Court Rules Share Transactions as Business Income, Not Capital Gains

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Case Name:

Ratanlal J. Oswal vs Commissioner of Income Tax (High Court of Bombay)

Income Tax Appeal No. 1670 of 2013

Date: 27th July 2015

Key Takeaways

- The court determined that the appellants were engaged in share trading as a business, not as investors.

- The decision was based on the volume and frequency of transactions, the use of multiple brokers, and the borrowing of funds for share purchases.

- The principle of consistency from previous years was not applicable due to the lack of identical circumstances.

Issue

Should the income from the appellants' share transactions be taxed as business income or capital gains?

Facts

The appellants, a father and son, were involved in numerous share transactions with multiple brokers and had borrowed funds for these transactions. The tax authorities classified their income as business income, but the appellants argued it should be considered capital gains, as it had been in a previous year.

Arguments

- Appellants: Argued that their income should be taxed as capital gains, citing the principle of consistency from a previous assessment year.

- Respondent (Tax Authorities): Maintained that the nature of the transactions indicated a business activity, not investment, due to the high volume, frequency, and use of borrowed funds.

Key Legal Precedents

- CIT v/s Gopal Purohit: The appellants referenced this case to support their argument for consistency in tax treatment. However, the court found it distinguishable due to differences in transaction nature and evidence presented.

- CIT v/s H. Holck Larsen: Cited to argue that determining the nature of transactions is a mixed question of law and fact.

Judgement

The court dismissed the appeals, agreeing with the lower authorities that the appellants' activities constituted a business. The decision was based on the systematic and regular nature of the transactions, the use of multiple brokers, and the borrowing of funds, which are not typical of an investor's behavior.

FAQs

Q1: Why was the income classified as business income?

A1: The court found that the appellants' activities were systematic and regular, involving multiple brokers and borrowed funds, which are indicative of a business rather than investment.

Q2: What about the principle of consistency?

A2: The court noted that the circumstances in the current assessment year were not identical to those in the previous year, so the principle of consistency did not apply.

Q3: How does this decision affect future cases?

A3: This case reinforces the importance of the nature and frequency of transactions in determining whether income is classified as business income or capital gains.

1. In these two Appeals under Section 260 (of Income Tax Act, 1961)­A of the Income Tax Act, 1961 (the Act), the challenge is to common order dated 28th March, 2014 passed by the Income Tax Appellate Tribunal (the Tribunal). The common impugned order disposes of two independent appeals by a father and son for the Assessment Year 2006­-07.

2. The basic issue which arises for our consideration in both the appeals is whether the Tribunal was correct in treating the income arising on purchase and sale of shares as business income and not as income from investments under the head 'capital gains' as sought by the Appellants.

3. Admittedly, the facts in both the appeals are identical and therefore, for the sake of convenience, we shall refer to the facts as arising in Income Tax Appeal No.1670 of 2013 i.e. the appeal of the father.

4. For the subject Assessment Year, the Appellant filed its return of income declaring a total income of Rs.1.16 Crores. During the assessment proceedings, the Assessing Officer found that an amount of Rs.21.37 lakhs offered as short term capital gains earned through one M/s. Mahasagar Securities Limited were not genuine being mere hawala entries. Thus, the amounts of Rs.21.87 lakhs was brought to tax as income from other sources. So far the balance amount of short term capital gains of Rs.81.71 lakhs is concerned, the Assessing Officer looking at the volume, frequency, the tax audit report as well as the fact that loan was taken to purchase shares, held the same was taxable under the head 'business income'. On the aforesaid exercise, the Assessing Officer by order dated 28th November, 2008 passed under Section 143(3) (of Income Tax Act, 1961) arriving at a total taxable income of Rs.1.16 Crores.

5. In appeal, before the Commissioner of Income Tax [CIT(A)],

the Appellant submitted that the Assessing Officer was incorrect in

treating short term capital gains on sale and purchase of shares as

business income. This on the basis that for an earlier Assessment Year i.e.

Assessment Year 2005­06, the income offered as short term capital

gain was accepted and not treated as business income. Therefore, it was

submitted on the principle of consistency the same ought to be followed.

The CIT(A) after considering the submissions of the Appellant by order

dated 13th July, 2009, concluded that the Appellant is a dealer in the sale

and purchase of the shares and the order of the Assessing Officer on the

above aspect, calls for no interference.

6 On further appeal to the Tribunal, the Appellant contended

that in view of this Court's decision in CIT v/s. Gopal Purohit1

the view

taken in the earlier Assessment Year should be followed in the subject

Assessment Year also. The Tribunal on consideration of the facts found no

reasons to disturb the order of the lower authorities. Thus, the income of

Rs.81.71 lakh was brought to tax under the head 'business income' and

not as 'short term capital gains' as claimed by the Appellant.

7 Mr. Shreedharan, learned Sr. Counsel appearing for the

Appellant contends that a substantial question of law arises inasmuch as

on the issue of tax­ability of income as capital gains or business income,

the impugned order has been influenced by the fact that the Appellants

dealing of shares through one M/s. Mahasagar Securities Ltd., was bogus.

Thus, the impugned order stands vitiated as it has been influenced

by unrelated facts.Further, it is submitted that the CIT(A) has not

rendered any finding with regard to the issue of the nature of income on

sale and purchase of shares by the Appellant. It is silent as to whether it is

taxable as business income or under the head 'capital gains.' Further, it is

submitted that in view of the decision of this Court in Gopal Purohit

(supra),the authority should have followed its earlier practice and

accepted the income on purchase and sale of shares as that of an investor

under the head 'capital gains.' In any event, it is submitted that on similar

issue viz: income on purchase and sale of shares to be taxed under the

head 'capital gain' or as business income, appeals have been admitted by

this Court. In the above view, it is submitted that these appeals be

admitted. Finally, reliance was also placed upon the decision of the

Supreme Court in CIT v/s. H. Holck Larsen2

to contend that the issue

whether or not, the income arising on the sale and purchase of shares is

income arising from trading transactions or on account of investment, is a

mixed question of law and fact. In the above view, it is submitted that the

appeal ought to be admitted.

8 Mr. Pinto, learned Counsel appearing for the Revenue

opposes the admission of these appeals. The findings of the Assessing

Officer, CIT(A) and the Tribunal are reiterated.

9 We find that the Assessing Officer has on examination of the

manner in which the Appellant carried out its activity of purchase and sale

of shares found facts as under:­

“(a) The assessee has carried out transaction with as many as six

brokers, which normally an investor never do. This proves beyond

doubt that the assessee is running a full fledged business of share

trading. Hence, the transaction carried out cannot be treated as

capital gain.

(b) In majority of the cases, shares are purchased in huge quantity and

holding period of shares were not significant. There are hardly any

case where shares have been purchased and held for more than 6

months, 8 months or 1 year.

(c) Further, the value of the shares transacted by the assessee runs into

crores of rupees. It cannot b e said that the assessee has carried out

investments in those shares.

(d) Further, the assessee has also taken loans against purchase of shares

on which even interest of Rs.11,72,892/­ has been paid. Hence it

cannot be said that the assessee is doing investments.

(e) It may also be noted that the assessee himself was classified the

transaction in shares as Share Trading in the Tax Audit Report, filed

with the return of income where nature of business is written as

“Income from Share Trading & Salary Income”. Further, the

submission of Tax Audit Report proves beyond doubt that the

transactions in question are on trading account, as apart from share

transactions shown as Short Term Capital Gain, there are no other

transactions which is on trading account. Thus, the assessee

himself admitted the transaction in question is on trading account

and not on capital gain account. It has been shown as Capital Gain

just to claim the benefit of lower tax rate, which is not permissible.”

10 All the above facts are indicia of the Appellant doing business

in shares as a dealer thereof and not as an investor. Normally, no

investor would deal with six different share brokers, or for that matter

borrow funds for the purposes of investment in shares. Further, the tax

audit report filed by the Appellant had classified the Appellant's

transactions in shares as shares trading transactions. Moreover, the

impugned order of the Tribunal also records that the number of

transactions carried out by two Appellants were 100 and 120 shares

respectively in a very short period. Further, the turnover in case of the

father was Rs.4.89 Crores and in case of son was Rs.4.12 Crores. All

these were indicative of there being a regular systematic activity which is

the activity of business being pursued by the Appellant.

11 We do not find any merit in the submission that the Tribunal

in the impugned order while dealing with the issue of charging tax under

the head 'business income' or as 'capital gain' was influenced by the fact

that some transactions were found to be bogus. In fact, the impugned

order after making the above observation with regard to the Appellant's

conduct, observes that notwithstanding the same, the income on purchase

and sale of shares is taxable as business income. The decision in the case

of Gopal Purohit (supra) is completely distinguishable. In the present

case, the assessee has not before the authorities led any evidence to show

that the transaction in the earlier assessment and the present assessment

years are identical, calling for the same treatment in view of the decision

of this Court in Gopal Purohit (supra). This is particularly so when it is the

Appellant's case that the view taken in the earlier Assessment Year be

followed in this year on account of the principle of consistency. Moreover,

in the case of Gopal Purohit (supra), the assessee therein was maintaining

two types of transactions one as a dealer in shares subject to tax as

business income and the other as as investor, subject to tax under the

head 'capital gain'. No such finding is there in this particular case.

12 The other submission of Mr. Shreedharan, learned Senior

Counsel for the Appellant that similar questions having been admitted

which warranted the admission of this appeal, is not acceptable as they

were admitted in the context of the facts and circumstance of those cases.

Similarly, the contention that the CIT(A) has not rendered any finding

about the nature of the Appellant's activity is not correct as in fact, after

consideration of the submission of the Appellant, it has held that the

Appellant is a dealer in purchase and sale of shares. Similarly, the decision

of the Apex Court in Holck Larsen (supra) which had been relied upon, would have no application to the facts of the present case. In the above

case, the Supreme Court observed that two questions arise in cases where

the Courts have to determine whether the purchase and sale of shares

was as an investor or as trader. The first question is according to the Court

is whether the findings of the Tribunal is based on evidence from which

the conclusions arrived at by the Tribunal can be said to be either

reasonable or possible. If the conclusions drawn by the Tribunal are pure

inferences of facts, then no question of law arises and no occasion arises

for interference with the order of the Tribunal. If, however, the conclusion

arrived at by the Tribunal is such that no reasonable man could possibly

have arrived at, then such a conclusion would be without any evidence

and perverse in law. The Court further observed that if there is

material to support the conclusion, the fact that another Court might

have arrived at a different conclusion, is not a relevant factor. The second

issue that would arise is the legal principles applicable to determine the

nature of the transactions i.e. dealer in shares or investor in shares. In

this case, the findings of the Tribunal are based on facts particularly

borrowing funds for purchase of shares, frequency of purchase and sale

of shares, the quantum of turnover are all the tests to be applied to

determine the nature of the transaction. Nothing has been shown to us

to indicate that the legal principles applied or the facts found, are

incorrect and/or perverse.

13 It may be pointed out that an affidavit of the Appellant dated

29th June, 2015 has been filed along with appeal memo. We have not gone

into the affidavit, as the same was not available before the Tribunal.

Besides, this affidavit has been filed without having obtained any leave of

the Court. This leave would have been granted if the Appellant would

have satisfied us that the Affidavit brings on record facts which were not

available before the Tribunal and are necessary to be looked into in the

interest of justice. Since this has not been done, we have not considered

the affidavit of the Appellant dated 29th June, 2015.

14 In view of the above, we find that no substantial question of

law arises for our consideration. Accordingly, both the appeals are

dismissed. No order as to costs.

(N.M.JAMDAR,J.) (M.S.SANKLECHA,J.)