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2026 Supreme(Online)(ITAT) 10395
INCOME TAX APPELLATE TRIBUNAL (AHMEDABAD BENCH)
Annapurna Gupta, Accountant Member, Siddhartha Nautiyal, Judicial Member
Deputy Commissioner of Income Tax – Appellant
Versus
Kutir Navinchandra Patel – Respondent
I.T.A. No.2309/Ahd/2025
For the Appellants/Petitioners: S. N. Divatia, Samir Vora
For the Respondents: Sher Singh
Income from the sale of shares constitutes capital gains rather than business income when the transactions are genuine, delivery-based, and consistently treated as investments in the account books, notwithstanding the use of borrowed funds or short-term holding periods if systematic trading activity is absent.
Headnote:(A) Income Tax Act, 1961 - Section 10(38) - Capital Gains vs. Business Income - Treatment of share transactions - Assessee held shares as investments - Whether short-term and long-term capital gains can be recharacterized as business income - Held, transactions were delivery-based, consistently reflected as investments in books, and lacked indicators of systematic trading activity - CBDT Circular No. 6/2016 mandates that if listed shares are held for more than 12 months, the characterization as capital gains cannot be disputed - Mere use of borrowed funds does not convert investment into business transactions - Addition deleted by CIT(Appeals). (Paras 9, 15, 16, 17)
Facts of the case:
The assessee, an individual, declared Short Term Capital Gain and Long Term Capital Gain on the sale of listed equity shares. The Assessing Officer treated these gains as “business income” on the basis that the assessee utilized unsecured loans for investments, indicating profit-oriented business activity. The CIT(Appeals) deleted this addition, reaffirming the investment classification.
Findings of Court:
The tribunal found that the Assessing Officer failed to provide evidence of bogus or sham transactions. The shares were held in demat form, reflecting investment intent. Based on jurisdictional precedents and CBDT circulars, the tribunal upheld the order of the CIT(Appeals) deleting the addition of Rs. 13,10,30,341/-.
Issues: Whether capital gains from share transactions should be recharacterized as business income based on the utilization of borrowed funds and frequency of transactions.
Ratio Decidendi: Mere utilization of borrowed funds or volume of transactions does not alter the character of an investment into stock-in-trade if the intention of the assessee is to hold the shares as investments, provided the transactions are not bogus and are consistently treated as investments in the books of account.
Result: Appeal of the Revenue is dismissed.
| Table of Content |
|---|
| 1. factual background of the assessment order and the grounds of appeal regarding recharacterization of capital gains to business income. (Para 1 , 2 , 3 , 4 , 5 , 6 , 7) |
| 2. cit(appeals) reasoning regarding the nature of share transactions and the applicability of cbdt circulars. (Para 8 , 9 , 10 , 11 , 12) |
| 3. tribunal's affirmation that borrowed funds do not invalidate investment status and the necessity of objective analysis of trading intent. (Para 13 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22) |
O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Revenue against the order passed by the Ld. Commissioner of Income Tax (Appeals), (in short “Ld. CIT(A)”), National Faceless Appeal Centre (in short “NFAC”), Delhi vide order dated 21.08.2025 passed for A.Y. 2017-18.
2. The Revenue has raised the following grounds of appeal:
(a) Whether, the Ld. Commissioner of Income-Tax (Appeals) has erred in law and on facts in deleting the addition treating capital gains as business income of Rs. 8,51,46,889/- even though the assessee has primarily traded in shares of only one entity & the period of holding in some cases was on 3 days.
(b) Whether, on the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) has not appreciated that the intent of the transactions was under question.
(c) Whether, on the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) ought to have upheld the order of the Assessing Officer.
(d) The appellant craves leave to add, alter and / or to amend all or any the ground before the final hearing of the appeal.
3. At the outset, we observe that the appeal is time barred by 27 days. The delay of 27 days is condoned on due consideration of facts of assessee’s case and owing to causing no perceptible prejudice to other side.
4. The brief facts of the case are that the assessee is an individual engaged in the business of manufacturing corrugated boxes and trading in cloth through proprietary concerns, namely Dolphin Packaging and Dolphin Associates. The assessee filed his return of income for the assessment year 2017-18 declaring total income of Rs. 8,62,20,910/-, which included Short Term Capital Gain (STCG) of Rs. 8,51,46,889/- and exempt Long Term Capital Gain (LTCG) of Rs. 4,58,83,452/- arising from sale of listed equity shares. The case was selected for scrutiny under CASS and assessment was completed under section 143(3) on 20.12.2019.
5. During the course of assessment proceedings, the Assessing Officer issued various notices calling for details such as demat account, contract notes, source of investment, and loan details. The Assessing Officer issued a show cause notice dated 09.12.2019 proposing to treat the capital gains as business income. The assessee filed reply on 13.12.2019 along with documentary evidences explaining that the shares were held as investments, transactions were delivery-based, and investments were made out of own funds and business surplus. The assessee also submitted that the shares were consistently reflected as investments in the books and that there was no intention to carry on trading activity.
6. However, the Assessing Officer rejected the explanation primarily on the ground that the assessee had utilized unsecured loans for making investments in shares and that such loans were repaid upon sale of shares, indicating a systematic and profit-oriented activity akin to business. The Assessing Officer held that the entire activity constituted business activity. Accordingly, the Assessing Officer treated both STCG of Rs. 8,51,46,889/- and LTCG of Rs. 4,58,83,452/- aggregating to Rs. 13,10,30,341/- as business income and made addition under the head “Profits and Gains of Business or Profession.”
7. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(Appeals). The assessee submitted that the shares were consistentl
