By TIOL News Service

MUMBAI, FEB 21, 2018: THE issue is - Whether when the Revenue had accepted the assessee as an investor in the previous year, it can change his status to trader merely because he made some profit on shares. NO is the ruling.

Facts of the case

The Assessee is an individual who derives income from sale & purchase of shares. During the year under consideration, the assessee showed income from long term capital gains of Rs.3,95,24,398/- on sale of shares which was claimed as an exempt income u/s. 10(38). Similarly, the assessee had shown short term capital gains of Rs.10,45,90,433/- on sales of shares. Further, the assessee had shown loss of Rs. 7,38,18,591/- from the Future & Option (F&O) in trading of share. While filing his return, the assessee had set off the F&O loss from the income earned from short term capital gains on sale of shares. The AO during the course of assessment, observed that assessee had traded in shares in huge volumes and in some cases shares purchased in lots were not even held for one day, before being sold. The assessee was asked by the AO to explain as to why the income from trading in shares be not brought to tax as income from business, to which the assessee submitted that he was an investor in shares. However, on analysis of the period of holding, the AO observed that assessee had mainly dealt in the share of the company named Core Projects Ltd. and the magnitude of dealing in shares of Core Projects Limited clearly revealed that assessee was dealing in the said shares with complete knowledge and timing of the market and hence the assessee was treated by the AO as trader of shares. The AO therefore assessed the income of Rs. 7,02,69,2369/- which was brought to tax as income from business and profession.

On appeal, the Tribunal held that,

++ it is observed that assessee has dealt in the past in the securities wherein the Revenue has accepted income earned from sale and purchase of shares on delivery basis to be capital gains (losses) while income (loss) from F&O transactions was assessed as income under the head income from business or profession. It is settled law that principle of Res-judicata is not applicable to the income-tax proceedings while principles of consistency has to be followed. It is the claim of assessee that all the shares were duly de-mated and dealings were undertaken on delivery basis, wherein the assessee has taken physical delivery of shares in his demat account on purchase of shares while the assessee has given delivery of shares on the sale of shares. It is an undisputed position that on such shares, capital gains were offered for taxation. The Revenue is, however, aggrieved with large volumes of trade and short period of holding which propelled him to treat the said income as income under the head income from business or profession. The assessee has also offered income from F&O under head income from business or profession. The assessee is treating the shares taken on delivery basis as "Investments" in its books of accounts which are valued at cost while stocks/securities under F&O dealings were valued at cost or market value whichever is lower and are shown as stock-in-trade in its books of accounts. There is no bar on maintaining two portfolios of shares i.e. one for investment purposes and second for trading purposes. The assessee has not borrowed interest bearing money to invest in shares which were dealt on delivery basis and were treated as "Investment" in its books of accounts which is evident from the financial statements as no interest is debited with respect to such shares, however some credit is extended by creditors which also majorly constitute payable on F&O transaction wherein interest is found debited for the transactions in F&O segment. The period of holding in case of majority of shares on which short term capital gains has arisen is ranging from 4 months upwards and insignificant amount of capital gain /loss has arisen on sale of shares within one months of its acquisition;

++ on the perusal of the frequency of transactions which has led to earning of short term capital gains, it is to be seen that assessee has made investments in shares and it could not be categorised that the assessee is trader in shares even though majorly the assessee earned capital gains on one share namely Core Projects Limited and quantitatively large number of shares were purchased and sold. Every prudent person who make investments in share-market do so for earning money on its investment with commercial expediency in mind and if an opportunity exists for making money in a very volatile and complex market, every prudent person keeping in view principles of commercial expediency will exit from the stock which yielded good returns and it cannot be expected of prudent investor governed by the principles of commercial expediency to hold shares for a longer period in a volatile and complex stock market and then end up losing money on shares merely with the fear that Revenue will classify it as trader if he end up selling at shorter period wherein he had the opportunity to make money. Merely because the investor has earned money on shares, it cannot be concluded that he is trader in shares. The Revenue has accepted in preceding years gains arising from the dealing in the share as capital gains wherein the assessee was held to be an investor and principle of consistency has to be followed. Thus, income earned by assessee from dealing in shares is to be assessed as income from capital gains.

(See 2018-TIOL-282-ITAT-MUM)