Investors,who profit by frequently buying and selling shares, may have to pay higher tax if one goes by a recent order of a tax tribunal. 

Such profits can now be treated as business income with a 30% tax payout depending on the frequency and transaction pattern, against a short-term capital gain tax of 15%. 

The Mumbai bench of the Income Tax Apellate Tribunal(ITAT), after hearing a case between one Devji Nenshi Palani and the Income-Tax department, passed an order in September which implies that not all delivery-based transactions may be treated as investment activity if such deals are resorted to with high frequency and are large in number. The order was made public recently. 

Palani derived income from frequently purchasing and selling shares in fiscal year 2006-07 and declared it as short-term capital gains. However, after the Income-Tax assessing officer (AO) found that the number of transactions were "very large" and were carried out "frequently", the gains were treated as business income, which made the assessee liable to pay 30% tax, twice that of short-term capitalgain tax. 

The assessee appealed before the IT Commissioner (Appeals) who set aside the assessment order while accepting Palani's claim. However, this was contested by the tax department before ITAT, Mumbai, which upheld the AO's claim. 

The tribunal observed that in most of the cases the shares were sold on the very date of purchase, which itself showed sales were done without even taking delivery. Thus, most of the transactions were speculative in nature. 

In fact, the assessee, while giving the details of the transactions himself mentioned 'Speculative Short-Term Capital Gain'. 

The other shares were sold after holding them for a short period. The number of transactions was very large and the assessee was almost buying or selling on a daily basis. 

The pattern of transactions, the tribunal said, clearly showed that the assessee was trading in shares and was not an investor. "Therefore, there is no merit in the claim of the assessee that the shares have been bought and sold as an investment activity," the ITAT ruled. 

The order could add to the controversy surrounding taxability of profits from dealing in shares, according to tax experts. "After the ITAT's order, a fresh controversy has been created vis-avis taxability of profits of dealing in shares as a capital gain or business income," said chartered accountant Bhupendra Shah. 

However, market experts like Nirmal Jain, chairman, IIFL, believe the solution how to treat such gains possibly lies in a person opening separate depository participant accounts — one for trading and the other for investment. 

"An investor should decide which account he wants to use before placing the order —it should be a priori and not post facto. Gains from trading can then be treated as business income while those in the investment account can be treated as capital gains," said Jain.