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August 8, 2022

Sale of shares held as investment is a capital gain

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Sale of shares held as investment is a capital gain

Facts and Issues of the case

The assessee is a Limited Company and is engaged in the business as consultancy service, trading and investment in securities. The Assessing Officer found that the assessee had sold shares mainly in one company namely Sintex Industries Limited (for short SIL).

The assessee has traded in shares of SIL and earned huge profit and claimed the same as capital gain. Therefore, a  show cause notice was issued to the assessee and  was required to explain why the Short Term Capital Gain (STCG) of Rs. 22.36 crore should not be taxed as business  income,  since there was no business activity  by  the assessee  other than these sale of SIL shares.

The assessee replied that it had made investment in shares of Sintex Industries Ltd. company only with a motive to hold it as investment and the shares had never been converted into stock-in- trade.

Observations by the Court

We have given our thoughtful consideration and perused the materials available on record including the Paper Book field by the assessee. It is an undisputed fact that the assessee is maintaining its shareholding in two separate portfolios namely one as “investment” and another as “stock-in-trade”.The method of maintaining two portfolios is fully recognized under the accounting parlance.

It is also undisputed fact by the Revenue that 51,93,393 equity shares  of  Sintex Industries Ltd. was held by the assessee as “investment” which is reflecting in the balance sheet of the assessee.  The assessee acquired the above shares with its intention to hold the same as an investment. With a view to safeguarding the investment made in SIL shares and also to see the investment does not erode due to volatile conditions of the share market at all times and depending upon the favourable situation, the assessee disposed of a part of its investment in SIL Shares.  Considering the market conditions the assessee sold SIL shares which was held as “investment” and resulted in short term capital gain to the assessee.

Thus, the sale of shares and consequential short term capital gain does not partake the character of “business income” as held by the Assessing Officer. As rightly stated by the assessee, the above shares, if the assessee retained and sold in April, 2011, the above transaction would be long term capital gain which is also exempt u/s. 10(38) of the Act. This submission of the assessee cannot be ignored. In such a situation, the assesse is not bound to pay tax, as the same exempt from payment of any taxes on sale of such shares as long term capital gain. But the assessee with a view to safeguarding the investment held by it and also in order to see the value of its “investment” dos not erode due to volatile conditions of the share market.

The assessee has chosen to sale the shares as short term capital gain during the favourable market conditions. It is not the case that the assessee has not paid the short term capital gain. This clearly shows the bona fide intention of the assessee in promptly paying the short term capital gain taxes which is legally bound to pay by the assessee.

We also note that the assessee was indulging in sale of shares for the assessment year 2008-09 wherein regular assessment is completed by the Assessing Officer accepting the short term capital gain as offered by the assessee.  Similarly, for the Assessment Year 2010-11, the regular assessment u/s. 143(3) was completed accepting the return filed by the assessee.   Thus, the assessing Officer cannot take a different stand for the present assessment year.

The method of maintaining two portfolios is fully recognized under the accounting parlance

We hold that the sale of SIL shares held by the assessee as investment is to be treated only as short term capital gain and not as business income.


The shares held as investment and sold have to be treated as capital gain. Such income cannot be taxed as business income.


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