INCOME TAX ACT, 1961

Section 14

Head of income - Business income or capital gain- profit on sale of shares - Taxation as capital gain in view of higher frequency and volume of share transactions - Assessee primarily being investor in shares

Assessee earned profit on sale of certain shares and offered resulting profit as short term capital gain. However, AO taxed the same as business income mainly on the ground that assessee carried on activities of purchase and sale of shares on regular basis, volume of purchase and sale of shares was huge, frequency of transaction was very high, conduct of assessee was that of a trader in shares and no proper records were maintained. Held: Intention and the entries in books showing shares as investment should be the guiding and determining factors whereas according to AO, volume of business in shares and frequency of transactions and the objective of the assessee to trade in shares (as per Memorandum of Association of the company) were deciding factors. It was evident, assessee was primarily an investor in shares and 84% of the income was determined from long-term holding of STT paid listed equity shares. Only a small component 15% of income from shares was treated as short-term. A look into the holding period of shares would reveal that out of 560 scripts, only 60-65 scripts which were sold in at different times. 409 scripts out of 560 total scripts had a holding period of more than 60 days having a short-term capital gain of Rs. 5.13 crores out of Rs. 6.23crores, only Rs. 1.09 crores were earned from 151 scripts having a holding period of 15-60 days barring few which are than 10 days. Assessee stated that when shares were acquired after paying STT and taking complete delivery of shares keeping a long-term in view as 84% of shares were held for more than one year, transacting in some shares in short-term to alter its investment vision and goal could not be considered as an action borne out to do trade. It happened when the vision was long-term, some shares purchased were dropped out from portfolio either because sufficient funds were not available to make them reach to a level to accumulate capital or because of some other allied reasons. It was not the finding of AO that shares were shown as stock in trade or assessee was not correct in showing these shares as investment. Thus, profit accrued on sale of those shares was short-term capital gain and assessee was eligible for claiming charging of the gain under section 111A.

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