HC Rules Profit-oriented Share Purchases Not Investments

Case Details: Panchsheel Textile Manufacturing and Trading Co. (P.) Ltd. vs. Commissioner of Income-tax (Appeals) - [2025] 174 taxmann.com 847 (Punjab & Haryana)

Judiciary and Counsel Details

• Mrs Lisa Gill & Mrs Sudeepti Sharma, JJ.
• Akshay Bhan, Sr Adv. &  Shantanu Bansal, Adv. for the Appellant
• Ranvijay Singh, Sr Standing Counsel for the Respondent

Facts of the Case

The assessee was engaged in the business of manufacturing and trading of Yarn/cloth. Up to the Assessment Year 1997-1998, the assessee was not doing any share trading activity. As per the memorandum and articles of association, the assessee was not entitled to carry on such activity.

Later, the memorandum was amended to include the business of trading in shares. The board of directors approved the same, and the assessee started trading in shares. The assessee duly reflected shares as stock-in-trade, and the balance sheet was duly audited by the auditors. For such trading, the assessee borrowed money for purchasing shares.

During the assessment proceedings, the Assessing Officer (AO) disallowed the entire business loss incurred due to interest paid on the borrowed amount for investing in the shares of a company. AO contended that the shares were not sold for a long time, and some of the shares were pledged. Thus, they were not purchased for trading but as an investment.

The matter reached the Punjab & Haryana High Court.

High Court Held

The High Court held that the AO treated the shares of the shares as an investment based on assumptions and presumptions. It was not the case that all the shares were pledged. The assessee purchased and sold shares of about 24 various companies during the relevant assessment years, which were accepted as stock-in-trade. It was also not the case that the assessee sold the shares of the company immediately after the purchase. The assessee sold some shares in the subsequent assessment years.

The assessee purchased the shares as stock-in-trade, not as an investment. The assessee was involved in the trading of shares and waited to sell them at the best price to maximise profit. Thus, the AO’s contention that the company’s shares were not purchased for trading was not justified.

Therefore, the assessee had the intention to engage in the business of trading, even with shares of the company, and does not show an intention to hold the company’s shares as an asset. Since the assessee had been selling the shares of the company at different intervals of time, the shares of the company purchased by the assessee should be treated as stock-in-trade and not as an investment.

List of Cases Reviewed

• Order passed by ITAT, Chandigarh in ITA No.171, 14 and 15/Chandi/2005 dated 31-07-2006 [Para 34] Set aside