PERSONAL TAX: Gains from share trading may be treated as business income

This week's case is about a taxpayer who is a homemaker. She had claimed short-term capital gains on sale and purchase of shares as well as speculation income from trading of shares in her return of income for the assessment year 2007-08.

During the course of assessment, the tax officer found that the taxpayer was actually carrying out a systematic activity of trading in shares with a business motive. In his opinion, she did not have two distinct activities of trading and investment but had actually integrated both. Keeping this observation in mind, the tax officer concluded that the taxpayer was carrying out a trading activity, and therefore, charged the short-term capital gains offered in the return of income as business income. 

The first level appellate authority agreed with the tax officer's view and dismissed the appeal filed by the taxpayer. 

The taxpayer preferred an appeal before the Mumbai Tax Tribunal and argued that being a homemaker she has been showing a profit on sale of sale and purchase of shares as short-term capital gains in the previous years, too. The taxpayer's contention had been duly accepted by the tax officer in the previous years. Just because the taxpayer is having a speculative transaction in trading of shares, the investment cannot be treated as a trading activity for the year in question. The taxpayer argued that the tax officer is obligated to follow his own stand in her case for previous years and the short-term capital gains should not be treated as business income. However, the Tribunal ruled against the taxpayer.

Aggrieved by the Tribunal's order, the taxpayer preferred an appeal before the Bombay High Court. Based on the details of sales and purchase of shares during the year, the Honorable High Court observed that a total of 73 transactions were disclosed. Out of these, only one transaction is shown in the long-term capital gains category. The other transactions are sale and purchase of shares during the year itself. Out of the 72 transactions showing short-term capital gains, only in case of ten transactions was the holding period over a month. In the majority of the transactions, the period of holding was less than one week – ranging anywhere from one day to seven days.

The argument put forth by the taxpayer that merely because ten transactions disclose holding period of over one month, it cannot be said to be reflective of the transactions undertaken during the year under assessment, opined the High Court. On the contrary, the trend seems to be that majority of transactions have a common feature where the holding period ranges from one day to seven days. The taxpayer was found to have sold the shares within a period of one week from the date of purchase in more than 80% of the cases. The High Court was of the view that it is this trend which resulted in all the lower appellate authorities including the Tribunal concurred in their findings against the taxpayer. 

The intention of the taxpayer in indulging in frequent transactions is to earn a profit at the earliest possible occasion when there was a rise in the price, which implies that the taxpayer is moving as per the stock market trend. At the first available opportunity, the taxpayer was selling the shares. This type of activity of sale and purchase can be said to be governed by the motive of sale and purchase to make profit at the earliest occasion and certainly not as investments.

Accordingly, the Bombay High Court ruled against the taxpayer. Readers may take note of the fact that there are many conflicting judgements in this matter, and hence, each case and its circumstances will be looked at differently by the tax department. This case cannot be said to be the only precedent in the matter of capital gains versus business income for trading in shares. 

The writer is a Sebi-registered investment advisor