The Income Tax Appellate Tribunal (ITAT) has delivered a landmark ruling that transaction volume alone cannot determine whether a taxpayer is an investor or a trader. According to reports from The Economic Times, this decision came in a dispute over noted investor Dolly Khanna's claim for a ₹54.23 crore short-term capital loss. The tribunal rejected the Income Tax Department's attempt to treat her losses as business losses, establishing a crucial precedent for stock market taxation.
The case relates to assessment year 2020-21, where Khanna reported a short-term capital loss of ₹54.23 crore and a long-term capital loss of ₹37.35 crore from share sales. During scrutiny proceedings, the assessing officer questioned whether the transactions should continue to be treated as investment activity. The tax department argued that the frequency and volume of transactions indicated Khanna was engaged in share trading rather than investing, with the pattern of purchases and sales more consistent with trading activity than long-term investing.
Khanna challenged the assessment, arguing that the department had focused on transaction volume while overlooking broader facts. She submitted evidence of more than two decades of equity investing with consistent reflection of shareholdings as investments in books of account. The tribunal noted that average holding period of shares was around 580 days, supporting the investment nature rather than trading. Additionally, Khanna argued that investments were made from her own funds and that the department had previously accepted her investor status in earlier years.
The ITAT emphasized that no single factor can conclusively determine investor or trader status, with transaction volume being only a relevant consideration rather than the sole basis for reclassification. The tribunal found no material evidence to suggest Khanna was carrying on a separate business of trading and noted apparent inconsistency in the department's approach. Importantly, the ruling highlighted that several sales occurred during the COVID-19 market correction in March 2020, which the tribunal noted is typical investor behavior during periods of extreme volatility.
The ruling reinforces that transaction volume and frequency may invite scrutiny but cannot override other factors such as treatment of shares in books of account, source of funds, holding periods, and consistency in tax reporting. For active investors, the decision offers reassurance that frequent buying and selling of shares does not automatically change the tax character of an investment portfolio. The tribunal emphasized that classification ultimately depends on whether the taxpayer's conduct reflects investment activity or carrying on a trading business, with the overall nature of the activity mattering more than any single indicator.
