Gains made on sale of investments by a share trader are capital gains and should not be classified as business income

Facts in Brief:

1.  The assessee was engaged in the investment of shares and securities cum business of shares and securities and other related activities. In the return of income, the assessee disclosed certain short-term capital gains on account of sale of shares.

2.  Assessing Officer held that the sale and purchase was not in the nature of investment but transactions relating to trading in shares. Thus, treated it as business income. 

3.  Assessing Officer also levied penalty under section 271(1)(c) holding that the assessee did not disclose full and necessary particulars.

4.  On appeal, CIT(A) deleted the penalty observing that all particulars relating to capital gains were duly disclosed in the return as well as in the balance sheet which indicated that the assessee was maintaining a clear demarcation between the shares which were treated as investment and shares held as stock-in-trade for business.

5.  On appeal, Tribunal affirmed the finding of the Commissioner (Appeals).

   On appeal High Court held as under:

6.  In the written submission filed before the Commissioner (Appeals) it was stated that the details of shares held as investments were duly mentioned in the balance sheet and in note forming part of the balance sheet, detail of transactions which were treated as business was clearly reflected. Further, the shares which were sold and treated as short-term capital gains were not accounted for in the opening balance nor in the closing balance. In the books of account also, the shares in question were shown under the head 'investment' and in the profit and loss account, short-term capital gains was duly credited.

7.  The aforesaid finding of the Commissioner (Appeals) was affirmed by the Tribunal in the impugned order. Thus, the finding of the Assessing Officer that material facts were not duly disclosed by the assessee is not correct. No document or material has been filed to support or contend that the finding of the appellate authorities including the Tribunal is perverse or factual incorrect.

8.  Coming to the question of bona fides and the explanation offered by the assessee, it is to be noticed that the question whether the shares were held as investment or stock-in-trade is highly debatable and a difficult call in many cases. The assessee was investing in shares and securities and also dealing in purchase and sale of securities. There is no adverse comment or observation of the Assessing Officer on the submission and assertion made by the assessee that it was maintaining two separate portfolios, one for shares held as investment and the other for the shares held as stock-in-trade. The assessment order itself records that there were number of transactions relating to the shares which were held as stock-in-trade. Further, the aforesaid demarcation of shares held as investment and as stock-in-trade had existed in earlier and subsequent years also. 

9.  Two observations in the assessment order; (1) physical delivery of the shares was not taken; and (2) brokers did not indicate whether the shares were held as investment or as stock-in-trade, are not acceptable and cannot be a ground to hold that the shares were held as stock-in-trade and not as an investment. 

10.  The assessee had brought forward long-term capital loss and the short-term capital gains were sought to be set off from the said long-term capital loss. This is indicative of the fact that in the earlier years, the assessee had sold or transferred certain shares held as an investment and suffered long-term capital loss. The assessee was certainly holding shares as investment. In fact, the assessment order itself records that the assessee held certain shares of group companies as investment.

11.  In view of the aforesaid position, no substantial question of law arises for consideration in this appeal. The appeal is dismissed.