Share trading profit versus capital gain depends on surrounding circumstances showing resale intent, not enduring investment

Where shares are acquired in a commercial setting, financed by borrowed funds, sold shortly afterwards in small lots, and the proceeds reinvested elsewhere, the surrounding circumstances may show that the purchase was for resale at a profit rather than for obtaining managing agency control or making a long-term investment. On that footing, the shares are treated as stock-in-trade and the surplus on sale is taxable as business profit under section 10 of the Indian Income-tax Act, 1922, not as capital gain under section 12B.

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Issues: (i) Whether there was material to support the finding that the shares were purchased with a view to acquire the managing agency and control of the company, or whether they constituted stock-in-trade. (ii) Whether, if the shares were not stock-in-trade, the profit on sale was capital gain chargeable under section 12B of the Indian Income-tax Act, 1922.

Issue (i): Whether there was material to support the finding that the shares were purchased with a view to acquire the managing agency and control of the company, or whether they constituted stock-in-trade.

Analysis: The surrounding circumstances showed that the shares were acquired in a commercial setting and sold shortly thereafter in small lots for profit. The purchase was financed by borrowed money, the interval between purchase and sale was short, and the proceeds were reinvested elsewhere. The Court treated the totality of circumstances as decisive and held that the assessee was not shown to have acquired the shares for obtaining the managing agency or as a long-term investment.

Conclusion: The finding that the shares were bought to acquire the managing agency and control of the company was unsupported by material, and the shares were held to be stock-in-trade of the assessee.

Issue (ii): Whether, if the shares were not stock-in-trade, the profit on sale was capital gain chargeable under section 12B of the Indian Income-tax Act, 1922.

Analysis: Since the shares were held to be stock-in-trade and the sale proceeds represented trading profit, the surplus was not assessable as capital gain. The Court held that the receipt fell within business profits chargeable under section 10 rather than capital gains under section 12B.

Conclusion: The profit on sale was not capital gain chargeable under section 12B; it was taxable as business profit under section 10.

Final Conclusion: The reference was answered against the assessee and in favour of the revenue, with the sale surplus treated as taxable trading profit.

Ratio Decidendi: Where the surrounding circumstances show that shares were acquired for resale at a profit and not for enduring investment or acquisition of control, the surplus on sale is business income and not capital gain.

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