Income from the sale of shares purchased with borrowed funds is business income.

By | March 8, 2025
0 Comment

Profit from Share Trading Treated as Business Income, Not Short-Term Capital Gains

Issue: Whether the profit derived from the purchase and immediate sale of shares, using borrowed funds, should be treated as business income or short-term capital gains under the Income-tax Act, 1961.

Facts:

  • The assessee-company, incorporated for investment counseling, borrowed Rs. 104.10 crores from a partnership firm.
  • The company invested Rs. 101.18 crores to purchase 19.86 lakh shares of STFC, which were immediately sold for Rs. 129.04 crores, resulting in a profit of Rs. 27.85 crores.
  • The assessee treated the income as “short-term capital gains” under Section 111A.
  • The Assessing Officer (AO) concluded that the investment, considering the company’s authorized share capital was only Rs. 1 lakh, was an “adventure in the nature of trade” and taxable as “income from business.”
  • The borrowed money was used solely for trading purposes.

Decision:

  • The court held that since the borrowed amounts were invested in shares and the investment was made for the purpose of trading, the investment in shares by the assessee-company was to be treated as a business venture for trading in shares and not as income from short-term capital gains.
  • The court relied on the fact that the money was borrowed specifically for trading, indicating a business intent rather than a capital investment.

Key Takeaways:

  • This case highlights the distinction between capital gains and business income in share trading.
  • When a company borrows money specifically for trading in shares, and the transactions are frequent and substantial, the profit is likely to be treated as business income.
  • The court considered the company’s authorized share capital and the nature of the transaction to determine the intent behind the investment.
  • This decision emphasizes that the intent and nature of the transaction are crucial factors in classifying income from share trading.
  • The use of borrowed funds solely for trading purposes is a strong indicator of business intent.
HIGH COURT OF MADRAS
Commissioner of Income-tax II
v.
First Choice Professional Services (P.) Ltd.
R. Suresh Kumar and C. Saravanan, JJ.
T.C.A. No.491 of 2015
NOVEMBER  25, 2024
Avinash Krishnan Ravi, Jr. Standing Counsel and T. Ravi Kumar, Sr. Standing Counsel for the Appellant. R.V. Easwar, Sr. Counsel and R. Sivaraman and for the Respondent.
JUDGMENT
C. Saravanan, J. – This Tax Case Appeal is directed against the Impugned Final Order dated 30.01.2015 passed by the Income Tax Appellate Tribunal (ITAT) in I.T.A.No.2640/Mds/2014.
2. Operative portion of the Impugned Final Order dated 30.01.2015 of ITAT in I.T.A.No.2640/Mds/2014 reads as under:-
“8. The Revenue, on the other hand, has drawn support from the decision of Hon’ble AP High Court in the case of PVS Raju v. ACIT (supra), wherein the Hon’ble High Court after analyzing various factors viz. magnitude, frequency, volume of transactions, ratio of sales to purchases on total holdings etc. came to the conclusion that the assessee had not purchased the shares as an investment and the intention was to trade in such scrips. Whereas, in the present case, the facts are entirely different. The assessee has not indulged in trading of shares in huge volumes. Even the transactions are not repetitive in nature. The assessee invested in only one company and purchased shares only once. Thereafter, the shares were sold on three different dates. There is nothing on record to show that the assessee invested or traded in any other scrip. Thus, the decision of the Hon’ble High Court in the case of PVS Raju (supra) will not be applicable in the facts and circumstances of the present case.
9. In view of the facts of the case and the decision rendered in the case of Felspar Credit and Investment (P.) Ltd. (supra), we are of considered opinion that the assessee is justified in returning the profit from sale of shares as short term capital gain. We find no error in the findings of Commissioner of Income-tax(Appeals). The appeal of the Revenue is dismissed.”
3. At the time of admission on 23.07.2015, this Appeal was admitted on the following substantial question of law:-
“Whether the Tribunal was right in holding that the profit from sale of shares as short term capital gain when the assessee has purchased shares out of borrowed capital for the purpose of trading in shares in order to make profit out of it, which is a business income assessable under Section 28 of the Income Tax Act?”
4. By the Impugned Final Order dated 30.01.2015, the appeal of the Appellant herein before the Appellate Tribunal against the Order dated 06.05.2014 of the Appellate Commissioner namely the Commissioner of Income Tax (Appeals)-II, Chennai was dismissed for the Assessment Year 2011-2012.
5. Earlier, the assessment was completed by the Assessing Officer namely the Deputy Commissioner of the Income Tax, Salary Circle-I, Chennai under Section 143(3)(ii) of the Income Tax Act, 1961 on 19.03.2014 for the Assessment Year 2011-2012 whereby, a sum of Rs.26,08,20,165/- was added to the income of the respondent-assessee Company.
6. The computation of taxable income was made under both Section 115JB of the Income Tax Act, 1961 and under the normal computation methods. Since the tax payable under Section 115JB of the Income Tax Act, 1961 on the book profit of the respondent-assessee Company was less than the tax payable under the normal computation, the income was computed under the normal method at Rs.27,84,64,690/-.
7. Relevant portion of the Assessment Order dated 19.03.2014 reads as under:-
“11. Taxable Income under Normal Method: Rs.27,84,64,690/-
Income Tax thereon @ 30%: Rs. 8,35,39,407/-
Computation of Book Profit u/s 115JB:
Taxable Book Profit u/s 115JB: Rs.27,85,61,026/-
Income Tax thereon @ 18%: Rs. 5,01,40,985/-

 

Since tax payable under normal computation is more than tax payable on book profit, the income computed under normal method at Rs.27,84,64,690/- is adopted for tax computation.
Income Tax on Rs.27,84,64,690/-
Add: Surcharge
Add: Education Cess		: Rs.8,35,39,406/-
: Rs. 62,65,455/-
: Rs. 26,94,146/-
Total Tax Payable: Rs.9,24,99,007/-
Add: Interest u/s.234B: Rs.1,22,39,640/-
Interest u/s.234C: Rs. 1,05,253/-
Total Tax Payable: Rs. 10,48,43,900/-
Less: AT Paid: Rs. 5,85,00,000/-
Balance Tax Payable: Rs. 4,63,43,900/-

 

Tax should be paid as per Demand Notice enclosed.
Penal proceedings u/s.271(1)(c) of the Act initiated separately.”
8. The above decision of the Assessing Officer namely the Deputy Commissioner of the Income Tax, Salary Circle-I, Chennai was reversed by the Appellate Commissioner namely the Commissioner of Income Tax (Appeals)-II, Chennai vide Appellate Order dated 06.05.2014 which decision has been affirmed by ITAT vide Order dated 30.01.2015 in I.T.A.No.2640/Mds/2014. Aggrieved by the same, the Income Tax Department is in Appeal before this Court.
9. To answer the above substantial question of law, it will be useful to keep the admitted facts in mind. The respondent-assessee was incorporated as a private limited Company only on 15.01.2009. The main and incidental/ancillary objects of the respondent-assessee Company in the Memorandum of Association has been captured in the Assessment Order dated 19.03.2014. It reads as under:-
Main ObjectsObjects incidental or ancillary to attainment of the main objects
(1) To carry on business of investment, counseling, such as rendering services like merchant banking subject to the SEBI regulations and act as security transfer agent for physical and depository forms.
(2) To establish, maintain, conduct, provide, procure or make available consultancy service in various fields, such as general, administrative, commercial, financial, legal, economic, labour and industrial relations, public relations, statistical, accountancy, direct and indirect taxation and other allied services and to take such steps as may be necessary for the said purpose.		(26) To carry on the business of subscribing for purchase or otherwise hold, sell, dispose and deal in shares, stocks, debentures, debenture stocks and any other money market, instrument of securities of any company, mutual fund or of any authority, state municipal, local or otherwise subject to such regulation as may be issued by RBI from time to time under NBFC regulations.

 

10. It was categorically admitted during the course of hearing that the authorized share capital of the respondent-assessee Company was only Rs.1,00,000/- at the time of its incorporation. In the first year of its incorporation i.e., during the Financial Year 2009-2010, the respondent-assessee Company borrowed a sum of Rs.104,10,00,000/- from M/s.Revathi Associates, a Partnership Firm in which the Director of the respondent-assessee Company was a partner.
11. Out of Rs.104,10,00,000/- borrowed from M/s.Revathi Associates, a sum of Rs.101,18,95,901/- was invested by the respondent-assessee Company in M/s.Shriram Transport Finance Corporation Limited, for purchasing 19,86,240 shares of M/s.Shriram Transport Finance Corporation Limited.
12. The respondent-assessee Company sold the entire stock of shares purchased in January 2010 during the month of April, September and October, 2010 for a total consideration of Rs.129,04,56,927/-. Thus, made profit of Rs.27,85,61,026/- (Rs.129,04,56,927 – Rs.101,18,95,901)
13. The learned Junior Standing Counsel for the appellant would submit that in the present case the respondent-assessee Company was incorporated in the year 2009 i.e., on 15.01.2009 and in the same year, a sum of Rs.104,10,00,000/- was borrowed from M/s.Revathi Associates, out of which, a sum of Rs.101,18,95,901/- was invested by the respondent-assessee Company in M/s.Shriram Transport Finance Corporation Limited by purchasing 19,86,240 shares from M/s.Shriram Transport Finance Corporation Limited and thereafter sold the shares for a total sum of Rs.129,04,56,927/- during April, September and October, 2010 and thus, made a profit of Rs.27,85,61,026/-(Rs.129,04,56,927 – Rs.101,18,95,901). After deducting expenses, the balance profit was arrived as follows:-
Sales :Rs.129,04,56,927/-
Less : Purchases :Rs.101,18,95,901/-
Profit :Rs. 27,85,61,026/-
Less : Expenses :Rs. 1,77,40,861/-
Balance Profit :Rs. 26,08,20,165/-

 

14. During the interregnum, the respondent-assessee Company has also received a dividend for a sum of Rs.35,84,00,000/- (0.5% of Rs.101.18 Crores) from M/s.Shriram Transport Finance Corporation Limited which was exempted from payment of income tax during the period in dispute.
15. The respondent-assessee Company has also paid a sum of Rs.1.76 Crores as interest to M/s.Revathi Associates representing 0.017% (Rs.1.76 Crores divided by Rs.101,18,95,901/- x 100).
16. The respondent-assessee Company had debited the following amounts towards interest under Section 36(1)(ii) of the Income Tax Act, 1961 paid to M/s.Revathi Associates:-
Sl.No.DateAmount
1.Year ended 31.03.2010Rs.2,57,22,260/-
2.Year ended 31.03.2011Rs.1,76,44,521/-

 

17. Aforesaid amount of Rs.1,76,44,521/- was however disallowed by the respondent-assessee Company itself under Section 14A of the Income Tax Act, 1961 in the returns.
18. The Assessment Order dated 19.03.2014 also reveals that in the balance sheet of the Partnership Firm namely M/s.Revathi Associates indicates that the said M/s.Revathi Associates had borrowed the following amounts from the following 3 group companies of M/s.Shriram Transport Finance Corporation Limited:-
Sl.No.Name of the CompanyAmount
1.Shriram InvestmentsRs. 10,10,000/-
2.Shriram Business FinanceRs. 15,25,00,000/-
3.Shriram Hire Purchase & InvestmentsRs. 115,02,00,000/-
TotalRs. 130,37,10,000/-

 

19. It is from the aforesaid amount of Rs.130,37,10,000/-, a sum of Rs.104,10,00,000/- was advanced to the respondent-assessee Company out of which, a sum of Rs.101,18,95,901/- was invested in M/s.Shriram Transport Finance Corporation Limited during January 2010.
20. The Assessing Officer has concluded that since the authorized share capital of the respondent-assessee Company was only Rs.1,00,000/-, investment of Rs.101,18,95,901/- in M/s.Shriram Transport Finance Corporation Limited can be treated only as an “adventure in the nature of trade” and therefore the same was liable to tax as “income from business” under Part-D of Chapter IV of the Income Tax Act, 1961.
21. On the other hand, the respondent-assessee Company has treated the income from sale of shares as a “short-term capital gain” under Section under Section 111A of the Income Tax Act, 1961 and thus claimed that it was eligible for deduction under Section 80C of the Income Tax Act, 1961.
22. Arguing the case on behalf of the appellant, the learned Junior Standing Counsel for the appellant submits that the Appellate Tribunal has erred in passing the Impugned Final Order based on the decision of the Andhra Pradesh High Court in PVS Raju v. ACIT,ITR 75 (Andhra Pradesh) and the decision of this Court in Felspar Credit and Investment (P.) Ltd., v. Commissioner of Income-tax, (Madras).
23. It is submitted that the decision of this Court rendered in Felspar Credit and Investment (P.) Ltd., v. Commissioner of Income-tax, ITR 121 (Madras) was distinguishable to the facts of the case as the said case dealt with the situation where the said Company namely Felspar Credit and Investment (P.) Ltd., was incorporated on 26.11.1984 and that the Company did not have any investment during the relevant Assessment Year namely from the year of its incorporation and during the succeeding accounting years till 1986 and 1987.
24. It is submitted that in the said case, starting from the accounting year 1987-1988, the Company started making investments in equity shares of other Companies in the same group and that only during the year ending 31.03.1991 (Assessment Year 1991-1992), apart from acquiring shares, the Company started selling shares which went on for three years thereafter.
25. It is submitted that it is in that context, this Court observed that Felspar Credit and Investment (P.) Ltd., Company held that 90% of its investments were only in the group companies and that the said Company-assessee never intended to keep them as stock-in-trade and the Revenue also accepted the contention of the assessee for the preceding years and in the following Assessment Years (Assessment Year 1992-1993 and Assessment Year 1993-1994).
26. It is submitted that this Court concluded that investment in shares and its sale were on profit long after the investment and incorporation of the Company.
27. Learned Junior Standing Counsel for the appellant has also drawn attention to the following decisions of the Hon’ble Supreme Court, Delhi High Court, Calcutta High Court, Gujarat High Court, Patna High Court and that of this Court:-
i.Commissioner of Income Tax, Bombay v. H.Holck Larsen
ii.Raja Bahadur Visheshwara Singh (Deceased) and others v. Commissioner of Income Tax, Bihar and Orissa, [1961] 41 ITR 685 (SC).
iii.New Era Agencies (Pvt.) Ltd., v. Commissioner of Income Tax, Bombay City 1, Bombay,
iv.CIT, Nagpur v. Sutlej Cotton Mills Supply Agency Ltd.,
v.Commissioner of Income Tax (Central), Calcutta v. Associated Industrial Development Co. (P) Ltd., Calcutta, [1971] 82 ITR 586 (SC).
vi.Manoj Kumar Samdaria v. Commissioner of Income Tax- 1,
vii.Gyan Traders Ltd., v. Commissioner of Income-tax, (2022) 20 ITR-OL 669.
viii.Pari Mangaldas Girdhardas v. Commissioner of Income Tax, (1977) 6 CTR (Guj) 647.
ix.Dalmia Cement Ltd., v. Commissioner of Income-tax, Bihar and Orissa,
x.Commissioner of Income-Tax, Madras-I v. Amalgamations (P.) Ltd.
xi.V.Amirtham Ammal v. Commissioner of Income-Tax, Madras,
28. On the other hand, the learned Senior Counsel for the respondent-assessee Company has also drawn attention to 2 Circulars dated 15.06.2007 and 29.02.2016 of CBDT as also the following orders of the Hon’ble Supreme Court, Bombay High Court, Delhi High Court and that of this Court:-
i.Commissioner of Income-tax v. P.Mohanakala,
ii.Vijay Kumar Talwar v. Commissioner of Income Tax, Delhi, 2011 (1) SCC 673/AIR 2011 SC (Supp) 215.
iii.Commissioner of Income-tax v. Gopal Purohit
iv.Commissioner of Income-tax, Delhi-II v. Jubilant Securities (P.) Ltd.
v.Commissioner of Income-tax v. Consolidated Finvest and Holding Ltd.,
vi.Felspar Credit and Investment (P.) Ltd., v. Commissioner of Income-tax,
vii.Commissioner of Income-tax v. N.S.S.Investments (P.) Ltd.
viii.Commissionerof Income-tax v. S.Ramaamirtham,
ix.Commissioner of Income-tax v. Trishul Investments Ltd.,
29. Arguing the case, learned Senior Counsel for the respondent-assessee Company has also attempted to defend the case by relying on the decision of the Hon’ble Supreme Court in Vijay Kumar Talwar, (cited supra) wherein, the decision of the Hon’ble Supreme Court in Hero Vinoth (Minor) Hero Vinoth (Minor) v. Seshammal, 2006 (5) SCC 545 was affirmed. A reference was also made to Paragraphs 19 to 22 from the said decision of the Hon’ble Supreme Court which reads as under:-
“19. It is manifest from a bare reading of the section that an appeal to the High Court from a decision of the Tribunal lies only when a substantial question of law is involved, and where the High Court comes to the conclusion that a substantial question of law arises from the said order, it is mandatory that such question(s) must be formulated. The expression “substantial question of law” is not defined in the Act. Nevertheless, it has acquired a definite connotation through various judicial pronouncements.
20. In Sir Chunilal V. Mehta & Sons Ltd. v. Century Spg. and Mfg. Co. Ltd. [AIR 1962 SC 1314], a Constitution Bench of this Court, while explaining the import of the said expression, observed that: (AIR p. 1318, para 6)

“6…. The proper test for determining whether a question of law raised in the case is substantial would, in our opinion, be whether it is of general public importance or whether it directly and substantially affects the rights of the parties and if so whether it is either an open question in the sense that it is not finally settled by this Court or by the Privy Council or by the Federal Court or is not free from difficulty or calls for discussion of alternative views. If the question is settled by the highest court or the general principles to be applied in determining the question are well settled and there is a mere question of applying those principles or that the plea raised is palpably absurd the question would not be a substantial question of law.”

21. Similarly, in Santosh Hazari v. Purushottam Tiwari [(2001) 3 SCC 179], a three-Judge Bench of this Court observed that: (SCC pp. 187-88, para 14)

“14. A point of law which admits of no two opinions may be a proposition of law but cannot be a substantial question of law. To be ‘substantial’ a question of law must be debatable, not previously settled by law of the land or a binding precedent, and must have a material bearing on the decision of the case, if answered either way, insofar as the rights of the parties before it are concerned. To be a question of law ‘involving in the case’ there must be first a foundation for it laid in the pleadings and the question should emerge from the sustainable findings of fact arrived at by court of facts and it must be necessary to decide that question of law for a just and proper decision of the case. An entirely new point raised for the first time before the High Court is not a question involved in the case unless it goes to the root of the matter. It will, therefore, depend on the facts and circumstance of each case whether a question of law is a substantial one and involved in the case, or not; the paramount overall consideration being the need for striking a judicious balance between the indispensable obligation to do justice at all stages and impelling necessity of avoiding prolongation in the life of any lis.”

22. In Hero Vinoth v. Seshammal [(2006) 5 SCC 545], this Court has observed that: (SCC p. 556, para 24)

“(iii) The general rule is that the High Court will not interfere with the concurrent findings of the courts below. But it is not an absolute rule. Some of the well-recognised exceptions are where (i) the courts below have ignored material evidence or acted on no evidence; (ii) the courts have drawn wrong inferences from proved facts by applying the law erroneously; or (iii) the courts have wrongly cast the burden of proof. When we refer to ‘decision based on no evidence’, it not only refers to cases where there is a total dearth of evidence, but also refers to any case, where the evidence, taken as a whole, is not reasonably capable of supporting the finding.”

30. Learned Senior Counsel for the respondent-assessee Company would submit that in terms of the decision of the Hon’ble Supreme Court in Hero Vinoth (Minor) v. Seshammal, 2006 (5) SCC 545, the Court has laid down a general rule that High Court will not interfere with the concurrent findings of the Courts below, unless the following exceptions are attracted:
i.The courts below have ignored material evidence or acted on no evidence;
ii.The courts have drawn wrong inferences from proved facts by applying the law erroneously;
iii.The courts have wrongly cast the burden of proof.
31. It is submitted by the learned Senior Counsel for the respondent-assessee Company that none of the above mentioned exceptions pointed out by the Hon’ble Supreme Court in Hero Vinoth (Minor) v. Seshammal, 2006 (5) SCC 545 were present in the present case.
32. A reference was made to Paragraph 2 from the decision of the Bombay High Court rendered in Gopal Purohit, (cited supra). It reads as under:-
“2. The Tribunal has entered a pure finding of fact that the assessee was engaged in two different types of transactions. The first set of transactions involved investment in shares. The second set of transactions involved dealing in shares for the purposes of business (described in paragraph 8.3 of the judgment of the Tribunal as transactions purely of jobbing without delivery). The Tribunal has correctly applied the principle of law in accepting the position that it is open to an assessee to maintain two separate port folios, one relating to investment in shares and another relating to business activities involving dealing in shares. The Tribunal held that the deliverybased transactions in the present case, should be treated as those in the nature of investment transactions and the profit received therefrom should be treated either as shortterm or, as the case may be, long-term capital gain, depending upon the period of the holding. A finding of fact has been arrived at by the Tribunal as regards the existence of two distinct types of transactions, namely, those by way of investment on the one hand and those for the purposes of business on the other hand. Question (a) above, does not raise any substantial question of law.”
33. A reference was made to Paragraph 8 from the decision of the Delhi High Court rendered in Jubilant Securities (P.) Ltd., (cited supra) to buttress the point that no substantial question of law arises for consideration in this appeal. It reads as under:-
“8. It is clear from the aforesaid discussion that after taking into consideration the factual matrix on record, findings of facts are recorded by the two authorities below that the assessee was maintaining two portfolios, in so far as shares in JOL are concerned, they were taken as investment from the date of purchase itself and shown in the investment portfolio. The profits resulted therefrom were capital gain. Learned counsel for the appellant could not show any perversity in these findings. These are pure findings of facts. No substantial question of law arises for consideration in this appeal. Therefore, these appeals are dismissed in limine.”
34. A reference was made to Paragraph 3 from the decision of the Delhi High Court rendered in Consolidated Finvest and Holding Ltd., (cited supra). It reads as under:-
“3. We have heard the learned counsel for the Revenue and also the assessee and perused the records. There is no dispute that the shares which were acquired were sold within a short span of 7 to 10 months by the assessee. There is also no dispute that the assessee had also asserted to be non-banking financial company having business of investments and dealing in shares. However, the facts which were noted by the Commissioner of Income-tax (Appeals) and also the Tribunal are worth considering. The assessee was, in fact, engaged in manufacture of photographic goods having manufacturing units at different places prior to the demerger of the photographic goods business into separate company with effect from April 1, 2004, on the scheme of demerger of the company approved by the High Court of Uttaranchal. Though the demerger took place w.e.f. 1st April, 2004, the assessee continued to carry on the photographic goods manufacturing until the date of the order of the High Court of Uttaranchal approving the scheme of the demerger on November 1, 2004. The assessee also held longterm investments in various other shares. The aforesaid shares of ONGC were purchased by the assessee when it was a manufacturing company and the aforesaid shares were not purchased as part of any business activity of dealing in shares at the time of purchase. The assessee was neither in the business of investments nor dealing in shares, though it held shares of different companies at the beginning of the relevant previous year. The assessee had acquired those shares in a public issue and had, in fact, shown them in the books of account as investment and were booked under the head “nontrade” and not “trading” investment. The intention to acquire those shares as investment can be reflected from the fact that it was holding most of the shares of other companies since long period of time and was not entering into frequent business of sale and purchase of shares. From the facts, the Commissioner of Income- tax (Appeals) and the Tribunal arrived at a finding of fact that the acquisition of such shares in public issue with the intent of holding them for a long period of time to achieve long-term appreciation and the mere fact that the shares were sold in a short span of time of its acquisition due to steep and unanticipated rise in stock market does not mean that the intention of the assessee at the time of purchase of shares was not to hold them for a long period of time or to deal in them. This was a pure question of fact arrived at by the Commissioner of Income-tax (Appeals) and the Tribunal, and rightly so that the profit arisen from sale of shares of ONGC during the relevant previous year was to be treated under the head “Capital gains” and not “profit or gain of business and profession”.
35. A reference was also made to Paragraph 19 from the decision of this Court rendered in Felspar Credit and Investment (P.) Ltd., (cited supra) wherein under similar circumstances where right from the beginning of the incorporation of the Company, it held shares only as an investment and 90% of its investment were only in the group Companies and that the said Company never intended to keep them as stock-in-trade and the Revenue also accepted the contention of the assessee for the preceding years and in the two following assessment years too.
36. It is submitted that under similar circumstances, following the earlier decisions of the Hon’ble Supreme Court, this Court held that the extent of income earned from the sale of shares cannot be the criteria to hold that the assessee was dealing in shares as a business venture. Paragraph 19 from the decision of this Court rendered in Felspar Credit and Investment (P.) Ltd., (cited supra) reads as under:-
“19. In the background of the decisions of the apex court, when we analyse the facts herein in this case, it is seen that the assessee had declared on the dividend income received as well as on the profit of sale of shares apart from profits that the assessee had on the finance business. The fact remains that right from the beginning of the incorporation of the company, it had held shares only as an investment and 90 percent of its investment were only in the group companies. The assessee never intended to keep them as stock-in-trade and the Revenue also accepted the contention of the assessee for the preceding years and in the two following assessment years too. In respect of the assessment year 1992-93, the assessee claimed exemption under section 54E in respect of long-term capital gains arising on the sale of the shares held in Bank of Madura on the ground that it had invested the gains in three years IDBI bonds. The claim was rejected originally under section 143(1)(a) of the Act was, however, allowed in the appeal filed by the assessee. In reopening of the assessment under section 143(3) read with 148 of the Act, the Income-tax Officer treated the same amount as “business income”. The assessee went on appeal before the Commissioner of Income-tax (Appeals), who allowed the same in his order dated February 11, 1997, and treated the income from the shares as capital gains. The pattern is the same for the assessment year 1993-94. During the assessment year 1991-92, when the first sale of shares was effected by the company and a sum of Rs. 18,000 was offered as capital gains, the said claim was allowed by the Assessing Officer. However, the issue arises only for the assessment years 1992-93 and 1993-94, that too when the assessee had made a substantial profit on the sale. As held by the Supreme Court, the extent of income earned from the sale of shares cannot be the criteria to hold that the assessee was dealing in shares as a business venture. When the Revenue had no grievance on the same pattern of transaction done in the preceding years and in the subsequent years, the mere fact that the assessee had a profit in the assessment years 1992-93 and 1993-94, by itself, cannot change the nature of business of hire purchase as one dealing in shares.”
37. A further reference was made to Paragraph 2 from the decision of this Court rendered in N.S.S.Investments (P.) Ltd, (cited supra) wherein it was held that a Company can hold some shares as stock-in-trade for the purpose of doing business of buying and sale of such shares, while at the same time it can also hold some other shares as its capital for the purpose of earning dividend income. Here the shares in question were held as the assessee\qs capital and not as stock-in-trade. Hence, there would be capital gain and not business income.
38. A reference was made to Paragraph 5 from the decision of this Court rendered in S.Ramaamirtham, (cited supra) wherein it was held that there is nothing in law which prohibits a trader in shares to invest in shares. The intention of the assessee is relevant to determine whether he is carrying on the business in shares or investments. On facts, both the first appellate authority as well as the Tribunal correctly held that the surplus derived from the sale of shares has to be assessed under the head “Capital gains”. In Paragraph 5 of its Judgment, this Court has held as under:-
“5. Heard counsel. On facts, it was found that the assessee has been maintaining separate books of account for the trading in shares as well as investments in shares. The assessee is carrying on the business only in the name and style of “Brilliant and Company”. The surplus earned from “Brilliant and Company” has been shown as business income. The payments in shares have been done by the assessee in his personal account. Further, it was found that the assessee has been holding shares for a long time and has been utilising the surplus funds only for the investments. In earlier years also, the assessee has been showing only capital gains on similar transactions and the same has been accepted by the Revenue. There is nothing in law which prohibits a trader in shares to invest in shares. The intention of the assessee is relevant to determine whether he is carrying on the business in shares or investments. On facts, both the first appellate authority as well as the Tribunal correctly held that the surplus derived from the sale of shares has to be assessed under the head “Capital gains”.
The said finding is based on valid materials and evidence and the order of the Tribunal is not a perverse one. The concurrent finding given by both the authorities below is based on valid materials and evidence. In the case of CIT v. P. Mohanakala (SC), the Supreme Court held that whenever there is a concurrent finding by the authorities below, no interference should be called for by the High Court. Under these circumstances, we do not find any error or legal infirmity in the order of the Tribunal so as to warrant interference.”
39. A reference was made to Paragraph 5 from the decision of this Court rendered in Trishul Investments Ltd., (cited supra). It reads as under:-
“5. Heard the counsel. The assessee is in the business of investments in shares and securities and it was never in the business of trading in shares. The term “business” is defined in section 2(13) of the Act. The “capital asset” is defined in section 2(14) of the Act. The test to decide whether it was an investment or an adventure in the nature of trade, has a very thin line of demarcation. Even a single instance of transaction can be regarded as business and even multiple transaction sometimes are deemed as investments. So, the criteria for deciding whether it is investment or business is that of the intention of the assessee, viz., whether the assessee’s real intention is to invest or the intention was in the nature of trade. As per the memorandum of association of the assessee-company, it could be seen that the assessee-company was incorporated on January 24, 1995, under the Companies Act, 1956, to engage in the business of investment. The Tribunal considered the relevant materials and evidences and held in paragraph 8 of its order, as follows :

“On a consideration of rival submission, we are of the view that the assessee’s contention is justified in law. It is also a point for consideration that the Department never attempted to lift the corporate veil to see the real nature of the transaction. Right from the memorandum of association, the object of the assessee-company is only to an investment company. Particularly for the period ending March 31, 1996, and March 31, 1997, the company did not carry on any operations. The purchase of shares of RCL by the assessee-company was only with the intention of making investment. The assessee had no intention to trade in shares. Hence, it cannot be a business asset in the hands of the assessee-company. The assessee-company offered the same under the capital gain. Hence, by respectfully following the decisions of the hon’ble Supreme Court and the Calcutta High Court cited supra, we set aside the orders of the authorities below by holding that it is only an investment activity and it cannot be termed as a business activity. We, therefore, decide the first issue in favour of the assessee and against the Revenue.”

40. We have considered the arguments advanced by the learned Junior Standing Counsel for the appellant and the learned Senior Counsel for the respondent.
41. The Hon’ble Supreme Court rendered in Sutlej Cotton Mills Supply Agency Ltd., (cited supra) has laid the test. The test was whether the dominant intention was to carry on an adventure in the nature of business in which case, the profit can be taxed; otherwise not. In other words, the question is whether the assessee purchased the shares in a commercial spirit with a view to make profit by trading in them. In Paragraphs 20 and 24 of its Judgment, the Hon’ble Supreme Court has held as under:-
“20. Secondly, the Tribunal said that from 1947 to 1956, no dividend had been declared by the Rayon Company and that the money which went into the purchase of these shares was borrowed by the assessee. In other words, the view of the Tribunal was, it was with borrowed funds that the assessee purchased the shares. It is no doubt true that there was no evidence to show that the money was specifically borrowed for the purpose of buying shares. But there was evidence before the Tribunal for its finding that the liabilities of the assessee exceeded its assets. The finding, therefore, that the shares were purchased with borrowed funds on which the assessee was paying interest, was a finding supported by evidence. The reasoning of the Tribunal that it is most improbable that the assessee would be investing borrowed money on which interest would have to be paid in shares which yielded no dividend, was correct. We cannot say that this was not a relevant circumstance for the Tribunal to take into consideration for coming to the conclusion that the transaction was an adventure in the nature of business. Looking into all the circumstances, the Tribunal negatived the case of the assessee that it had invested its funds with a view to earn dividend.
21……….
24. Mr Chagla for the respondent contended that the only question to be asked and answered is: What was the dominant intention of the assessee when it purchased the shares? If the dominant intention was to carry on an adventure in the nature of business, the profit can be taxed; otherwise not. In other words, the question is whether the assessee purchased the shares in a commercial spirit with a view to make profit by trading in them. The Tribunal found, after taking into account all the relevant circumstances that the dominant intention of the assessee was to make profit by resale of the shares and not to make an investment.”
42. In Commissioner of Income Tax, Hyderabad-Deccan v. Vazir Sultan and Sons, [1959] 36 ITR 175 (SC), the Hon’ble Supreme Court held that one of the relevant tests in determining whether or not the shares/security are capital asset or whether it is in the nature of fixed assets or constituted as stock-in-trade of the assessee’s business, fixed asset is what the owner turns to provide keeping the asset in his own possession, stock-in-trade is what he makes profit by parting with it and letting it change master. After noting several other decisions it was held in determining the question whether after acquiring the shares, the assessee dealt with it as an investor or carried on business with it treating it as stock-in- trade or as a trading asset what is relevant is that, if the case falls within the former category receipts by way of sale of such shares will be capital receipts but if it falls within the latter the receipts will be trading receipts and profits therefrom is business income and in deciding this question the object with which such operation are carried on assumes importance.
43. In Union of India v. Azadi Bachao Andolan
(SC), the Hon’ble Supreme Court pointed out that to decide as to whether the sale of shares amounted to capital gains or business income would require examination of facts. Further it was held that the capital investment and resale do not lose their capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced value motivated the investment. Further a transaction is not necessarily in the nature of trade because the purchase was made with the intention of resale. Further it was pointed out where the purchase of any article or of any capital investment, for instance shares is made without the intention to resell it at a profit, the resale under such changed circumstances would only be realization of capital and would not stamp the transaction with a business character.
44. The Calcutta High Court in Gyan Traders Ltd., (cited supra), followed the above two decisions of the Hon’ble Supreme Court. In Paragraph 15 of its Judgment, the Calcutta High Court has held as under:-
“15. If the above legal principles are applied to the facts of the case on hand, the only irresistible conclusion is to approve the view of the Commissioner of Income-tax (Appeals) who had considered all the relevant materials and details which were placed by the assessee. The learned Tribunal had failed to note that the assessee had maintained a separate account for investment, which fact was very material to consider the nature of transactions effected by the assessee during the relevant period.”
45. This Court in V.Amirtham Ammal, (cited supra), in Paragraphs 4 to 6 of its Judgment has held as under:-
“4. What should be noticed is that it is the cumulative effect or impression that is formed in the mind of the court of the totality of the facts and circumstances in each case, in the light of the principles just referred to, that should decide the issue and not by matching decided cases with the facts in a particular case.
5. Looking at the facts before us, the outstanding features are these:
(1) the assessee was not a regular dealer in shares in the sense that there was no transaction in shares engaged in by her before or after the isolated transaction on December 5, 1960;
(2) the subject-matter was shares in a company;
(3) their purchase was on August 6, 1960, and they were sold so soon thereafter on December 5, 1960;
(4) the transaction brought a sizable profit;
(5) the assessee, as circumstances showed, clearly anticipated that the managing director and his group of shareholders attempted or would attempt to acquire all the available shares in order to concentrate the power of the private company as much as possible in their hands and thus there would be a demand for the shares held by other shareholders.
6.Taking all these facts into account, the cumulative effect of them, to our minds, is that the transaction of sale cannot be said to be merely a conversion of one form of asset into another giving rise to capital gain. At any rate, we do not feel justified to differ from the conclusion of the Tribunal, in the circumstances, that the transaction was an adventure in the nature of trade. Learned counsel for the assessee took one or other of the circumstances we have mentioned in isolation and attempted to show that by itself was not conclusive on the question. What primarily influences our minds is the nature of the subject-matter of sale and the shortness of the time between purchase and sale of the shares coupled with the fact that the profit was anticipated or should have been anticipated and that there is no material on record to show that there was any urgency for the assessee to cash the shares so soon after their purchase. That last feature particularly seems to point against the purchase of shares on August 6, 1960, being an investment and the same being sold for any purpose other than making a profit. It is stated that this is an isolated transaction but that it related to shares in a private company which are not normally put in the share market for purchase or sale and that therefore there was no commercial motive. We are not impressed by this contention. Nor are we able to derive any assistance from Williams (H.M. Inspector of Taxes) v. Davies [[1945] 26 T.C. 371.] or Commissioners of Inland Revenue v. Reinhold [[1953] 34 T.C. 389.], for accepting the assessee’s contention that the transaction was not a commercial one. It was suggested for her that we should approach the question from the standpoint whether the Tribunal had material before it to sustain its conclusion. If that were the proper form of approach, we have no hesitation in stating that the Tribunal had certainly material. But, as pointed out by the Supreme Court in G. Venkataswami Naidu & Co. v. Commissioner of Income-Tax [[1959] 35 I.T.R. 549 (S.C.).], the question in such a case should be in the form whether the inference drawn by the Tribunal from the facts was justified in law. As it should be clear by now, we are of the view that the Tribunal was in this case so justified. We answer the question against the assessee with costs, counsel’s fee Rs. 250.”
46. The Central Board of Direct Taxes (CBDT), Department of Revenue, Ministry of Finance, Government of India, has issued the following 2 Circulars and 1 Instruction as detailed below:-
Sl.No.Circular No./Instruction No.Date
1.6/201629.02.2016
2.1827 (F.No.181/1/89-IT(AI))31.08.1989
3.4/200715.06.2007

 

47. In Circular No.6/2016 dated 29.02.2016, it has been clarified as follows:-
“3…….
(a)……..
(b) In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;
(c) In all other cases, the nature of transaction (i.e., whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.”
48. In Instruction No.1827 (F.No.181/1/89-IT(AI)) dated 31.08.1989, it has been clarified as follows:-
“2. Certain general principles in this regard were laid down by the Supreme Court in the case of G.Venkata Swami Naidu & Co. v. CIT [1959] 35 ITR 594 (SC). In this case the Supreme Court was dealing with a question whether the excess sum realised on the sale of certain plots was assessable as income from an adventure in the nature of business. The Supreme Court held that in deciding the character of such transaction, several factors were relevant. For instance:-

i. Whether the purchaser was a trader and the purchase of the commodity and its resale were allied to his usual trade or business or were incidental to it.

ii. The nature and quantity of the commodity purchased and resold – if the commodity purchased is in very large quantity, it could tend to eliminate the possibility of investment for personal use, possession or enjoyment.

iii. The repetition of the transaction.

3…..
4. The Supreme Court in this case also discussed the test of intention. It held that in cases where the purchase has been made solely and exclusively with the intention of resale at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying it or using it, the presence of such intention is a relevant factor and unless it is off-set by the presence of other factors, it would raise a strong presumption that a transaction is an adventure in the nature of trade.
5……….
8. In the case of Karam Chand Thapar and brothers (P) Ltd., v. CIT (1971) 83 ITR 899 it was held by the Supreme Court that the circumstance that the assessee had shown certain shares as investment in its books as well as its balance sheet was by itself not a conclusive circumstances, though it was a relevant circumstance.”
49. In Circular No.4/2007 dated 15.06.2007, it has been clarified as follows:-
“5. In the case of Commissioner of Income Tax (Central), Calcutta v. Associated Industrial Development Company (P) Ltd, ([1971] 82 ITR 586 (SC) ), the Supreme Court observed that:
‘Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.’
6…….
10. CBDT also wishes to emphasise that it is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-intrade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.
11. Assessing Officers are advised that the above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (and therefore giving rise to capital gains) or as stock-intrade (and therefore giving rise to business profits). The assessing officers are further advised that no single principle would be decisive and the total effect of all the principles should be considered to determine whether, in a given case, the shares are held by the assessee as investment or stock-intrade.”
50. The facts are not in dispute. The respondent-assessee Company was incorporated to carry out the business in consulting viz., in the business of investment counselling, such as rendering services like merchant banking subject to SEBI Regulations and to act as a security transfer agent for physical and deposit forms.
51. This appears to be ostensibly the main object for which the respondent-assessee Company was incorporated. However, it had no income from the said main object for which the respondent-assessee during the assessment year in question.
52. It is quite possible that unethical means were adopted in collusion with promoters of M/s.Shriram Group of Companies in funding the purchase of shares. An element of insider-trading is also evident, resulting in a huge profit in the hands of the respondent-assessee Company in the 2nd year of its incorporation by borrowing capital for investment in shares.
53. In this case, the respondent-assessee Company had borrowed a sum of Rs.104,10,00,000/- from M/s.Revathi Associates, a Partnership Firm in which the Director of the respondent-assessee Company was a partner in the year of its incorporation.
54. The said partnership firm M/s.Revathi Associates in turn had earlier borrowed a sum of Rs.130,37,10,000/- as mentioned in Table from Paragraph 18 of this Order, from 3 group Companies of M/s.Shriram Transport Finance Corporation Limited, out of which, a sum of Rs.104,10,00,000/- was lent to the respondent-assessee Company. The respondent-assessee Company invested an amount of Rs.101,18,95,901/- to purchase 19,86,240 shares of M/s.Shriram Transport Finance Corporation Limited out of the borrowed capital. These shares were sold immediately for a sum of Rs.129,04,56,927/- resulting in a net profit of Rs.27,85,61,026/- on account of sale of shares of M/s.Shriram Transport Finance Corporation Limited.
55. Apart from the above, the respondent-assessee Company also received a dividend income of Rs.35,84,00,000/- for the shares during the period when it held the shares of M/s.Shriram Transport Finance Corporation Limited.
56. Thus, it is evident that the money that was borrowed was only for the purpose of trading in it. Ordinarily, investment in shares are expected to be made only if surplus amounts was available in the hands of the respondent-assessee Company from its business. Whereas, in the present case, amounts were borrowed and were invested in the shares of M/s.Shriram Transport Finance Corporation Limited. Therefore, investment in the shares of M/s.Shriram Transport Finance Corporation Limited by the respondent-assessee Company out of the borrowed capital of Rs.104,10,00,000/- was to be treated as a business venture for trading in shares. The income from sale of shares by the respondent-assessee Company could not be claimed as income from shortterm capital gains under Section 111A of the Income Tax Act, 1961. It has to be treated as income from business of the respondent-assessee Company although the main object for which the respondent-assessee Company was incorporated was for consultancy service.
57. Since the investment in the shares of M/s.Shriram Transport Finance Corporation Limited was out of borrowed amounts which was sold immediately after the investment was made in the succeeding financial year, it has to be construed that the respondent-assessee Company was indeed incorporated for trading purpose although the main object of the respondent-assessee Company was for providing consultation in investment to its customers.
58. It is therefore held that the income gained from sale of shares is to be construed as business income of the respondent-assessee Company.
59. That apart, the share capital of the respondent-assessee Company was only Rs.1,00,000/-. Without any other income from the main object for which the respondent-assessee Company was incorporated, the respondent-assessee Company borrowed money and invested in shares. Therefore, it has to be construed that the amount was borrowed was only for its business purpose namely for trading purpose. Therefore, the profits made from the sale of the shares has to be treated as income from its business and not income from shortterm capital gains.
60. We are therefore unable to sustain the reasoning of the Income Tax Appellate Tribunal (ITAT) in Impugned Final Order dated 30.01.2015, dismissing the appellant’s Income Tax Department’s appeal before it. Therefore, this Tax Case Appeal deserves to be allowed.
61. We therefore answer the substantial question of law in favour of the appellant Income Tax Department and against the respondent-assessee Company.
62. Accordingly, this Tax Case Appeal stands allowed with consequently restoring the Order of the Assessing Officer. No costs.