed to discover whether it was in the nature of trade? The surplus realized on the sale of shares, for instance, would be capital if the assessee is an ordinary investor realizing his holding; but it would be revenue if he deals with them as an adventure in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in a higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business? |
Raja Bahadur Kamakhya Narain Singh v. CIT [1970] 77 ITR 253 (SC)
| ♦ | Mere fact that an investment company periodically varies its investment does not necessarily mean that the profits resulting from such variation are taxable under the Income-tax Act. Variation of its investments must amount to dealing in investments before such profits can be taxed as income under the Income Tax Act. |
Dalhousie Investment Trust Co. Ltd. v. CIT [1967] 66 ITR 473 (SC)
| ♦ | In deciding whether a venture is in the nature of trade no rigid formula can be applied. The total impression must be gathered from all the relevant facts and circumstances. | |
| In a transaction of purchase and re-sale where the purchase is made solely and exclusively with the intention to re-sell at a profit and the purchaser has no intention of holding the property for himself or otherwise using it, the presence of such an intention is a relevant fact and unless offset raises a strong presumption that the adventure is in the nature of trade. |
Premji Bhimji v. CIT [1971] 81 ITR 179 (Cal.)
| ♦ | In order that it may be held that a person is undertaking a trade or business, or entering into an adventure in the nature of trade, it is essential that the particular transactions under scrutiny should have been entered into with the intention of earning a profit. Though that is not a conclusive test it is certainly an essential test before such a conclusion can be drawn; but such a case is quite different from the case of a person purchasing property with the dominant intention of using it himself or enjoying it himself but at the same time expecting that at some future date if it goes up in value he may take advantage of the rise in the price. | |
| If a person invests money in land intending to hold it, enjoys its income for sometime, and then sells it at a profit, it would be a case of capital accretion and not profit derived from an adventure in the nature of trade. Cases of realization of investments consisting of purchase and resale, though profitable, are outside the domain of adventure in the nature of trade. | ||
| Though intention subsequently formed may be taken into account, it is the intention at the inception that is crucial. One of the essential elements in an adventure in the nature of trade is the intention to trade; that intention must be present at the time of the purchase. The mere circumstance that a property is purchased in the hope that, when sold later on it would leave a margin of profit, would not be sufficient to show an intention to trade at the inception. |
Bhogilal H. Patel v. CIT [1969] 74 ITR 692 (Bom.)
| ♦ | It is not possible to evolve any single legal test or formula which can be applied in determining whether a transaction is an adventure in the nature of trade or not. The answer to the question must necessarily depend in each case on the total impression and effect of all the relevant factors and circumstances proved therein and which determine the character of the transaction. |
P. M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735 (SC)
| ♦ | The term "adventure in the nature of trade" clearly suggests that the transaction itself cannot properly be regarded as trade or business. It is characterized by some of the essential features that make up trade or business but not by all of them; and so even an isolated transaction can satisfy the description of an adventure in the nature of trade. It is impossible to evolve any formula which could be applied to determine the character of an isolated transaction. However, the following factors are relevant: Was the purchaser a trader and was the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? What is the nature of the commodity purchased and re-sold and in what quantity was it purchased and re-sold? If the commodity purchased is generally the subject matter of trade and if it is purchased in very large quantities it would tend to eliminate the possibility of investment for personal use, possession or enjoyment. Did the purchaser by any act subsequent to the purchase improve the quality of the commodity and thereby make it more readily resaleable? What were the incidents associated with the purchase and resale? Were they similar to the operations usually associated with trade or business? Are the transactions of purchase and resale repeated? In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into picture? The total effect of all the relevant factors and circumstances would determine the character of the transaction. |
CIT v. Himalayan Tiles & Marble (P.) Ltd. [1975] 100 ITR 177 (Bom.)
| ♦ | A number of principles have been enumerated succinctly and in the narrow compass of a few sentences:- |
| "(a) | The commodity purchased plays an important role in deciding whether a person was indulging in an adventure in the nature of trade or was making an investment? | |
| (b) | Whether the transaction was an isolated one or formed part of a series of transactions showing a tendency to indulge in trade is another important factor; | |
| (c) | The fact that the property bought has been sold within a short time does not by itself indicate that the transaction was in the nature of trade; | |
| (d) | If land has been purchased or a commodity which normally is not treated as a stock-in-trade has been purchased, the presumption is that the intention was to make an investment and not to indulge in an adventure in the nature of trade, and | |
| (e) | If the property purchased was capable of yielding income then again the inference was that an investment was intended and not an adventure." |
Michael A. Kallivayalil v. CIT [1976] 102 ITR 202 (Ker.)
| ♦ | Where there is an isolated transaction, some of the indicia for testing whether the transaction was a transaction in the nature of investment or of an adventure in the nature of trade are:- |
| (a) | Was the purchase a trade and where the purchase of the commodity and its resale allied to his usual trade or business or incidental to it? | |
| (b) | What is the nature of the commodity purchased and resold and in what quantity was it purchased and resold? | |
| (c) | Did the purchaser, by any act subsequent to the purchase, improve the quality of the commodity purchased and thereby make it more readily resaleable? | |
| (d) | What were the incidents associated with the purchase and resale? | |
| (e) | Were they similar to the operations usually associated with trade or business? | |
| (f) | Are the transactions of purchase and sale repeated? | |
| (g) | In regard to the purchase of the commodity and its subsequent possession by the purchaser, does the element of pride of possession come into the picture? | |
| (h) | Whether the finance required for the purchase of the commodity has been found from the surplus funds with the assessee or whether they represent borrowed money? |
G.Venkataswami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC)
| ♦ | In order to determine whether profit arising on sale is business income, the following tests can be applied:— |
| • | The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment? If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, if would furnish a valuable guideline; | |
| • | The second test is why and how and for what purpose the sale was effected subsequently? | |
| • | The third test is as to how the assessee dealt with the subject matter of transaction during the time the asset was with the assessee, whether it has been treated as stock-in-trade, or has been shown in the books of account and balance sheet as an investment? This inquiry, though relevant, is not conclusive; | |
| • | The fourth test is how the assesee himself has returned the income from such activities and how the Department has dealt with the same in the course of preceding and succeeding assessments? This factor, though not conclusive, can afford good and cogent evidence to judge the nature of transaction and would be a relevant circumstance to be considered in the absence of any satisfactory explanation; | |
| • | The fifth test normally applied in cases of firms and companies is whether the deed of partnership or the memorandum of association, as the case may be, authorizes such an activity? | |
| • | The most important test is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, an inference can readily be drawn that the activity is in the nature of business. |
CIT v. Rewashanker A. Kothari [2006] 283 ITR 338/155 Taxman 214 (Guj.)
| ♦ | According to the Assessing Officer as well as the Tribunal, the shares were held as an investment of the assessee and, therefore, the profit earned by the assessee on the sale of the shares was to be treated as capital gains. However, the CIT was of the view that the shares were the stock-in-trade of the assessee and, therefore, profit earned on the sale thereof could not be treated as capital gains but as business income; | |
| It was noted by the Tribunal that in earlier assessment years, the assessee had shown the shares held in BT Tech Net Ltd., as an investment right from the date of purchase and this was shown as such in the balance sheet of the assessee, which was filed alongwith the return of income. No objection was taken to this position in the earlier years. However, the CIT had not decided that it was not an investment without there being any change in facts and, therefore, the Tribunal held that there was no occasion for the CIT to take a contrary view than what was disclosed and accepted on earlier occasions; | ||
| ♦ | Even on merits, the Tribunal came to the conclusion that the shares held by the assessee in BT Tech Net Ltd. were an investment and, therefore, any profit earned on the sale thereof was required to be treated as capital gains. Whether the shares were held by the assessee as an investment or stock-in-trade was a matter of fact, and we do not find any perversity in the view taken by the Tribunal that the shares were held as an investment. |
CIT v. Gulmohar Finance Ltd. [2008] 170 Taxman 483 (Delhi)
| ♦ | Capital gains viz-a-viz business income – sale of shares, there is nothing, in law, which prohibits a trader in shares to invest in shares. The intention of the assessee is relevant to determine whether he is carrying on the business in shares or investments. It was found that the assessee had been holding shares for a long time and had been utilizing the surplus funds only for the investments. Both, CIT(A) and Tribunal had concurrently found as a fact that assessee was dealing as also investing in shares while maintaining separate books of account and receipts from sale of shares in question was assessable under the head capital gains. Finding was not perverse, hence, no substantial question of law arose. |
CIT v. S. Rammaamirtham [2008] 217 CTR 206 (Mad.)
| ♦ | We were of the view that the Tribunal had not committed any error in the opinion expressed by it. The assessee held the shares as an investment and there was nothing to show that the investment was converted into stock-in-trade of the business of the assessee. In fact, the business of the assessee appeared to have been that of running a restaurant. It was true that one of the objects mentioned in the Memorandum of Association was with respect to buying and selling of shares but that was neither the business of the assessee nor was there any material on record to show that the assessee was regularly dealing in shares. | |
| The Supreme Court in Raja Bahadur Kamakhya Narain Singh(supra) took the view that the treatment given to a transaction in the books of account is of importance. As noted above, the assessee had shown its shareholding in JPIL as an investment and not a stock-in-trade of business. As already noted, there was nothing to show that the shares were converted into stock-in-trade. | ||
| Under these circumstances, the Commissioner as well as the Tribunal were justified in holding that the claim of the assessee for capital gains was justified and that the Assessing Officer was not correct in taking the income of the assessee from the sale of shares as business income. |
CIT v. Ess Jay Enterprises (P.) Ltd. [2008] 173 Taxman 1 (Delhi)
| ♦ | Whether where shares were never treated by assessee as stock-in-trade and they were held for earning dividend only, profit on sale of shares in question was to be treated as capital gains instead of as business income, as adopted by Assessing Officer? |
CIT v. N.S.S. Investments (P.) Ltd. [2007]158 Taxman 13 (Mad.)
| ♦ | The mere volume of transactions by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction. Though the principle of res judicata does not apply to the Income-tax proceedings, as each year is an independent year of the assessment, but in order to maintain consistency it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts. | |
| In the facts of the instant case, the assessee was holding the shares as an investment from year-to-year. It was the intention of the assessee which was to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares was on a large magnitude, but the same would not decide the nature of transaction. Similar transactions of sale and purchase of shares in the preceding years had been held to be income from capital gains, both on long-term and short-term basis. The transaction in the year under consideration on account of sale and purchase of shares was same as in the preceding years and the same was to be accepted as short-term capital gains. There was no basis for treating the assessee as a trader in shares, when his intention was to hold shares in the Indian companies as an investment and not as stock-in-trade. The mere magnitude of the transaction would not change the nature of transaction, which were being assessed as income from capital gains in the past several years. The Assessing Officer was to be directed to set off the long-term capital loss against the short-term capital gain of the year under consideration. |
Janak S. Rangwalla v. Asstt. CIT [2007] 11 SOT 627 (Mum.)
| ♦ | The assessee was in the business of investments in shares and securities and it was never in the business of trading in shares. The term 'business' is defined in sec. 2(13). The "capital asset" is defined in sec. 2(14). The test to decide whether it is an investment or an adventure in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business and even multiple transactions sometimes are deemed as investments. So, the criteria for deciding whether it is investment or business is that of the intention of the assessee, viz., whether assessee's real intention is to invest or the intention is in the nature of trade. As per the memorandum of association of the assessee-company, it could be seen that the assessee-company was incorporated to engage in the business of investment. The finding given by the Tribunal was that the assessee had no intention to trade in shares. Hence, the purchase of shares could not be business asset in the hands of the assessee. The assessee had rightly offered the same under the head "Capital gain". The Tribunal also correctly arrived at a conclusion that it was only an investment activity and held that the profits derived from the sale of shares were subject to capital gain. The reasons given by the Tribunal were based on valid materials and evidences and there was no error or legal infirmity in the order of the Tribunal so as to warrant interference. Under the circumstances, no substantial question of law arose. |
CIT v. Trishul Investments Ltd. [2008] 305 ITR 434 (Mad.)
| ♦ | Reference may also be made to a recent judgment of the Mumbai Bench of the Income Tax Appellate Tribunal in the case ofGopal Purohit v. Jt. CIT [2009] 29 SOT 117 (Mum.), wherein the following observations have been made:- | |
| "In the present case, the assessee is also maintaining separate records for both types of transactions. Further, in the present case, it is important to notice that the assessee has entered into two different types of transactions where both activities are entirely different in nature, i.e., one activity is of investment in nature on the basis of delivery and second activity is purely of jobbing (without delivery), which puts assessee's case on a more strong footing. Hence, in our view, the ratio of this decision would squarely apply to the facts of the present case. Accordingly, we hold that the delivery based transaction should be treated as of the nature of investment transactions and profit therefrom should be treated as short-term capital gain or long-term capital gain, depending upon the period of holding." | ||
| ♦ | The Hon'ble High Court in the case of CIT v. Gopal Purohit [2011] 336 ITR 287/[2010] 188 Taxman 140 (Bom.) had concurred with the view of the Income Tax Appellate Tribunal with the following remarks:— | |
| "Held, dismissing the appeal, (i) that it was open to the assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, and this warranted no interference. | ||
| (ii) That there should be uniformity in treatment and consistency when facts and circumstances for different years were identical particularly in the case of the same assessee. | ||
| (iii) That entries in the books of account alone are not conclusive in determining the nature of income." | ||
| While delivering the above judgment the High Court had opined that it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares, that a finding of fact had been arrived at by the Tribunal as regards the two distinct types of transactions, namely, those by way of investment and those for the purposes of business, that there should be uniformity in treatment and consistency when facts and circumstances are identical, particularly in the case of the assessee and that entries in books of account along are not conclusive in determining the nature of income. Subsequently, the Special Leave Petition filed by the Department against the said judgment had been dismissed by the Hon'ble Supreme Court vide judgment, dated 15-11-2010 passed in the case of CIT v. Gopal Purohit [S.L.P. (Civil) No. 32891 of 2010 reported at 334 ITR 308 (Statutes)] | ||
| ♦ | The Delhi High Court in a recent judgment delivered on 9-1-2013 in the case of CIT v. Avinash Jain [2013] 214 Taxman 260/30 taxmann.com 133 has upheld the decision of the Hon'ble Income Tax Appellate Tribunal deleting the addition made by the Ld. Assessing Officer by holding that the intent and purport of the CBDT's Circular No. 4/2007, dated 15-6-2007 is that a taxpayer could have two portfolios, namely, an investment portfolio and a trading portfolio. The assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case, whenever the shares are sold and gains are made, the gains would be capital gains and not profits of any business venture. In this connection the following observations made by the Learned Judges are relevant and topical. | |
| "5. Before us the Ld. Counsel for the revenue submitted that while the CBDT's Circular only mentioned that it was "possible" for a taxpayer to have two portfolios, namely, an investment portfolio and a trading portfolio, the Tribunal has misunderstood the said Circular by holding that the Circular had "allowed" the assessee to maintain two types of portfolios. Although technically the Ld. Counsel for the revenue may be right, but that really does not make any difference when the entire circular is considered. The intent and purport of the circular is to demonstrate that a taxpayer could have two portfolios, namely, an investment portfolio and a trading portfolio. In other words, the assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case whenever the shares are sold and gains are made the gains would be capital gains and not profit of any business venture. In the latter case, any gains would amount to profits in business. This has been made clear by the CBDT's Circular in the remaining portion of the Circular itself. | ||
| 6. On the facts, the Commissioner of Income Tax (Appeals) and the Income Tax Appellate Tribunal have held that the short-term capital gains and the long-term capital gains in the present case were out of the investment account and were not related to the trading account of the assessee. That being the position, no interference with the decision of the Tribunal is called for. No question of law arises for our consideration." |
Conclusion
3. In the light of the above discussions, it seems abundantly clear that the dominant judicial, administrative and professional opinion is that there is no bar on an assessee for maintaining two portfolios, viz., an investment portfolio and a trading portfolio. However, while accounts in respect of the said activities should not only be separately maintained, but, in addition a systematic criteria needs to be adopted and consistently applied to bifurcate the various transactions into each of the portfolios. In the case of an investment activity the intention to acquire and hold the underlying securities should be evident from the underlying facts and records. The transactions should invariably be backed by actual/constructive delivery of shares.
Regards
Prarthana Jalan
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