In a ruling that is going to benefit many people who deal in shares, the Income Tax Appellate Tribunal, Mumbai, has ruled that multiple orders for purchase or sale of shares might constitute one transaction.
The ruling, delivered by accountant member TR Sood and judicial member Vijay Pal Rao on December 15, came in response to an appeal filed by a garment manufacturer and exporter whom the income tax (I-T) department had termed as trader in shares rather than an investor.
A trader in shares has to pay income tax at the rate of 30% as it falls under business income category whereas for an investor, as in this case, it is 20% as it falls under short-term capital gain. Businessman Nehal Shah had shown short-term capital gain of Rs 1.07 crore for year 2004-2005. He showed short-term capital gain in the investor category, which the assessing officer of the I-T department refused to accept.
The assessing officer had observed that Shah had entered into 127 purchase and 83 sale transactions, which is a high frequency. He also observed that in 88% sales of shares, the same were purchased during the year only. “The high ratio of sales within a year indicates that assessee [Shah] was only a trader in shares,” the officer had observed.
Shah approached the commissioner of income tax (appeal) who upheld the officer’s order. He then approached the tribunal. In his submission, Shah said he was an investor and had not borrowed any money for investing in shares. One of the criteria for differentiating between a trader and investor is borrowing money for dealing in shares.
He also submitted that he was not very experienced in the share line and hence was taking services of portfolio management service provider. He stated that he was investing in shares for a long time and in earlier years the department accepted such transactions.
Rejecting the assessing officer’s observations, the tribunal said, “If the assessee was a trader, he would have definitely realised the huge profit of almost Rs 6 crore immediately and not carried out the stock to the next year.”
The tribunal also accepted Shah’s contention that he had carried out only 31 purchase and 25 sale transactions, which could not be said to be a great volume of transactions.
The tribunal observed that the number of transactions have not been calculated properly by the assessing officer. “It may happen some time that a single transaction would be split by the computer trading of stock exchange into many smaller transactions,” the tribunal observed.”
“We are of the view that the transaction disclosed by the assessee has to be treated as investment transaction and not as business transaction,” the order said.