Share investment versus trading stock: tax character depends on purchase intention and consistent treatment, not sale volume alone.

Tax treatment of share-sale receipts depends on the true character of the holding at acquisition and the surrounding conduct. Where shares are bought as investments, consistently reflected as assets, and not treated as stock-in-trade, later sale normally results in capital gains rather than business income; the volume of sales alone is not decisive. The discounted interest on IDBI bonds was treated as assessable in the manner indicated by earlier binding decisions, with the point not disputed on merits.

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Issues: (i) Whether profits arising from the sale of shares held by the assessee were taxable as business income or as capital gains. (ii) Whether the discounted interest on IDBI bonds received was assessable in the relevant assessment year.

Issue (i): Whether profits arising from the sale of shares held by the assessee were taxable as business income or as capital gains.

Analysis: The determining factor was whether the shares were acquired and held as investment or as stock-in-trade. The governing principle, drawn from the settled law on the subject, is that mere holding of shares does not amount to carrying on a business in shares, and the character of the transaction must be tested from the inception of purchase. Where the purchase is by way of investment and the shares are consistently treated as assets, the later sale ordinarily retains the character of realisation of investment and not trading activity. The materials showed that the assessee had invested mainly in group concerns, had consistently treated the holdings as investments, and the Revenue had accepted the same pattern in earlier and later years. The magnitude of sales in the relevant years did not by itself convert the investment activity into a trading venture.

Conclusion: The receipts from the sale of shares were capital gains and not business income, in favour of the assessee.

Issue (ii): Whether the discounted interest on IDBI bonds received was assessable in the relevant assessment year.

Analysis: This question was stated to be covered by earlier binding decisions and was not disputed on merits. The court accepted that the receipt had to be assessed in the manner indicated by those decisions.

Conclusion: The issue was answered against the assessee and in favour of the Revenue.

Final Conclusion: The appeals succeeded on the principal controversy concerning the character of the share-sale receipts, while the separate issue relating to discounted interest was decided against the assessee. The Tribunal's view treating the share-sale profits as business income was set aside.

Ratio Decidendi: Whether share-sale receipts constitute business income or capital gains depends on the true character of the holding at the time of purchase and the surrounding conduct, and investments consistently treated as assets do not become trading stock merely because they are later sold at a profit.

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