Dealing in shares- business income or capital gains?
1. Introduction:
The Income Tax Act, 1961 classifies income under distinct heads – “Capital Gains” and “Profits and Gains of Business or Profession” (PGBP). However, share transactions often create ambiguity: Is the assessee merely investing, or is there a systematic commercial activity akin to business?
2. Basis for litigation:
Over the years, this distinction has become a litigation hotspot, especially where taxpayers:
Frequently buy/sell shares
Hold multiple assets over varying periods
Report similar transactions differently across years.
3. Legal Framework
Section 2(14) – Definition of “Capital Asset”:
Any property held by the assessee (excluding stock-in-trade, consumables, etc.) is a capital asset.
Section 2(13) – Definition of “Business”:
Includes any trade, commerce, or manufacture, or any adventure in the nature of trade.
Section 45 – Capital Gains:
Profits arising from transfer of a capital asset are taxed as capital gains.
Section 28 – PGBP:
Profits from business or profession are taxed under this head, including profit from trading stock.
CBDT circular:
It is permissible as per CBDTs Circular No. 4 of 2007 of 15-6-2007 that an assessee can have both portfolios, one for trading and other for investment provided it is maintaining separate account for each type, there are distinctive features for both and there is no intermingling of holdings in the two portfolios.
4. Guiding principle laid down by Hon Bombay HC in CIT vs. Gopal Purohit 228 CTR 582 (Bom), where it was held that:
(a) it was open to an assessee to maintain two separate portfolios, one relating to investment and another relating to business of dealing in shares,
(b) 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,
(c) that there should be uniformity in treatment and consistency when facts and circumstances are identical particularly in the case of the assessee and
(d) that entries in books of account alone are not conclusive in determining the nature of income though they have a bearing.
5. Some other relevant cases:
Where assessee held shares from seven to eleven months, earned dividend and entered into a few transactions of sale of such shares during relevant year even though he held a huge number of shares, income arising from sale of shares would be taxable as short-term capital gain. [CIT v. Vinay Mittal [2012] 22 taxmann 151 (Delhi)].
Where assessee-company’s main business was investment in shares & securities, shares could not be treated as business assets but income from sale of shares was liable to capital gains. [CIT v. Trishul Investments Ltd. (2008) 305 ITR 434 (Mad.)]
6. Litigation Triggers
Frequency of Transactions
High volume raises suspicion of trading. But volume alone is not decisive.
Holding Period
Short holding periods may point to business intent. Yet, rapid exits can occur in volatile markets legitimately.
Treatment in Books
Disclosure in books as “Investments” or “Stock-in-trade” is relevant but not the only factor for determining whether the gains are from business or capital in nature. Consistency in disclosures is key.
Use of Borrowed Funds
Borrowed capital for acquisitions may be cited to allege business activity.
