Gains from Sale of Delivery-Based Share Investments Are Assessable Under Capital Gains, Not Business Income

By | May 18, 2026
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Gains from Sale of Delivery-Based Share Investments Are Assessable Under Capital Gains, Not Business Income

Issue

Whether the gains arising from the sale of listed equity shares, which were consistently held as investments and traded on a delivery basis, are assessable under the head “Capital Gains” or as “Business Income,” given that the assessee utilized unsecured loans to fund the investments.

Facts

  • Assessee Profile: The assessee is an individual engaged in the core businesses of manufacturing corrugated boxes and trading in cloth through proprietary concerns.

  • Income Declared: For the Assessment Year 2017-18, the assessee declared Short-Term Capital Gains (STCG) and Long-Term Capital Gains (LTCG) arising from the sale of listed equity shares.

  • AO’s Action: The Assessing Officer (AO) reclassified the entire capital gains as business income, reasoning that the use of unsecured loans to fund the share purchases demonstrated a systematic, commercial, and profit-oriented trading activity.

  • First Appeal Findings: The Commissioner (Appeals) observed that the shares were consistently recorded as investments in the books, the transactions were genuine and delivery-based, and there was no evidence of an organized trading mechanism or frequent churning.

  • First Appeal Order: The Commissioner (Appeals) held that using borrowed funds does not automatically alter the character of an investment, deleted the AO’s addition, and ruled the LTCG eligible for exemption under Section 10(38) while retaining the STCG under the head “Capital Gains.”

Decision

  • Held, yes: The gains derived from the sale of shares are assessable strictly under the head “Capital Gains” and cannot be treated as “Business Income.”

  • Held, yes: The Commissioner (Appeals) was fully justified in deleting the business income addition made by the Assessing Officer, as the delivery-based nature of the transactions supported the investment intent.

Key Takeaways

  • Source of Funds is Not Determinative: The mere utilization of interest-bearing borrowed capital or unsecured loans to purchase shares does not conclusively turn an investor into a trader, nor does it automatically transmute capital gains into business profits.

  • Book Treatment and Delivery Matter: Where an assessee consistently reflects shares as “Investments” in their financial statements and engages in non-speculative, delivery-based transactions, the residency of the income remains under the head “Capital Gains.”

  • Dominant Intent Rule: The primary intent at the time of acquiring the shares (investment versus trading asset) dictates the tax head. Concurrent regular business operations in unrelated fields (e.g., manufacturing and cloth trading) further distinguish the share portfolio as an independent investment activity.

IN THE ITAT AHMEDABAD BENCH ‘D’
Deputy Commissioner of Income-tax
v.
Kutir Navinchandra Patel*
Siddhartha Nautiyal, Judicial Member
and Smt. Annapurna Gupta, Accountant Member
IT Appeal No. 2309 (Ahd) of 2025
[Assessment year 2017-18]
APRIL  23, 2026
S. N. Divatia and Samir Vora, ARs for the Appellant. Sher Singh, CIT-DR for the Respondent.
ORDER
Siddhartha Nautiyal, Judicial Member.- This appeal has been filed by the Revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 21.08.2025 passed for A.Y. 2017-18.
2. The Revenue has raised the following grounds of appeal:
“(a) Whether, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the addition treating capital gains as business income of Rs. 8,51,46,889/- even though the assessee has primarily traded in shares of only one entity & the period of holding in some cases was on 3 days.
(b) Whether, on the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has not appreciated that the intent of the transactions was under question.
(c) Whether, on the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) ought to have upheld the order of the Assessing Officer.
(d) The appellant craves leave to add, alter and / or to amend all or any the ground before the final hearing of the appeal. “
3. At the outset, we observe that the appeal is time barred by 27 days. The delay of 27 days is condoned on due consideration of facts of assessee’s case and owing to causing no perceptible prejudice to other side.
4. The brief facts of the case are that the assessee is an individual engaged in the business of manufacturing corrugated boxes and trading in cloth through proprietary concerns, namely Dolphin Packaging and Dolphin Associates. The assessee filed his return of income for the assessment year 2017-18 declaring total income of Rs. 8,62,20,910/-, which included Short Term Capital Gain (STCG) of Rs. 8,51,46,889/- and exempt Long Term Capital Gain (LTCG) of Rs. 4,58,83,452/- arising from sale of listed equity shares. The case was selected for scrutiny under CASS and assessment was completed under section 143(3) on 20.12.2019.
5. During the course of assessment proceedings, the Assessing Officer issued various notices calling for details such as demat account, contract notes, source of investment, and loan details. The Assessing Officer issued a show cause notice dated 09.12.2019 proposing to treat the capital gains as business income. The assessee filed reply on 13.12.2019 along with documentary evidences explaining that the shares were held as investments, transactions were delivery-based, and investments were made out of own funds and business surplus. The assessee also submitted that the shares were consistently reflected as investments in the books and that there was no intention to carry on trading activity.
6. However, the Assessing Officer rejected the explanation primarily on the ground that the assessee had utilized unsecured loans for making investments in shares and that such loans were repaid upon sale of shares, indicating a systematic and profit-oriented activity akin to business. The Assessing Officer held that the entire activity constituted business activity. Accordingly, the Assessing Officer treated both STCG of Rs. 8,51,46,889/- and LTCG of Rs. 4,58,83,452/- aggregating to Rs. 13,10,30,341/- as business income and made addition under the head “Profits and Gains of Business or Profession.”
7. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(Appeals). The assessee submitted that the shares were consistently treated as investments in the audited financial statements, were held in dematerialized form on delivery basis, and the intention at the time of acquisition was to invest and not to trade. The assessee further submitted that the LTCG arose from shares held for more than 12 months and therefore, in view of CBDT Circular No. 6/2016 dated 29.02.2016, the same could not be disputed by the Assessing Officer. The assessee also furnished evidences including demat statements, purchase and sale invoices, bank statements, capital account details, and financial statements to demonstrate that investments were substantially made out of own funds and business capital. The assessee also submitted that he had substantial opening capital balance of Rs. 1.39 crores and was carrying on substantial business activity, which was ignored by the Assessing Officer. The assessee further submitted that even if borrowed funds were used, the same would not ipso facto convert investment transactions into business transactions, as held by various judicial authorities including Pr. CIT. v. Bhanuprasad D Trivedi (HUF) (Gujarat), CIT v. Gopal Purohit /[2011] 336 ITR 287 (Bombay) and CIT v. Rewashanker A. Kothari 283 ITR 338 (Gujarat). The assessee also emphasized that the transactions were limited, largely confined to a single scrip (Kushal Ltd.), and there was no frequency, multiplicity or organized activity indicative of trading.
8. The CIT (Appeals), after considering the assessment order, submissions of the assessee and material on record, first addressed the issue of Rule 46A and observed that the documents relied upon by the assessee were not in the nature of fresh additional evidence but were already part of the assessment record or constituted elaboration of earlier submissions. Accordingly, the same were admitted and considered for adjudication on merits.
9. On the substantive issue, the CIT(Appeals) observed that the Assessing Officer had failed to carry out any objective analysis of relevant factors such as intention, holding period, frequency, and accounting treatment, and had instead proceeded merely on presumptions regarding use of borrowed funds. With regard to LTCG, the CIT(Appeals) recorded a categorical finding that the shares were held for more than 12 months and were consistently reflected as investments in the balance sheet. There was no allegation of bogus or sham transactions. Therefore, in terms of para 3(b) of CBDT Circular No. 6/2016, the Assessing Officer was bound to accept the treatment adopted by the assessee. On these specific facts, the CIT(Appeals) held that the LTCG of Rs. 4.58 crores was rightly claimed as exempt under section 10(38) and could not be recharacterized as business income.
10. As regards STCG, the CIT(Appeals) applied the judicially settled tests and examined the specific facts of the assessee’s case. The CIT(Appeals) noted that the shares were held on delivery basis in demat account, the investments were concentrated in a limited number of scrips rather than diversified trading, there was no evidence of frequent or systematic trading activity, and the assessee did not have any infrastructure or organizational setup for share trading. The accounting treatment consistently reflected the shares as investments and not as stockin-trade. The CIT(Appeals) also noted that the Assessing Officer had failed to bring any material on record to demonstrate speculative activity, repetitive transactions, or business-like conduct.
11. On the issue of borrowed funds, the CIT(Appeals) held that the Assessing Officer’s reliance on this factor was misplaced and contrary to settled law. Relying on jurisdictional High Court decisions, the CIT(Appeals) held that utilization of borrowed funds, in absence of other indicators of business activity, does not alter the character of investment transactions. In the present case, the assessee’s intention to invest was clearly borne out from the books of account, holding pattern, and overall conduct.
12. In view of these detailed findings, the CIT(Appeals) held that the entire addition of Rs. 13,10,30,341/- made by treating capital gains as business income was unsustainable both in law and on facts and accordingly deleted the same. Since the appeal was allowed on merits after detailed consideration of evidences and legal position, the grounds relating to violation of principles of natural justice were treated as academic and not adjudicated separately.
13. The Department is in appeal before us against the order passed by CIT(Appeals) allowing the appeal of the assessee.
14. We have heard the rival contentions and perused the material available on record. The solitary issue for consideration is whether the Ld. CIT(Appeals) was justified in deleting the addition of Rs. 13,10,30,341/-made by the Assessing Officer by treating the Short Term Capital Gain and Long Term Capital Gain declared by the assessee as business income.
15. On a careful consideration of the facts of the case, we find that the Ld. CIT(Appeals) has passed a well-reasoned and speaking order after duly appreciating the factual matrix and the settled legal position governing the issue. It is an undisputed fact emanating from the assessment order itself that there is no allegation by the Assessing Officer that the transactions in shares are bogus, sham or in the nature of penny stock transactions. The genuineness of purchase and sale of shares, supported by demat statements, contract notes and banking channels, has not been doubted. It is further an admitted position that the shares giving rise to Long Term Capital Gain were held for more than the stipulated period of 12 months and were consistently reflected as “investments” in the books of account of the assessee.
16. In such factual background, we find that the Ld. CIT(Appeals) has correctly applied the binding CBDT Circular No. 6/2016 dated 29.02.2016, particularly para 3(b), which mandates that where listed shares are held for more than 12 months and the assessee treats the same as investments, the Assessing Officer shall not dispute the characterization of income as capital gains. The Assessing Officer, in the present case, has disregarded the said binding circular without recording any finding that the transactions were non-genuine. Therefore, the Ld. CIT(Appeals) was justified in holding that the Long Term Capital Gain of Rs. 4,58,83,452/-is to be assessed under the head “Capital Gains” and is eligible for exemption under section 10(38) of the Act.
17. With regard to the Short Term Capital Gain, we find that the Ld. CIT(Appeals) has examined the issue in the light of well-settled judicial principles governing distinction between investment and trading. The factual findings recorded by the Ld. CIT(Appeals), which remain uncontroverted by the Revenue, clearly demonstrate that the shares were held on delivery basis in dematerialized form, the investments were largely concentrated in a single scrip, there was no frequency or multiplicity of transactions indicative of systematic trading, and the assessee did not have any infrastructure or organized activity for dealing in shares as a business. Further, the accounting treatment consistently reflected the shares as investments and not as stock-in-trade. These factual findings in our view establish that the intention of the assessee was to hold the shares as investments and not to trade.
18. The sole basis adopted by the Assessing Officer for recharacterizing the income is the alleged use of borrowed funds. In our considered view, such reasoning is unsustainable in law. The Hon’ble jurisdictional High Court in the case of Bhanuprasad D. Trivedi (HUF)(supra), following the earlier decision in Rewashanker A. Kothari (supra), has categorically held that mere utilization of borrowed funds or volume of transactions does not alter the character of investment into stock-in-trade if the intention of the assessee is to hold the shares as investments. Similarly, the Hon’ble Bombay High Court in Gopal Purohit (supra) has upheld the importance of consistency and intention in determining the nature of income from share transactions. The ratio laid down in these judgments squarely applies to the facts of the present case.
19. We further find that the Assessing Officer has not carried out any objective analysis with respect to frequency of transactions, holding period, intention at the time of purchase, or treatment in the books of account, and has proceeded merely on presumptions arising from the flow of funds. In contrast, the Ld. CIT (Appeals) has dealt with each of these aspects in detail and has recorded categorical findings of fact in favour of the assessee. No material has been brought on record by the Revenue to controvert these findings.
20. In view of the above factual and legal position, we are of the considered opinion that the Ld. CIT(Appeals) has correctly appreciated the facts of the case and applied the settled principles of law in holding that the gains arising from sale of shares are assessable under the head “Capital Gains” and not as “Business Income.”
21. Accordingly, we find no infirmity in the order of the Ld. CIT(Appeals) deleting the addition of Rs. 13,10,30,341/-. The same is hereby upheld and the grounds raised by the Revenue are dismissed.
22. In the result, the appeal of the Revenue is dismissed.