Tests laid down to distinguish shares gains as LTCG/STCG vs. business profits

CIT vs. Vaibhav J. Shah (HUF) (Gujarat High Court)

The assessee offered the gains from buying and selling shares as LTCG/ STCG. The AO held that the assessee was “dealing heavily in shares” with high frequency and magnitude and that the gains were assessable as business profits. This was reversed by the CIT (A) and Tribunal. On appeal by the department to the High Court, HELD dismissing the appeal:

In Rewashanker A. Kothari 283 ITR 338 (Guj) six objective tests have been laid down to distinguish between capital gains and business profits on sale of shares. From this, it is clear that where number of transactions of sale and purchase of shares takes place, the most important test is the volume, frequency, continuity and regularity of transactions of purchase and sale of the shares. However, where there is repetition and continuity, coupled with magnitude of the transaction, bearing reasonable proportion to the strength of holding, then an inference can be drawn that activity is in the nature of business. Learned counsel for the revenue from the records could not demonstrate that there were large number of transactions which had frequency, volume, continuity and regularity and fell within the tests laid down by the Division Bench of this Court. Consequently, the income earned by the assessee from trading in shares under the head long term capital gain / short term capital gain was correctly shown.