Share-sale surplus depends on intention, holding period and separate portfolios: investment gains may be capital gains, trading gains business income.

Share-sale surplus is characterised by the assessee's intention at acquisition and the surrounding indicators, including entries in the books, source of funds, frequency of transactions, holding period, valuation method and the existence of separate portfolios. Where investment shares are shown separately, funded without borrowings, supported by dividend income and held for a long period, the surplus retains the character of capital gains. Where shares are sold within a very short period, the activity may be treated as trading and the surplus taxed as business income. A taxpayer may maintain genuine separate investment and trading portfolios if the distinction is real and reflected in accounts and conduct.

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Issues: Whether profits from sale of shares were assessable as capital gains or as business income, and whether the assessee could maintain separate investment and trading portfolios for tax purposes.

Analysis: The decisive consideration was the assessee's intention at the time of acquisition of shares, as reflected from the treatment in the books, source of funds, frequency of transactions, period of holding, valuation method, and the existence of separate portfolios. The assessee had shown the investment portfolio separately in the balance sheet, had not used borrowed funds, had earned dividend income, and had maintained a distinct trading portfolio for regular share-dealing activity. Applying the cumulative effect of these factors, the Tribunal accepted that shares held as investment and sold after a long holding period retained the character of capital assets. At the same time, shares sold within a very short period were treated as having been dealt with in the nature of trade. The Tribunal also applied the principle that a taxpayer may maintain two distinct portfolios, one for investment and another for business, if the distinction is real and supported by accounts and conduct.

Conclusion: The surplus arising from shares held as investment was held taxable under the head capital gains, while gains arising from shares sold within 30 days were held taxable as business income. The appeal was therefore partly allowed.

Ratio Decidendi: Where an assessee maintains genuine separate investment and trading portfolios, the character of share-sale surplus depends on the intention at acquisition and the surrounding indicators; long-held investment shares yield capital gains, whereas very short-held shares may be taxed as business income.

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