Business income or long-term capital gain – Income from shares and securities held for period beyond 12 months – Investments whether made from borrowed funds or own funds of assessee – No distinction made in circular issued by CBDT – Department bound by circular – Profit is long term capital gain

53. Principal CIT vs. Hardik Bharat Patel;
410 ITR 202 (Bom): Date of order: 19^th November,
2018 A. Y. 2008-09

Business income or long-term capital gain –
Income from shares and securities held for period beyond 12 months –
Investments whether made from borrowed funds or own funds of assessee – No
distinction made in circular issued by CBDT – Department bound by circular –
Profit is long term capital gain

For the A. Y. 2008-09, the Tribunal directed
the Assessing Officer to treat the profit of the assessee that arose out of the
frequent and voluminous transactions initiated with borrowed funds in shares as
“long term capital gains” instead of as business income following its order for
the earlier assessment year. The Department filed appeal before the High Court
and contended that the amount invested in shares by the assessee was out of
borrowed funds and therefore, the profit was to be treated as business income
and not as long-term capital gains. The Bombay High Court upheld the decision
of the Tribunal and held as under:

“i)   According to Circular No. 6 of 2016 dated
February 29, 2016, issued by the CBDT, with regard to the taxability of surplus
on sale of shares and securities, whether as capital gains or business income
in the case of long term holding of shares and securities beyond 12 months, the
assessee has an option to treat the income from sale of listed shares and
securities as income arising under the head “Long-term capital gains”. However,
the stand once taken by the assessee would not be subject to change and
consistently the income on the sale of securities which are held as investment
would continue to be taxed as long-term capital gains or business income as
opted by the assessee. The circular makes no distinction whether the
investments made in shares were out of borrowed funds or out of its own funds.

ii)    The Department was bound by Circular No. 6
of 2016 dated February 29, 2016 issued by the CBDT and the distinction which
had been sought to be made by the Department could not override the circular
which made no distinction whether the investments made in shares were out of
borrowed funds or out of the assessee’s own funds. No substantial question of
law. Hence not entertained.”