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50.  Tax Implication — Trading versus Investing in Shares

Disputes do arise between the tax payers and the IT department about the nature of income as to whether it is Capital Gain or Business Income. This is so in case of transactions relating to purchase and sale of shares. In a recent judgment by the Andhra Pradesh High Court in the case of P. VS. Raiu and P. Rajvalakshmi v. Additional cIT (2012) 340 ITR 75 it has been held that where there was a finding that the transactions of purchase and sale of shares were as based on the frequency, magnitude and volume of transactions, constituted business, then the profits on the transactions were held to be assessable as Business Income and not Capital Gains. As this is an important judgment on the question of Capital Gain or Business Income, the facts and the judgment in this case are analysed in this tip below.

The assessees filed their returns declaring income from investment in shares, interest income, salary and capital gains. After issuing notices under Sections 143(2) and 142(1) of the IT Act, the assessing authority passed orders of assessment holding that the assessees were traders in shares. They had classified their activities, for the assessment year 2005-06, into three categories, i.e., business income, short-term capital gains before 1.10.2004 and after 1.10.2004, and in respect of some of the transactions effected during the period 1.4.2004 to 3 1.3.2005, the assessees had admitted that it was business income. The claim of the assessee that these share transactions should be treated as short-term capital gains and taxed under Section lilA of the IT Act was rejected and the assessing authority treated the same income as business income. This was also confirmed by the Tribunal. On appeal to the High Court, the High Court dismissed the appeal and held that it was evident from the order of the Tribunal that the voluminous share transactions were in the ordinary line of the assessee’s business; purchase of shares by them was not for the purpose of earning dividend, but with a dominant intention of resale in order to earn profits; the profit made by them was not mere enhancement in the value of the shares, but was a profit made in the carrying on of a business scheme of profit making; the huge volume of share transactions, the repetition and continuity of the transactions, gave them a flavour of trade; the magnitude, frequency and the ratio of sales to purchases on the total holdings was also the evidence that the assessees had not only purchased the shares as an investment, but with the intention to trade in such scrips. Hence, the income was assessable as business income, so held the Andhra Pradesh High Court.


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