practical tax & investment planning online
international tax expert / colunmist / author / speaker


Mumbai High Court Stresses On Need For

Uniformity & Consistency In Approach!

“Activity of a taxpayer accepted as investment in shares in earlier years cannot be treated as business in subsequent years, if facts are the same.” This landmark ruling of the Mumbai High Court delivered on 6th January, 2010 will make several investors heave a sigh of relief, in the backdrop of the recent onslaught of the Income-tax Department in treating capital gains from securities liable to tax as business income from trading in shares. While long term capital gains from securities are exempt and short term gains attract a concessional tax, business income gets taxed at normal rates.

                       The Department, in the appeal filed before the High Court in the case of Gopal Purohit, had questioned the order of the Income-tax Appellate Tribunal (ITAT) in treating the income from sale of 7,59,003 shares for Rs.5,00,12,879/­ as an income from short term capital gain and sale of 3,88,797 shares for Rs.6,65,02,340/­ as long term capital gain, as against ‘income from business’ assessed by the Assessing Officer (AO).

                       In this case, the taxpayer was engaged in two different activities of sale and purchase of shares. The first set of transactions involved investment in shares in which the assessee took delivery of the shares. The second set of transactions representing purely jobbing without delivery involved dealing in shares for the purposes of business.

               The taxpayer was thus both an investor as well as a dealer and while the income from investment activity was offered as capital gains, the income from dealing activity was offered as business income. This position was accepted by the AO in the earlier years. However, in AY 2005-06, the AO took a different view and held that even the shares held on investment account had to be assessed as business income.

                        The ITAT allowed the taxpayer’s appeal holding that the delivery based transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as short term or, as the case may be, long term capital gain, depending upon the period of the holding.

                  Dismissing the further appeal filed by the Department, the Mumbai High Court held that the ITAT has correctly applied the principle of law in accepting the position that it is open to a taxpayer to maintain two separate portfolios, one relating to investment in shares and another relating to business activities involving dealing in shares. Delivery based transactions were rightly treated as being in the nature of investment transactions giving rise to capital gains.

             The High Court has further held that the Tribunal correctly accepted the position that though the principle of res judicata is not attracted, there ought to be uniformity in treatment and consistency when the facts and circumstances are identical. “The Tribunal has noted that the taxpayer has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year in all the years and there was no justification for a different view being taken by the AO.”

            The High Court also held that the Tribunal had applied the correct principle in holding that while entries in the books of account alone are not conclusive in determining the nature of income, it does have a bearing.




Leave a Reply

Powered by