Investment portfolio treatment of share sales: gains taxed as short-term capital gains, not business income, where intention was investment.

Shares shown in the balance sheet as investments, and held in an investment portfolio, give rise to capital gains rather than business income where the surrounding facts show the purchase was intended for investment and not trading. The assessee maintained separate investment and trading portfolios, and the CBDT circular recognised that such dual portfolios may be taxed under different heads according to their character. On the facts, the shares were found to have been acquired and held as investments, so the gain on sale was assessable as short-term capital gain and not as business income.

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Issues: Whether the gain arising from sale of shares was assessable as short-term capital gain or as business income.

Analysis: The assessee reflected the shares as investments in the balance sheet and the income from their sale in the profit and loss account as short-term capital gain. The decisive factor was the intention at the time of purchase, which was found to be investment and not trading. The supplementary CBDT Circular No. 4 of 2007 recognised that an assessee may maintain two portfolios, namely an investment portfolio and a trading portfolio, and that income from each is taxable under the appropriate head. The earlier Instruction No. 1827 stood supplemented by that circular. On the facts, the material on record showed that the assessee held the shares in an investment portfolio.

Conclusion: The gain from sale of shares was liable to be assessed as short-term capital gain and not as business income.

Ratio Decidendi: Where shares are shown and held as investments and the surrounding facts establish an investment portfolio, the resulting gain is taxable under the head capital gains even if the assessee also has a trading portfolio.

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