STCG-LTCG of NBFC held as capital gains not business income based on broad principles as laid down by various judicial pronouncements

STCG-LTCG of NBFC held as capital gains not business income based on broad principles as laid down by various judicial pronouncements

ITAT observed that in deciding whether a transaction of sale of shares is business income or investment income taxable as short term or long term capital gain, the following broad principles have been laid down by various judicial pronouncements :

(i) Whether particular trading is from ‘investment on capital asset’ or from ‘stock in trade’ is a question of fact.
(ii) The fact depends on how it is recorded in the books of accounts of assessee and what is the accounting treatment given to it.
(iii) Magnitude of transaction is not relevant to the issue.
(iv) Principle of consistency is to be followed on this issue.

ABCAUS Case Law Citation:
940 2016 (06) ITAT
Date of Judgment: June, 2016

Important Judgments Cited:
CIT Vs Chowdary Associates in I.T.A. No. 544/2013 (Delhi HC)
CIT Vs Gopal Purohit (2010) 336 ITR 387 (Bombay HC)

Brief Facts of he Case:
The assessee was a non banking financial company (NBFC) engaged in the business of trading in units of mutual funds and investment in shares and debentures. During the assessment proceedings, the Assessing Officer observed that the assessee had purchased and sold mutual funds and shares and claimed Long Term Capital Gain (LTCG) and Short Term Capital Gain (STCG) . Since the trading income is lower than capital gain, the AO proposed to treat transaction in all the shares as income from business and profession keeping the volume of business and percentge of income from trading in shares and mutual fund to the total income as basis. The AO held that the main activity of the assessee was trading in shares, and during the year, 60 transactions in shares were shown as capital gain. According to him, the volume of business, the volume of income from capital gain and the volume of investment indicated that trading in shares and mutual fund is the core activity of the assessee. The AO also noted that the time gap between purchase and sale of shares is very thin. The AO further observed that the humongous expense on portfolio management was an indication towards trading in shares as core business. Accordingly, the AO relying on CBDT circular No.4 of 2007 dated 15.6.2007, treated the entire STCG and LTCG as income from business. 

On appeal, CIT(A) deleted the addition against which the Revenue was in appeal before ITAT

Important Excerpts from ITAT Judgment:

Ld. Assessing Officer had negated the assessee’s contention merely because of the dealing in shares by the assessee. There is no doubt that the bulk of shares held by the assessee were form substantial period. The objective of the assessee is to get substantial capital gain and not earning profits which would result in transaction being in nature of trade. Further it is observed that the method of valuation adopted by the assessee is at cost price on a permanent basis and not on ad-hoc basis. From the list of shares submitted before us, it is observed that the assessee has been holding the shares as investment from year to year. The treatment given to the transaction in the books of accounts is of importance, and the assessee has treated these shares and sale thereof as investment. It is observed that the assessee has been maintaining the clear distinction among its holdings, as units of mutual funds are held as stock in trade and shares are held as investments. Similar were the facts before Hon’ble Bombay High Court in the case of Gopal Purohit (supra). Hon’ble Court has held that the principle of consistency is a basic factor to be considered while deciding the nature of income. The Hon’ble Bombay High Court has also held that the uniformity in maintaining the books of accounts is the most crucial source of getting to know intention of the assessee as regard to the nature of transaction. It is observed from the details placed in the paper book that the assessee has made investments in the mutual funds and shares which has been shown by the said company under the head stock in trade / “Investments” in their balance sheet consistently. There is also no change in the year under consideration as well, as compared to the preceding years, where the income from sale / purchase of shares has been assessed as Short term capital gain. It is an accepted fact that the assessee had shown the stocks in his books of accounts as investments and not as stock-in-trade and this important treatment from the accounting angle has a bearing on the issue. There is no stock in trade of shares in the Balance sheet of the assessee, rather these are consistently shown by the assessee under the head investments. The assessee company had shown the gains in earlier years also under the head capital gain, which has been accepted as such.

From the details of purchase and sale and period of holding of shares, it is observed that the assessee has held 11 transactions of shares for more than 50 days and the balance were held for more than 100 days in total number of 30 transactions. In the previous year and the subsequent years relevant to the Assessment Year under consideration the Department has been consistently accepting the investment in shares held by the assessee. During the year under consideration, the assessee has sold shares of two companies being Hindustan Construction and GMR Infra Structure. The remaining shares relate to purchases made in the previous years.