Capital gains vis-à-vis business income — If shares are held for more than a month, they should be treated as investment and profit on the sale should be charged as short-term capital gain — When shares are held for less than a month, gain on them should

The assessee is engaged in the business of weaving job work
and grey cloth. He declared profits from sale of shares as short-term capital
gains and long-term capital gains. The AO treated the entire sum as business
income on the basis of frequency of transactions and holding periods.

The CIT(A) partly confirmed the order of the AO and
short-term capital gains were treated as business income. However, long-term
capital gains were not allowed to be treated as business income.

The assessee has shown the transactions in shares as
investment and not as stock-in-trade. It has been shown consistently for several
years in the past and the Department has not challenged the book-keeping or
accounting of shares as investment. No contrary materials or facts have been
pointed out by the Revenue to show that facts in the current year are different
than the facts in earlier years. The entire portfolio has been valued at cost as
at the end of the accounting year. If in the past, the Department has accepted
the sale of shares of holding of more than a year as investment and profits
thereon has been assessed under the head ‘Capital Gains’, then there is no
reason to hold differently this year.

In respect of short-term capital gains, the assessee has
discharged the onus of showing that it is making investment, but the Revenue is
able to show that there are high frequencies and low holdings in many
transactions of shares indicating that the assessee has some intention of
purchasing and selling shares as a trader. Considering the totality and
peculiarity of the facts of the case, it was held that the assessee is neither
fully acting as a trader nor as investor. Therefore, a criterion was fixed for
determining as to when he is acting as trader and when as investor. Accordingly,
if shares are not held even, say, for a month, then the intention is clearly to
reap profit by acting as a trader and he did not intend to hold them in
investment portfolio. If a person intends to hold his purchases of shares as
investment, he would watch the fluctuation of rates in the market for which a
minimum time is necessary, which was estimated at one month. Where shares are
held for more than a month, they should be treated as investment and on their
sale short-term capital gains should be charged. When shares are held for less
than a month, gain on them should be treated as profit from business.