Tests for determining taxability for dealing in shares as Capital Gains OR Business income – Guj HC


CIT v Vaibhav j Shah (HUF) [Tax Appeal No: 77/78 of 2010] [Gujarat HC]

Background:

The assessee offered the gains from buying and selling shares as LTCG/ STCG. The AO held that the assessee was β€œdealing heavily in shares” with high frequency and magnitude and that the gains were assessable as business profits. This was reversed by the CIT (A) and Tribunal.

HELD:

The High Court relied on the following rulings:

  • CIT v. Associated Industrial Development Company (P) Limited, 82 ITR 586 (SC)
  • CIT v. H. Holck Larsen, 160 ITR 67 (SC)
  • CIT v. Rewashanker A. Kothari (2006) 283 ITR 338 (Guj.) has laid down the following test for determining the question as to whether an assessee can be said to be carrying on business. Such tests laid down by this Court are:
    (i) The first test is whether the initial acquisition of the subject matter of transaction was with the intention of dealing in the item, or with a view to finding an investment. If the transaction, since the inception, appears to be impressed with the character of a commercial transaction entered into with a view to earn profit, it would furnish a valuable guideline
    (ii) The second test that is often applied is as to why and how and for what purpose the sale was effected subsequently.
    (iii) The third test as has it been treated by the assessee i.e. as stock-in-trade, or has it been shown in the books of account and balance sheet as an investment.
    (iv) The fourth test is as to how the assessee himself has returned the income from such activities and how the department has dealt with the same in the course of preceding and succeeding assessments.
    (v) The fifth test, normally applied in cases of partnership firms and companies, is whether the Deed of Partnership or the Memorandum of Association, as the case may be, authorises such an activity;
    (vi) The last but not the least, rather the most important test, is as to the volume, frequency, continuity and regularity of transactions of purchase and sale of the goods concerned. In a case where there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can readily be drawn that the activity is in the nature of business

The High Court concluded that the Learned counsel for the revenue from the records could not demonstrate that there were large number of transactions which had frequency, volume, continuity and regularity and fell within the tests laid down by the Division Bench of this Court.

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