INCOME TAX ACT, 1961

--Head of income--Business income or capital gainsTransactions in share and security--The assessee derived business income from hiring of earthmoving equipments, in addition to hiring income, from purchase and sale of shares, mutual funds, derivatives, futures. Regular books of account were maintained. During the course of assessment proceedings, assessing officer observed that assessee carried on shares and like activities by way of two types: (i) by way of actual delivery transaction; and (ii) by way of non-delivery. Assessee accounted for these types of transactions separately and delivery based transactions were reflected as investments. Delivery based commodities and shares were held by way of investment and were sold on basis of delivery in the books of account. Assessee accordingly offered the income by way of two distinct types of activities: (i) Delivery based–held by way of investment, reflected in the books of account. The transactions were in volumes and only few scripts were traded. (ii) Non-delivery based, which were carried out by the assessee distinctly and separately, without delivery. STT transactions tax was also paid by the assessee in respect of delivery based transaction of shares. Assessing office, however, not accepting assessee's reply, held the delivery based transactions of shares and commodities as business income on following reasons: (i) There are no long-term capital gains from transactions in shares and the assessee had not derived any income by way of dividends. (ii) The CBDT Circular referred to by the assessee was only in the nature of guidance while determining the facts of each case. (iii) The assessee's main line of business was not that of hiring of machinery and equipment as claimed, but the substantial part of his income was derived out of capital/ commodity market. Therefore, it would be reasonable to hold that the assessee's main line of business pertained to commodity markets. (iv) The total purchase of shares was to the tune of Rs. 1,85,49,37,656 and the assessee's hire charges constituted a very small part of the share turnover. The amount of Rs. 7,61,56,446 claimed by assessee as short-term capital, was treated by the assessing office as profits and gains from business, liable to be taxed at the maximum marginal rate. Held: In the case of 2 portfolios, an eventuality may arise, like an assessee deals in the shares of TELCO, some are credited to trading activity and some may be accounted for on capital investment. The law and CBDT circular permits that in such cases accounting entry will determine the nature of assessee's income. When the CBDT Circular and various case laws allow such type of eventuality, the assessee has a stronger case. Looking at the accounting treatment, limited number of companies dealt in and limited number of transactions per month, the assessee's claim of capital investment cannot be denied. In view of the foregoings, ground in respect of delivery based share transactions, investment and capital loss in respect of commodity transactions on delivery basis both are to be held on account of short-term capital gain income and short-term capital loss respectively. Thus, the grounds of the assessee are allowed.