INCOME TAX ACT, 1961

--Head of income--Business income or capital gainsSurplus on sale of shares held as investment.--Assessee was purchasing and selling shares since assessment year 2002-03. Assessee had admitted short-term capital gain on sale of shares since beginning and the same was accepted by department except for two assessment years 2005-06 and 2006-07. AO was of the view that assessee was involved in business of share trading since he was purchasing and selling shares on a large scale, at high frequency and period of holding was also not very long. Accordingly, AO treated the income showed by assessee as business income. Assessee contended that it had shown purchases of shares as investment and as stock-in-trade. He further argued that when AO had accepted the income as short-term capital gain in preceding years and also in subsequent assessment year 2008-09 therefore, as per principle of res judicata, in two assessment years under consideration, treatment of income should be the same. Held Though the principle of res judicata is not applicable in tax matter; however, when AO had not pointed out any material change or diversion in the activity of assessee then, the rule of consistency demands that AO could take a different view in selective assessment year. Further, assessee had been giving the treatment to the purchase of shares in its books of account by reflecting it as investments and not stock-in-trade. Assessee was found having not borrowed any money to purchase shares and paid any interest thereon. Further, the holding of the shares also found to be high and assessee was also found having enjoyed dividend income and not merely earned profit and gains on sale and purchase of shares therefore, income would be taxed under capital gain head.

The shares in question have consistently been shown as investment and valued at cost and not at cost or market value or any realizable value, whichever is less. Moreover, the AO himself in his order has admitted that 62% of shares had been held for more than 100 days before sale, and 21% of shares were held for more than 30 days. Thus, from this fact of holding itself, it is evident that the appellant had not done any day-to-day trading. (Para 7) Further the intention of the assessee to hold the shares as investment and not as stock in trade. can be viewed in the light of the fact that the capital gain of Rs. 49.28 lacs was from the shares allotted to the assessee in public issue which in any case cannot be classified as stock in trade when the assessee is holding the same as investment. Further, the entire capital gain arising from the transaction of the shares which were held by the assessee for 60 days and above and only capital loss of Rs. 5.27 lacs has been incurred from the transaction of the shares held upto 30 days. This shows that the short period of holding the shares was to mitigate the loss on the particular scrips. Apart from this, as it is clear from the details of the capital and the amount utilised for purchase of shares in the various years from assessment year 2002-02 to 2005-06 that the assessee was having enough capital for investment in the shares and securities and no borrowed fund was used for purchase of shares. (Para 9) In view of the above discussion, the income arising from purchase and sale of shares held as investment is assessable as capital gain and not as business income. (Para 10)