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'Capital gains on share sales not biz income'
January, 19th 2010

Capital gains on sale of shares treated as investment income in earlier years cant be treated as business income in subsequent years if there is no change in the facts and circumstances in the case of the assessee. This was the gist of a recent Bombay High Court order dismissing an appeal against a tribunal order in the case of Commissioner of Income Tax versus assessee Gopal Purohit.

This order will clear many pending cases where the assessing officers and CIT appeals have held investors as traders, and therefore the concessional amended rates of 10% in the case of short-term capital gains and 0% for long-term capital gains will be available to investors, said chartered accountant Bhupendra Shah.

Short-term capital gains tax is levied at 10% on sale of shares that have been held for less than one year, while there is no tax on gains if the shares have been held for more than one year. In the case of trading of shares without taking delivery, the gains are added to the regular income and taxed at 33.99%.

The assessee undertook two kinds of transactions in the capital market, that of dealing in shares, ie, buying and selling without taking delivery, and the other which consisted in taking delivery of or investing in shares. The income from investment activity was offered as capital gains, while the income from dealing activity was offered as business income.

This position was accepted by the assessing officer in earlier years. However, in the assessment year 2005-06, the AO took a different view and held that shares even on the investment account had to be assessed as business income.

The assessee appealed against the assessing officers decision before the Income Tax Appellate Tribunal (Mumbai), a quasi judicial body on tax-related issues, which passed an order in favour of the former. The revenue department then appealed against the ITAT order in the HC, which dismissed the appeal and upheld the tribunals order.

The HC held that the tribunal was right in accepting the position that it was open to an assessee to maintain two separate portfolios, one relating to investment in shares and another relating to business activity or buying and selling of shares without taking/giving delivery. Delivery-based transactions were correctly treated as being in the nature of investment transactions that give rise to capital gains.

The tribunal also rightly held that since the assessee had followed a consistent practice of keeping records and presenting shares as investment at the end of the year in all the years, there was no justification for a different view being taken by the AO, the HC noted. Furthermore, the tribunal held that while entries on books of account alone were not conclusive in determining the nature of income (investment or business), it did have a bearing.

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