SHORT TERM GAIN v BUSSINESS INCOME Ashok Seth, Lucknow FCA, DISA (ICA)

9th October 2005Ashok Seth2 Introduction Section 111A inserted by Finance Act (No 2) 2004 w.e.f 1 st April 2004  Tax on Short term Capital Gain 10% on Equity Share or a unit of equity oriented fund

9th October 2005Ashok Seth3 Short Term Capital Gain  It should be Gain on Transfer of Short Term Capital Assets  Clause 42A of section 2 defines “Short-term capital assets” means a capital assets held by an assessee for not more than…………………………”

9th October 2005Ashok Seth4 “Business”  Sec 2(13)- includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture.  The term is of large and indefinite import CIT v Bazar 200 ITR 131, 34 ITR 368 (SC)

9th October 2005Ashok Seth5 “Bussiness” 26 ITR 765 (SC)  connotes some real, substantial and systematic or organized course of activity or conduct with a set purpose.  Income is business or not must be decided according to ordinary notions as to what a business is.

9th October 2005Ashok Seth6 Single & Isolated Transactions Prabhudayal 82 ITR 804 (SC):-  This does not, however, mean that under no circumstances a single transaction can amount to a business transaction  SC observed “Herein, we are dealing with the stray activity of a non- business man.”

9th October 2005Ashok Seth7 Single & Isolated Transactions  May fall within business being an adventure in nature of trade but it must bear clear “Indicia” of Trade 26 ITR 765 (SC), 35 ITR 594  Where isolated transaction is not in the line of business of the assessee the onus is on department to prove that the transactions is an adventure in the nature of trade CIT 187 ITR 316 (Bom)

9th October 2005Ashok Seth8 Single & Isolated Transactions  In CIT v. Calcutta National Bank Ltd. [1959] 37 ITR 171 (SC) it was also held that Though ordinarily, ‘business’ implies continuous activity in carrying on a particular trade or vocation, it may also include an activity which may be called ‘quiescent’

9th October 2005Ashok Seth9 Raja Bahadur Kamakhya Narain Singh 77 ITR 253 (SC) The surplus realised on the sale of shares, would be capital if the assessee is an ordinary investor realising his holding; but revenue, if he deals with them as an venture in the nature of trade. The fact that the original purchase was made with the intention to resell if an enhanced price could be obtained is by itself not enough but in conjunction with the conduct of the assessee and other circumstances it may point to the trading character of the transaction. Contd.

9th October 2005Ashok Seth10 Contd. For instance, an assessee may invest his capital in shares with the intention to resell them if in future their sale may bring in higher price. Such an investment, though motivated by a possibility of enhanced value, does not render the investment a transaction in the nature of trade. The test often applied is, has the assessee made his shares and securities the stock-in-trade of a business.”

9th October 2005Ashok Seth11 Khan Bahadur Ahmed Alladin And Sons 68 ITR 573 (SC) The answer to the question does not depend upon the application of any abstract rule principle or formula but must depend upon the total impression and effect of all the relevant facts and circumstances established in the particular case. It should not be Profit making Scheme

9th October 2005Ashok Seth12 Indrajit Singh 227 ITR 539 (MP) the sale of food grain was held to be adventure in nature of trade because the assessee was partner in a firm carrying on the business of food grain

9th October 2005Ashok Seth13 CIT v PKN Co Ltd 60 ITR 65 (SC)  Incidental sale or re-sale under changed circumstances would not stamp the transaction with business character  Power in the MOA to sell or turn into account, dispose of, or deal with the properties, has no decisive bearing on the question whether the profits arising there from are capital accretion or revenue income

9th October 2005Ashok Seth14 Investment from Borrowed Funds May point to a business transaction  Visheshwara v CIT 41 ITR 685  Khan Bahadur Ahmed Alladin And Sons 68 ITR 573 (SC) & Sutlez Cotton 100 ITR 706 BUT  this may not be decisive circumstances Rameshwar Pd Bagla 87 ITR 421 (SC) & 160 ITR 67 (SC)

9th October 2005Ashok Seth15 Investment Ltd. 77 ITR 533 (SC) it was held by the Hon’bl SC that neither the description of stock in the balance- sheet as "investments" nor its valuation method is decisive to determine whether loss incurred was revenue loss.

9th October 2005Ashok Seth16 Books Treatment not conclusive  Name given to a transaction by parties concerned does not necessarily decide the nature of transaction.  Likewise, the way the in which the receipt is dealt with in the accounts of the assessee is not conclusive against or in for of the assessee.

9th October 2005Ashok Seth17 Tests 160 ITR 67 (SC), 101 ITR 234 (SC), 262 ITR 194 (AP),  Profit Motive ?  Volume  Frequency  Continuity  Regularity  Activity continued or contemplated to be continued  Motive of purchase & Sales  Subject Matter  Period of Ownership  Supplementary work in connection with sale  Circumstances for realisation

9th October 2005Ashok Seth18 To Summarize (Subject to other facts of the case) Isolated TransactionGenerally Capital Gain (Onus on AO so will be difficult for him to prove otherwise) Few TransactionsMay be either way (apply Gut feeling) try to find facts in favour of assessee to prove not business.

9th October 2005Ashok Seth19 To Summarize (Subject to other facts of the case) Regular TransactionsGenerally Business profits (may not take risk of claiming STG unless very strong case on the facts) Bulk purchase & Sale in small lots Indicates Business profits- other facts important

9th October 2005Ashok Seth20 To Summarize (Subject to other facts of the case) Small purchases & bulk sale May be Capital sale depending upon the motive at the time of purchase and reasons for sale. What was done with sale proceeds is also important. Purchases with borrowed funds Tilting towards business profits unless proved otherwise

9th October 2005Ashok Seth21 THANKS FOR BEING NICE HAVE A GOOD DAY