In the case of Smt. Yamini Khandelwal[1] (Taxpayer), the issue which arose before the Kolkata Income Tax Appellate Tribunal (Tribunal) was whether income arising from sale of shares/mutual funds can be classified under the head “profits and gains from business or profession” or “capital gains”. In this case, the Taxpayer was engaged in the business of trading of derivatives. The Taxpayer also earned income from sale of shares/mutual funds, which were offered to tax under the head ”capital gains”. The said position was consistent with the position adopted by the Taxpayer in past years. The tax authority assessed the income as business income on the basis that there was a high volume of transactions undertaken and the Taxpayer had used borrowed funds for the purposes of acquiring shares and mutual funds.
The Tribunal referred to various judicial precedents and circulars of the Central Board of Direct Taxes (CBDT) on the issue. The Tribunal applied the factor of intention of parties in order to determine the characterization of income. The Tribunal held that since the Taxpayer had disclosed the shares/mutual funds as investments rather than as current asset in her books of account, the Taxpayer’s intention of investing in shares/mutual funds through stock exchanges was always to earn capital gains and dividends by holding the shares. Also, the Taxpayer had consistently adopted such position of characterizing the income as capital gains. Thus, applying the rule of consistency, the Tribunal noted that the tax authority could not bring on record any material to demonstrate the change in treatment. The Tribunal held that mere volume of transactions and utilization of borrowed funds are not criteria to alter the treatment given by the Taxpayer about her investments in the books in past tax years. Thus, the Taxpayer should be treated as investor and income earned by the Taxpayer on shares/mutual funds transactions should be classified under the head “capital gains”.
