“Whether the ITAT was right in holding that the gains from sale
and purchase of various securities should be treated as long term capital gains
or short term capital gains and not business income?”
CIT
vs VINAY MITTAL (HC)
The
assessee is an individual and an salaried employee for the A.Y 2007-08 he declared
total income of Rs. 6,00,62,080/- as
LTCG of Rs. 2,59,52,165/- which was
claimed as exempt and this included short term capital gains of Rs. 5,53,32,591/- from sale and purchase of
various securities.
The
AO treated the income from the sale of the shares as business income and made
additions accordingly. On appeal before CIT(A) and thereafter before ITAT deleted
the additions made by the AO.
On
appeal before Hon`ble High Court revenue accepted the assessee claim to treat
the long term capital gains as exempt, however revenue disputed the treatment of
lower rate of tax on the short term
capital gains.
Before
Hon`ble High Court Assessee produced a chart giving details of the purchase and
sale of the shares transactions which are subject matter of the A.Y 2007-08 that
showed that the shares reported in his return as long-term capital assets were
held for periods ranging between 1 year and 5 years and further, the shares
reported in his return as short-term capital assets were held for periods
ranging between 2 months and 11 months.
During
the course of hearing ld. counsel for the Revenue relied on the Instruction No.
4/2007 dated 15 June 2007 issued by CDBT which in turn relied on several
judicial precedents reported in CIT v. Associated Industrial Development Co. (P)
Ltd. [1971] 82 ITR 586 (SC), CIT v. H. Holck Larsen [1986] 160 ITR 67 (SC), Fidelity
Northstar Fund and Ors v. Unknown [2007] 288 ITR 641 (AAR) and advanced the
following arguments to treat the sale of shares held for less than a year as
business income. The Ld. DR also contented that the quantum of profit made from the sale was significantly higher than the
dividend earned by the assessee. This indicated that the main purpose of the assessee
was to earn profit. Since dealing in shares involves an element of uncertainty, the sale
and purchase activities were in the
nature of trade.
The
Ld. DR also stated that the frequent transactions, the substantial scale of activities and the
ratio of sales to purchase indicated that the assessee was in the business of
buying and selling shares.
The
Hon`ble High Court, observed that the assessee had salary income and also had
maintained two separate portfolios i.e. investment portfolio and trading
portfolio. The shares which were subject matter of short term capital gains
formed part of the investment portfolio of the assessee. Although the number of
shares sold was high, the numbers of transactions were few. Further, the period
of holding was not insignificant or small, which indicated that the purchase of
shares was in the nature of an investment. The ITAT had also previously
determined that the assessee had earned substantial dividend income in the past
years.
Hon`ble high court didn`t agree with the Revenue arguments that factors such as the risks inherent in
the share purchase activity, the quantum of profits or the ratio of purchase to
sale would influence the determination of the nature of income was There are
inherent risks in any share related activity and also observed that in the year
in which a assessee sells his investments, the ratio will always be in favour
of sales and the frequency of transactions may therefore be higher. These
cannot be concluding factors.
Relying
on judgment reported in (2006) 193 TAXATION 581 (GUJ) upheld the ruling of the ITAT
that the gains arising from the sale of
shares were in the nature of ‘capital gains’.
