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Holding Shares as investment not stock-in-trade

AIT News Network

MUMBAI. Vide a recent significant ruling AIT-2007-26-ITAT; the Income Tax Tribunal has ruled that there is no basis for treating the assessee as a Trader in shares, when his intention was to hold the shares in Indian companies as an investment and not as stock in Trade.

The assessee raised the grounds of appeal that on the facts and in the circumstances of the case, the Ld. CIT (A) legally erred in confirming the action of the Assessing Officer in not allowing the set off of long term capital loss of Rs.1,02,31,691/- against the short term capital gains of Rs.1,47,15,196/- and in the alternative, the Ld. CIT (A) legally erred in confirming the action of the Assessing Officer in treating the short term capital gains of Rs.1,47,15,196/- as profit from share trading business and on the facts and in the circumstances of the case, the Ld. CIT (A) legally erred in not giving relief in respect of alternative plea of the appellant that the learned Assessing Officer ought to have applied the ratio of the appellant being held as trader in respect of the activities in the purchase and sale of shares carried on by the appellant.In other words, the learned Assessing Officer ought not have held the appellant partially as trader and partially as investor.

The assessee was in the business of Trading of Import and Export of Dyes & Chemicals and having turnover of about Rs.6,34,00,000/-. For the purpose of carrying of his business of Trading / Export of Dyes & Chemicals, the assessee was maintaining full-fledged office infrastructure. The books of accounts were audited. In addition, the assessee was also investing in shares of various companies, wherein the income from Long Term Capital Gains, Short Term Capital Gains and speculative Gain/Loss is being shown by the assessee from year to year. It was the claim of the assessee that all the holdings in shares of Indian companies from year to year is reflected as investment in the Balance Sheet of the assessee.

According to the AO the assessee was a Trader in Shares and not an Investor in shares.

T H E R U L I N G :

The assessee had earned income from Short Term Capital Gains amounting to Rs.1,47,15,196/- on sale of shares in the year under consideration, which was claimed to be adjusted against Long Term Capital Loss. The assessee has also declared income from speculation gains / loss which are on account of sale and purchase of shares without delivery of the shares. During the year under consideration, the assessee had also claimed Long Term Capital Loss of Rs.1,02,31,691/- on sale of shares which were held by the assessee as investment and duly reflected in his Balance Sheet as investment. Similar transaction of sale and purchase of shares are being carried out by the assessee in preceding years, details of which have been filed on record. In addition to the Capital Gains received from Sales of Shares the assessee had declared income from dividend received from the said shares being held as investment by the assessee. The mere volume of transaction transacted by the assessee would not alter the nature of transaction. It is an established principle that income is to be computed with regard to the transaction. The transaction in whole has to be taken into consideration and the magnitude of the transaction does not alter the nature of transaction. Though the principle of Res Judicata does not apply to the Income Tax Proceedings as each year is an independent year of the assessment but in order to maintain consistency, it is a judicially accepted principle that same view should be adopted for the subsequent years, unless there is a material change in the facts.

The assessee is holding the shares as investment from year to year. It is the intention of the assessee which is to be seen to determine the nature of transaction conducted by the assessee. Though the investment in shares is on a large magnitude but the same shall not decide the nature of transaction. Similar transactions of sale and purchase of share in the preceding years have been held to be Income from Capital Gains both on Long Term and Short Term basis. The transaction in the year under consideration on account of sale and purchase of shares is same as in the preceding years and the same merits to be accepted as Short Term Capital Gains. There is no basis for treating the assessee as a Trader in shares, when his intention was to hold the shares in Indian companies as an investment and not as stock in Trade. The mere magnitude of the transaction does not change the nature of transaction, which are being assessed as Income from Capital Gains in the past several years. The AO is directed to set off the Long Term Capital Loss against the Short Term Capital gain of the year under consideration.

( Click here for full text of ruling AIT-2007-26-ITAT)