SECTION 28(I) OF THE INCOME – TAX ACT, 1961 – BUSINESS INCOME – CHARGEABLE AS – TESTS FOR DISTINCTION BETWEEN SHARES HELD AS STOCK-IN-TRADE AND SHARES HELD AS INVESTMENT
INSTRUCTION NO 1827, DATED 31-8-1989
[ Note : This INSTRUCTION NO 1827 supplemented by CBDT Circular No 4/2007 dated 15-6-2007 : Where an assessee has two portfolios ( investment portfolio and trading portfolio ), the assessee may have income under both heads, i.e., capital gains as well as business income. ]
1. The question whether a particular assessee is a trader in shares or the shares are held as capital assets sometimes gives rise to disputes and litigation. Over the years the courts have laid down the various tests or factors to be taken into account in determining this question.
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  35 ITR 594. 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. The Supreme Court observed that the presence of all these factors may be held in the court to draw an inference that a transaction is in the nature of trade but it is not a matter of merely counting the number of facts and circumstances pro and con what is important to consider is their distinctive character. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
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. In the case of H. Mohammad & Co. v. CIT  107 ITR 637 the Gujarat High Court observed that a stock-in-trade is something in which a trader or a business man deals, whereas his capital asset is something with which he deals. According to the High Court one of the indicators for deciding as to what is stock-in-trade is whether a particular assessee is buying or selling the goods or commodity or whether he has merely invested his money with a view to earning further income or with a view to carrying on his other business. It was further held by the High Court that the distinction between stock-in-trade and investment is that of selling outright in the course of the business activity and deriving income from exploitation of one’s own assets.
6. These general principles hold good in respect of shares also. However certain specific issues relevant for determining this question with reference to shares have also been decided by the courts. In the case of Sardar Indra Singh & Sons Ltd. v.CIT  24 ITR 415, the Supreme Court was dealing with the case of a company which was incorporated with the object, inter alia of carrying on the business of bankers, financiers, managing agents and secretaries and was also empowered to invest and deal with the monies of the company not immediately required for its business upon such securities and in such manner as might from time to time be determined. It was held by the Supreme Court in this case that to constitute business income, it was not necessary that surplus should have resulted from such a course of dealing in securities as by itself would amount to the carrying on of business or if the realisation of securities is a normal step in carrying on the assessee’s business. The Supreme Court observed that the principle applicable in all such cases was well settled and the question always was whether the sales which produced the surplus were so connected with the carrying on of the assessees business that it could fairly be said that the surplus was the profit and gains of such business. On the facts of this case it was held that the surplus resulting from sale of shares and securities constituted business income.
7. The aforesaid principles laid down by the Supreme Court was followed by Andhra Pradesh High Court in the case ofSBH v. CIT  151 ITR 703. The main business of the SBH was to accept deposits and to advance loans and the money constituted its stock-in-trade. The banking company has to carry on its business in accordance with the provisions of the Banking Regulation Act, 1949. Section 24 of the said Act requires every banking company to maintain in India either in cash or in the shape of gold or in the shape of unencumbered approved securities, 20% of its total time and demand liabilities at any given point of time. It was held by the High Court that what section 24 of the said Act did was to insist on the observance of a normal prudent banking business practice. If the banking company chooses to invest the money in unencumbered approved securities it is only one mode of keeping a portion of its deposits in ready cash or readily convertible into cash securities. Any income arising from the sale of such securities is, therefore closely connected with the banking business and is business income, it was concluded by the High Court.
8. In the case of Karam Chand Thapar & Brothers (P.) Ltd. v. CIT  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.
9. The decisions in CIT v. Associated Industrial Development Co.  82 ITR 586 (SC) and A.N. Ramaswami Chettiar v. CIT  48 ITR 771 (Mad.) may also be referred to for guidance.
10. Although the tests laid down by the courts may help determine the issue in particular cases the decision will ultimately turn on the facts of each case.