Gains Arising Out Of Sale & Purchase Of Shares Is 'Capital Gain', Not 'Business Income': Calcutta High Court Calls It A Question Of Fact

The facts of the case were that the appellant assessee was a public limited company in the business of granting loans and advances and also dealing in shares and units of mutual funds. The assessee also invested in shares with a view to hold them and earn income by way of dividend and receive bonus shares. Shares were held by the appellants both as investments and as stock-in-trade. It was the case of the appellants that the assessing officer treated short term capital gains arising from the shares purchased as investments during the previous year as 'business income,' the treatment of which was the issue before the Calcutta High Court.

The appellant argued that the Tribunal, the decision of which was under challenge in the present appeal, failed to take into consideration the fact that shares were held by them both as investments (valued at cost) and as stock-in-trade (valued at cost or market value, whichever lower), and also the fact that such shares were purchased by the assessee out of its own funds and never out of borrowings. Merely because the period of holding of the shares in such cases was somewhat short compared to other investments, the Tribunal could not assess short term capital gains arising from these as business income.

Reliance was placed on Circular No. 4 of 2007 dated 15.06.2007 issued by the Central Board of Direct Taxes ('CBDT'), which clarified that the question whether shares were capital assets or stock-in-trade could not be decided only with reference to the period of holding and that the total effect of several factors had to be cumulatively considered for deciding the question, and on the decisions in Commissioner of Income Tax-VII v. Avinash Jain, (2013) 214 Taxman 260 (Del), Commissioner of Income Tax v. Merlin Holding Private Limited, (2015) 375 ITR 118 (Cal), Commissioner of Income Tax-2 v. IHP Finvest Limited, (2016) 236 Taxman 64 (Bom) and Jet Age Securities Private Limited v. Commissioner of Income Tax, Kolkata- III, ITA No. 79 of 2010.

The respondent authority, on the other hand, argued that most of the shares in question were purchased and sold in the financial year relevant to the assessment year under consideration and were intended for the purpose of business. Furthermore, their case was that such shares were acquired by the assessee with the intention of earning quick profit and the transactions relating thereto were adventure in the nature of trade. Reliance was placed on the decisions in Venkataswami Naidu Company v. Commissioner of Income Tax, (1959) 35 ITR 594 (SC), Commissioner of Income Tax, Bombay v. H. Holck Larsen, (1986) 3 SCC 364, P.M. Mohammad Meerakhan v. Commissioner of Income Tax, Kerala, Ernakulam, (1969) 2 SCC 25 and P.V.S. Raju and P. Rajyalakshmi v. Additional Commissioner of Income Tax, (2012) 340 ITR 75 AP.

The court held the transactions to be in the nature of 'capital gains' and not 'business income,' based on the fact that two different accounts, one for its investment portfolio and the other for stock-in-trade, were maintained by the assessee.

The court took note of the CBDT circular which emphasized that it is possible for a taxpayer to 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), in which case, the assessee may have income under two separate heads: capital gains as well as business income.

The court, by relying on the principles laid down in the circular as well as in various decisions, held that questions relating to the nature of transactions such as whether there were substantial transactions, their magnitude, maintenance of books of accounts, and ascertaining the ratio between purchases and sales were all guiding factors in determining the treatment of gains. The Court added that if the assessee produces proof to show that he had maintained distinction between the shares which are held as stock-in-trade and as investment, then the intention of the assessee is a main criterion to be judged, making it a fact-dependent question, and where the object of investment in shares of the companies is to derive income by way of dividend, the transactions would yield capital gains and not business profits.

Case Title: M/s Gyan Traders Limited v. Commissioner of Income Tax, Kolkata-II

Case No: ITA/48/2009

Citation: 2022 LiveLaw (Cal) 323 

Coram: Justice T.S. Sivagnanam and Justice Supratim Bhattacharya

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