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2026 Supreme(Online)(ITAT) 11398
INCOME TAX APPELLATE TRIBUNAL (CHENNAI BENCH)
ALTIUS SECURITIES TRADING PVT. LTD. CHENNAI – Appellant
Versus
DCIT CORPORATE CIRCLE-1(1) CHENNAI – Respondent
ITA 653/CHNY/2026[2008-09]
Gains from sale of shares held as investments, with proper demarcation of portfolios and consistent accounting treatment, are assessable as short-term capital gains, not business income.
Headnote:(A) Income Tax Act, 1961 - Sections 14A, 28, 45, 111A - Income Tax Rules, 1962 - Rule 8D - CBDT Circular No. 4/2007 dated 15.06.2007 - Whether profit on sale of shares held as investments is assessable as business income or short-term capital gains - An assessee can maintain two separate portfolios for investment and trading - Maintaining separate portfolios, consistent accounting treatment, and use of own funds for investments support classification as capital gains. (Paras 7, 8, 9)
(B) Income Tax Act, 1961 - Section 14A - Rule 8D - Disallowance of expenditure relating to exempt income - Only investments that yielded exempt income during the year should be considered for computing average value of investments for Rule 8D(2)(iii). (Para 13)
Facts of the case:
The assessee is a company engaged in both trading of shares and derivatives and making investments of surplus funds in shares for earning dividend and capital gains. The assessee maintained separate portfolios for stock-in-trade and investments, and declared gains on sale of investments as short-term capital gains. The Assessing Officer re-characterized gains of Rs.11,16,89,271/- from sale of investments as business income, considering the volume, frequency, and short holding period of transactions. The Commissioner of Income Tax (Appeals) confirmed the assessment. The assessee appealed to the Tribunal.
Findings of Court:
The Tribunal found that the assessee consistently maintained separate portfolios for investments and stock-in-trade, used its own funds for investments, and followed distinct accounting treatment. The Tribunal held that magnitude or volume of transactions or short holding period alone cannot convert investment activity into business activity if proper demarcation and intention are maintained. The issue was covered by the Tribunal's earlier order in the assessee's own case for AY 2005-06, where it was held that profit on sale of shares held as investments is assessable as short-term capital gains. For the disallowance under Section 14A, the Tribunal directed the AO to compute disallowance considering only investments that yielded exempt income during the year, following the Special Bench decision in Vireet Investments.
Issues: The main issues were whether the gain from sale of shares held as investments should be treated as business income or short-term capital gains, and the correctness of the disallowance under Section 14A read with Rule 8D.
Ratio Decidendi: The Tribunal ruled that where an assessee maintains two distinct portfolios (investment and trading) with consistent accounting treatment, uses own funds for investments, and has a clear intention discernible from records, the gains from sale of the investment portfolio are assessable as capital gains, not business income. For disallowance under Section 14A, only investments yielding exempt income during the year should be considered for computing average value under Rule 8D.
Result: Appeal of the assessee is partly allowed; the stay application is disposed of. The AO is directed to assess profit of Rs.11,16,89,271/- as Short Term Capital Gains and recompute disallowance under Section 14A as per Vireet Investments decision.
| Table of Content |
|---|
| 1. filing of appeal and stay application (Para 1) |
| 2. stay application based on prior tribunal order (Para 2 , 3) |
| 3. maintaining separate portfolios for investment and trading (Para 4 , 5 , 6 , 7 , 8) |
| 4. prior tribunal decision binding on same issue (Para 9) |
| 5. profit on sale of shares held as investments is capital gain (Para 10 , 11) |
| 6. disallowance u/s 14a limited to exempt income yielding investments (Para 12 , 13) |
| 7. appeal partly allowed; stay disposed of (Para 14) |
आदेश/ORDER
PER ABY T. VARKEY, JM:
The appeal in ITA No.653/Chny/2026 has been preferred by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)/NFAC, (hereinafter referred to as ‘Ld.CIT(A)‘), Delhi, dated 15.01.2026 for the Assessment Year (hereinafter referred to as ‘AY‘) 2008-09 & the SP No.36/Chny/2026 is the Stay Application filed by the assessee for AY 2008-09.
2. First we take up the stay application of the assessee. The Ld. AR for the assessee pointed out at the time of hearing that, the major addition in the impugned assessment order relates to action of the lower authorities re-characterizing the gain of Rs.11.16 crores derived from sale of investments by way of business income as opposed to short term csapital, as returned by the assessee. The Ld. AR brought to our notice that, identical addition was done by the AO’s predecessor in AY 2005-06 and on appeal the Ld. CIT(A) had held that the profit/loss from sale of investments which were held for less than a year as well, was assessable by way of short-term capital gains and not business income. He pointed out that, though the AO had taken cognizance of the appellate order passed in assessee’s own case for AY 2005-06, but he still proceeded to assess the gain of Rs.11.16 crores derived from sale of investments by way of business income, as because the Revenue had preferred appeal against the order of Ld. CIT(A) before this Tribunal. The Ld. AR invited our attention to the appellate order in ITA Nos. 234/Mds/2010 & 217- 218/Mds/2012 passed by this Tribunal in assessee’s case for AYs 2005-06 to 2007-08 wherein on this identical issue, the Revenue’s appeals have been dismissed. Referring to the CBDT Office Memorandum dated 29.02.2016, the Ld. AR submitted that, since the impugned issue was squarely covered by assessee’s own case for AYs 2004-05 to 2006-07, the demand arising out of the impugned addition, deserves to be stayed. Per contra, the Ld. DR urged us not to entertain this stay application.
3. Having heard both the parties, it was seen that, the major issue impugned in this appeal relates to the re-characterization of gains derived from sale of investments by way of business income instead of short term capital gains. We found force in the Ld. AR’s submission that, the impugned issue was covered in assessee’s favour by its own order of this Tribunal for AY 2005-06. Having taken note of the same, and with the consent of both the parties, we heard the main appeal in ITA No.653/Mds/2026 along with this stay application.
4. We now take up the appeal in ITA No.653/Mds/2026. The brief facts as noted are that, the assessee is a company which is engaged in both trading of shares and derivatives. Besides, the assessee also made investments of its surplus funds in shares and securities for the purpose of earning dividend as well as for deriving capital gain. The assessee was therefore both a dealer as well as investor in shares. There is no dispute that in respect of income from purchase and sale of shares held in ‘stock in trade’, was declared under the head ‘business income’ and that the gain on sale of shares held as investments was declared under the head 'capital gains'. The AO is noted to have analyzed the transactions of investments which gave rise to short term capital gain of Rs.11,16,83,271/- declared in the return of income. Having regard to the duration of holding, frequency of transactions and conduct of the assessee and observed that, (i) the assessee had bought
