Trading in shares by assessee business activity or investment activity?

Now a days, almost everyone does trade in shares and securities to make some quick bucks, whether they a successful or drown their saving is a different question. Whatever it is profit or loss, through trading in share you need to disclose the same in your IT return. The question is how to treat the same? Business income or Capital Gain?

Here is a ruling by ITAT Mumbai bench regarding the treatment of the above issue-

Assessee was an investor for past several years – During previous year, he sold certain shares and claimed gain arising on sale of shares as short-term capital gain – Assessing Officer treated said gain as business income – Commissioner (Appeals) held transactions to constitute business activity and accordingly upheld order of Assessing Officer – Assessee was maintaining same set of books of account for both its business transactions and purported investment activity out of same common pool of funds – All transactions of assessee were imbued with same profit motive, which continued not only throughout year, but also from year to year – Whether findings by Commissioner (Appeals) that share transactions represented business transactions deserved to be affirmed.

Facts of the Case-

• The assessee was an investor for the past several years. During the previous year relevant to the assessment year 2008-09, he sold certain shares and claimed the gain arising on the sale of shares as short-term capital gain.
• The Assessing Officer disallowed the assessee’s claim and treated the gain in question as business income.
• On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
• On second appeal, the assessee contended that (i) he having been considered as an investor for the preceding as well as the subsequent years, the transactions for the current year could not be considered as a business activity, and (ii) if the transactions were to be considered as business transactions, he ought to be allowed a deemed conversion of investment brought forward as on 1-4-2007.

Held on Appeal-

In view of the foregoing, the findings by the Commissioner (Appeals) that the share transactions represented only the business transactions deserved to be upheld. However, it was to be directed to the lower authorities that:

• The computation of business income is to be restricted to the shares/units other than those shares carried over as capital assets as on 1-4-2007. Of all the shares as on 31-3-2008, only shares in India Cement Ltd. would continue to be classified as an investment, and carried over at cost. The balance would be valued at cost or market value, whichever is less, reckoned individually and not in aggregate, as done by the assessee. The business income is to be computed accordingly. Further the same value of the closing stock is to be taken into account in computing the income for the subsequent years, i.e., as and when actually the said shares are actually sold,
• The assessee shall be entitled to claim the benefit of Security Transaction Tax to the extent it relates to business income, though the onus to establish its claim would only be on the assessee, and
• The D-mat charges to the extent the same relate to shares confirmed as capital asset (long-term or short-term) would have to be adjusted against the cost thereof.

Click here to view full ruling.

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