Gains on shares held in investment portfolio not assessable as business profits

CIT vs. Avinash Jain (Delhi High Court)

The assessee was maintaining separate portfolios for shares in the trading account and for those in the investment account. This was accepted by the department in the earlier years. In AY 2007-08, the assessee sold all the shares in the investment portfolio and offered the gains to tax as long-term and short-term capital gains. The AO held that as the volume (Rs. 52 crores) and frequency of transactions was large, the LTCG & STCG were assessable to tax as business profits. The CIT(A) and Tribunal (order attached) reversed the AO by relying on CBDT Circular No. 4 of 2007 dated 15.06.2007 (291 ITR (Stat) 35). On appeal by the department to the High Court, HELD dismissing the appeal:

The intent and purport of Circular No. 4 of 2007 dated 15.06.2007 is to demonstrate that a tax payer could have two portfolios, namely, an investment portfolio and a trading portfolio. In other words, the assessee could own shares for the purposes of investment and/or for the purposes of trading. In the former case whenever the shares are sold and gains are made the gains would be capital gains and not profits of any business venture. In the latter case any gains would amount to profits in business. This has been made clear by the CBDT circular in the remaining portion of the circular itself. On facts, the finding of the CIT(A) & Tribunal that the short term capital gains and long term capital gains were out of the investment account and were not related to the trading account does not call for any interference