Capital gain vs. Business income – Sections 28 and 45 – A. Y. 2005-06 – Assessee share broker maintaining separate portfolios for investment and stock-in-trade – Profit from sale of shares of three companies held as investment – Profit assessable as short-term capital gain-

The assessee was a share broker registered with the National Stock Exchange and the Bombay Stock Exchange and was engaged in the business of purchase and sale of shares. In the A. Y. 2005-06, the assessee declared short-term capital gains of Rs. 82,32,316/- from sale of shares held by it as investment. The Assessing Officer held that the profit was assessable as business income. The Tribunal accepted the assessee’s claim that it is short-term capital gain.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) It was clear from the finding of the Tribunal that the assessee, though a member of the Bombay Stock Exchange and National Stock Exchange, maintained two portfolios, one relating to investment and the other relating to stock-in-trade. Profits and losses from investments were shown as “capital gains” either long term or short term and profits and losses from “stock-intrade were shown as “business income”. This position was also accepted in earlier assessment years, i.e., A. Y. 2002-03 onwards.

ii) The assessee had turnover of more than Rs. 4697.23 crore, whereas investment in shares in comparison was small amount of Rs. 2.95 crore. The assessee had declared “business income” of Rs. 63.77 crore in respect of transactions as a member of the stock exchanges and as a result of carrying out trade in shares.

ii) The shares held as investment were kept in a separate portfolio. The shares related to only three companies were not treated as stock-in-trade. These shares were sold after a gap of four months or more. Hence the profits were assessable as short-term capital gains.”