short term gain v bussiness income ashok seth, lucknow fca, disa (ica) [email protected]

SHORT TERM GAIN v BUSSINESS INCOME

Ashok Seth, LucknowFCA, DISA (ICA)

[email protected]

9th October 2005 Ashok Seth 2

Introduction

Section 111A inserted by Finance Act (No 2) 2004 w.e.f 1st April 2004

Tax on Short term Capital Gain 10% on Equity Share or a unit of equity oriented fund


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…………………………”


“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)


“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.


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.”


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)


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’


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.


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.”


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


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


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


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)


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.


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.


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


To Summarize (Subject to other facts of the case)

Isolated Transaction Generally Capital Gain (Onus on AO so will be difficult for him to prove otherwise)

Few Transactions May be either way (apply Gut feeling) try to find facts in favour of assessee to prove not business.



Regular Transactions Generally 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



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


THANKS FOR BEING NICEHAVE A GOOD DAY

short term gain v bussiness income ashok seth, lucknow fca, disa (ica) [email protected]

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