My client keeps a separate investment portfolio and a separate trading portfolio in shares. The officer says the whole activity is business. Can he do that?
Not where the two portfolios are genuinely kept and the department has accepted the split in earlier years. The Delhi High Court held that the intent and purport of CBDT Circular 4/2007 is to demonstrate that a taxpayer could have two portfolios, so that gains out of the investment account are capital gains and gains out of the trading account are business profits.
Decided by the High Court (Badar Durrez Ahmed J and R.V. Easwar J) on 2013-01-09, reported as ITA No.703/2012 (Delhi High Court); arising from ITA No.3379/Del./10. It bears on section 45, section 28, section 2(14), section 260A of the Income Tax Act 1961, in Capital Gains, Assessment & Scrutiny and How Tax Law Is Read matters.
This is the older and wider line, and it still does the work that Circular 6/2016 cannot: it covers shares held twelve months or less, unlisted shares and years before 2016. What carried the case was evidence, not assertion — separate demat accounts, separate bank accounts and separate trading and investment accounts in the books, plus a practice accepted by the department in earlier years. The Court also disposed of a point the Revenue still runs: the circular says a taxpayer 'could' have two portfolios rather than that he is 'allowed' to, and the Court held that although technically correct, the distinction makes no difference when the whole circular is read. Circular 4/2007 also states that no single principle is decisive and that the total effect of all the principles must be considered — which is the answer to an officer who picks out frequency alone.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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The assessee was engaged in sale and purchase of shares and maintained two separate portfolios, one investment and one trading, a practice followed in earlier years and recognised by the Revenue and by the Tribunal. For assessment year 2007-08 the Assessing Officer treated short-term capital gains of Rs 1,38,015 and long-term capital gains of Rs 1,07,44,493 on sales out of the investment portfolio as business income, construing the entire activity as a business activity. The Commissioner (Appeals) allowed the assessee's appeal on 24 June 2010, relying among other things on CBDT Circular No.4/2007 dated 15 June 2007 and on the Supreme Court decisions in CIT v. Associated Industrial Development Co. (P) Ltd. and CIT v. H. Holck Larsen. The Tribunal upheld that order on 20 July 2012, noting that the assessee maintained separate demat accounts, bank accounts and separate trading and investment accounts in the books, and that the department had earlier accepted the practice. The Revenue appealed.
The appeal was dismissed. On the concurrent findings of the Commissioner (Appeals) and the Tribunal that the short-term and long-term capital gains were out of the investment account and not related to the trading account, no interference with the Tribunal's decision was called for and no question of law arose.
The Revenue argued that the Tribunal had misunderstood the circular by saying it 'allowed' two portfolios when the circular said only that it was 'possible' to have them. The Court accepted that the submission might technically be right but held it made no difference when the entire circular is considered, because the intent and purport of the circular is to demonstrate that a taxpayer could have two portfolios, an investment portfolio and a trading portfolio: the assessee could own shares for investment or for trading, and in the former case the gains on sale are capital gains and not the profits of any business venture, while in the latter any gains amount to business profits, which the remaining portion of the circular itself makes clear (paragraph 5). The classification question then turned on the concurrent factual findings (paragraph 6).
Although technically the ld. Counsel for the revenue may be right but that really does not make any difference when the entire circular is considered.
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Handle my notice → Ask a CA on WhatsAppNot where the two portfolios are genuinely kept and the department has accepted the split in earlier years. The Delhi High Court held that the intent and purport of CBDT Circular 4/2007 is to demonstrate that a taxpayer could have two portfolios, so that gains out of the investment account are capital gains and gains out of the trading account are business profits. This was decided by the High Court (Badar Durrez Ahmed J and R.V. Easwar J) and bears on section 45, section 28, section 2(14), section 260A of the Income Tax Act 1961. It is reported as ITA No.703/2012 (Delhi High Court); arising from ITA No.3379/Del./10. This is the older and wider line, and it still does the work that Circular 6/2016 cannot: it covers shares held twelve months or less, unlisted shares and years before 2016. What carried the case was evidence, not assertion — separate demat accounts, separate bank accounts and separate trading and investment accounts in the books, plus a practice accepted by the department in earlier years. The Court also disposed of a point the Revenue still runs: the circular says a taxpayer 'could' have two portfolios rather than that he is 'allowed' to, and the Court held that although technically correct, the distinction makes no difference when the whole circular is read. Circular 4/2007 also states that no single principle is decisive and that the total effect of all the principles must be considered — which is the answer to an officer who picks out frequency alone. If it applies to you, the first step is this: Put the mechanics of the segregation on record: separate demat accounts, separate bank accounts, and separate investment and trading accounts in the books, with the ledgers.
The assessee was engaged in sale and purchase of shares and maintained two separate portfolios, one investment and one trading, a practice followed in earlier years and recognised by the Revenue and by the Tribunal. For assessment year 2007-08 the Assessing Officer treated short-term capital gains of Rs 1,38,015 and long-term capital gains of Rs 1,07,44,493 on sales out of the investment portfolio as business income, construing the entire activity as a business activity. The Commissioner (Appeals) allowed the assessee's appeal on 24 June 2010, relying among other things on CBDT Circular No.4/2007 dated 15 June 2007 and on the Supreme Court decisions in CIT v. Associated Industrial Development Co. (P) Ltd. and CIT v. H. Holck Larsen. The Tribunal upheld that order on 20 July 2012, noting that the assessee maintained separate demat accounts, bank accounts and separate trading and investment accounts in the books, and that the department had earlier accepted the practice. The Revenue appealed. The matter was decided on 2013-01-09 by the High Court (Badar Durrez Ahmed J and R.V. Easwar J). On those facts the High Court held as follows. The appeal was dismissed. On the concurrent findings of the Commissioner (Appeals) and the Tribunal that the short-term and long-term capital gains were out of the investment account and not related to the trading account, no interference with the Tribunal's decision was called for and no question of law arose.
The Revenue argued that the Tribunal had misunderstood the circular by saying it 'allowed' two portfolios when the circular said only that it was 'possible' to have them. The Court accepted that the submission might technically be right but held it made no difference when the entire circular is considered, because the intent and purport of the circular is to demonstrate that a taxpayer could have two portfolios, an investment portfolio and a trading portfolio: the assessee could own shares for investment or for trading, and in the former case the gains on sale are capital gains and not the profits of any business venture, while in the latter any gains amount to business profits, which the remaining portion of the circular itself makes clear (paragraph 5). The classification question then turned on the concurrent factual findings (paragraph 6). In the words reproduced by the source cited on this page: "Although technically the ld. Counsel for the revenue may be right but that really does not make any difference when the entire circular is considered." The decision followed or applied CBDT Circular No.4/2007 dated 15.06.2007 — applied; CIT v. Associated Industrial Development Co. (P) Ltd. : 82 ITR 586 (SC) — relied on below; CIT v. H. Holck Larsen : 160 ITR 67 (SC) — relied on below.
It was decided by the High Court on 2013-01-09 and is reported as ITA No.703/2012 (Delhi High Court); arising from ITA No.3379/Del./10. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 45, section 28, section 2(14), section 260A, the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed. On the concurrent findings of the Commissioner (Appeals) and the Tribunal that the short-term and long-term capital gains were out of the investment account and not related to the trading account, no interference with the Tribunal's decision was called for and no question of law arose. It arises in Capital Gains, Assessment & Scrutiny and How Tax Law Is Read matters, on section 45, section 28, section 2(14), section 260A of the Income Tax Act 1961, and was decided by Badar Durrez Ahmed J and R.V. Easwar J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Show the treatment accepted by the department in earlier assessment years and identify the assessments in which it was accepted. Quote the circular's own words that no single principle would be decisive and that the total effect of all the principles should be considered, and answer each principle rather than only the frequency point. For listed shares held over twelve months, run the Circular 6/2016 argument as well — it is the stronger one and does not depend on the officer weighing anything. Keep the classification consistent in the following year's return; inconsistency is what the department uses to attack the two-portfolio case.
Still good law. A citedby search returns 9 later decisions, all of them Tribunal decisions - no High Court has taken it up. It is applied as binding by the Delhi Benches, for which it is the jurisdictional High Court. In ACIT v Vivita Relan (ITAT Delhi, 22 March 2019) the Bench at para 16 followed 'the decision of the Hon'ble jurisdictional High Court in the case of CIT vs Avinash Jain, 362 ITR 441 (Del)' on an identical factual matrix, holding the gains assessable as capital gains and not business income, and dismissed the Revenue's appeal; the same Bench had done so in the assessee's earlier year (23 August 2018). The Delhi Benches apply it the same way in Ashish Choudhary (12 June 2015), Amit Jai Bhalla (30 August 2017) and ACIT v Shri Hari Investment (2 January 2018), and it has been used at Cochin (Equity Intelligence India, 8 August 2014), Hyderabad (Nirudhoddi Jaya Srinivasulu, 5 September 2014) and Indore (USS Reality, 31 October 2013). Nothing overruling, doubting or confining it was found and no contrary High Court view on the two-portfolio question under Circular 4/2007 was found. Note the weight: the support is entirely at Tribunal level, and the judgment turns on the department having accepted the split in earlier years. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The judgment reproduces only an extract of Circular 4/2007 dated 15 June 2007 — the passage on two portfolios and the direction that no single principle is decisive — not the whole circular; the earlier CBDT guidance the circular builds on, Instruction No. 1827 dated 31 August 1989, is named in Circular 6/2016 but was not read. The Tribunal passage the Court reproduces (its paragraph 6) is the Tribunal's numbering, not the High Court's; the High Court's own judgment runs to six paragraphs, the first unnumbered, ending with the disposal at paragraph 6. The assessment year is 2007-08, decades before 23 July 2024, so the 2024 rate changes have no application; the classification question the case decides is unaffected by them. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed. On the concurrent findings of the Commissioner (Appeals) and the Tribunal that the short-term and long-term capital gains were out of the investment account and not related to the trading account, no interference with the Tribunal's decision was called for and no question of law arose.
TaxSphere, “CIT v Avinash Jain — Circular 4/2007 and the assessee who keeps two portfolios”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-avinash-jain-two-portfolios-under-circular-4-2007/ (validity last checked 2026-09-08)
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