The assesses was engaged in the business of share trading and investments and offered income from sale of shares by way of STCG and LTCG. The AO treated the STCG as business profits on the ground that there was “systematic and regular course of share trading activity, the scale of activity was frequent and huge and the quantity purchased and sold are huge and repetitive”. It was also held that the ratio of purchase to opening balance and sales to closing balance made the assessee a trader in shares and not investor in shares. On appeal, the CIT(A) held that the gain arising on shares held for more than 30 days was STCG while the gains on shares held for less than 30 days was assessable as “business profits”. On cross appeals, HELD deciding in favour of the assessee:

(i) The CIT(A)’s view that the gains could be treated as either STCG or business profits depending on whether they had been held for a period of 30 days or shorter is not proper because the holding period is only one of the several criteria that has to be applied to determine whether the transaction is on trading or investment account. The principles that have to be applied are (a) the intention of the assessee at the time of purchase, (b) whether borrowed funds were used, (c) the frequency of purchase and sales, (d) the treatment in the books etc. No single criteria is conclusive and an overall view has to be taken (Associated Industrial Development 82 ITR 586 (SC) & Holck Larsen 160 ITR 67 (SC) followed);

(ii) On facts, even the gains on shares held for 30 days and less had to be assessed as STCG and not business profits because:

(a) There cannot be a sub-division of transaction relating to STCG. The transactions cannot be bifurcated on the basis of holding period of 30 days so as to classify a part of the gain as STCG and a part as business profit;

(b) The assessee had separate portfolios for investment and trading and in the books, the shares giving rise to the STCG had been treated as an “investment” and not as “stock-in-trade”. The shares were valued at cost and not at lesser of market value;

(c) In view of the consistent treatment of the assessee, it is established that the intention of the assessee at the time of acquiring the shares was for investment and not for trading;

(d) The assessee had used own funds and not borrowed funds to acquire the shares;

(e) As regards the frequency of purchase and sale of shares, transactions through the electronic system of Stock Exchange split a single order into numerous transactions. This gives an unrealistic figure of the number of transactions;

(f) The fact that the gains from shares held for less than 30 days was Rs. 15.19 lakhs as compared to the gains of Rs. 37.76 lakhs on shares held for more than 30 days shows the assessee’s intention to hold the shares for a longer period and to earn income of appreciation of the value of the shares and not earn the profit in the short period change in the price of the shares;

(g) The assessee was regularly earning dividend income;

(h) It is acceptable for an investor to reshuffle his portfolio in a short period in order to reduce the risk of loss of capital or income;