ITAT Allows Dolly Khanna To Treat Rs 54.23 Crore Share Market Loss As Capital Loss

The Chennai bench of the Income Tax Appellate Tribunal (ITAT) has ruled in favour of investor Dolly Khanna, allowing her to treat a short-term capital loss (STCL) of Rs 54.23 crore as a capital loss instead of a business loss.

The case relates to the assessment year 2020-21. Khanna, who has been investing in shares, securities and mutual funds for more than 25 years, had reported a short-term capital loss of Rs 54.23 crore and a long-term capital loss (LTCL) of Rs 37.35 crore under the head “Capital Gains” in her income tax return.

Her return was selected for scrutiny after the tax department flagged the large capital gains and losses reported during the year. During the assessment proceedings, the Assessing Officer (AO) examined the volume and frequency of her share transactions and concluded that the activity resembled trading in shares rather than investment.

In this regard, the AO considered the short-term capital loss of Rs 54.23 crore as a business loss. However, the long-term capital loss of Rs 37.35 crore continued to be recognised as a capital loss.

Khanna questioned the ruling, saying that over the past 20-plus years, she had been reporting any gains or losses from share transactions as capital gains, and the tax department had taken this stance in previous years.

Why ITAT Ruled In Her Favour

The tribunal reviewed her investment account history and determined that she had always considered shares to be investments, not stock-in-trade. This treatment had been accepted by the income tax department for many years, including in scrutiny assessments, it added.

The ITAT noted that the facts in the assessment year under consideration did not show any substantial change to justify the difference in treatment. It therefore applied the principle of consistency and held that the department could not take a contrary view for a single year without sufficient grounds.

The tribunal also took into account other factors that supported her claim as an investor. It pointed out that she invested her own money, had no business structure connected to share trading, and had not claimed any expenses that would normally be connected to a business engaged in share trading.

The tribunal also took into account the timespan of her investments. The shares were held for an average of approximately 580 days, which suggests a more long-term investment strategy.

Impact Of The Decision

The ITAT also accepted the explanation that the higher volume of transactions during March 2020 was linked to extreme market volatility during the Covid-19 outbreak. It held that selling investments during a market downturn to limit losses does not automatically make an investor a trader.

The tribunal further pointed out that both the short-term and long-term losses arose from the same investment portfolio. Therefore, treating one as a capital loss and the other as a business loss was not justified.

With this ruling, the ITAT directed the tax department to accept the Rs 54.23 crore short-term loss under the head “Capital Gains” and allow it to be carried forward in accordance with the provisions of the Income Tax Act.