Recently the Income Tax Appellate Tribunal (ITAT) Chennai bench ruled in favour of Smt Dolly Khanna, acknowledging her as an investor in shares rather than a trader. On this ground, ITAT Chennai determined that the short term capital loss (STCL) incurred by her should be categorised under capital gains income instead of being labelled as business loss, which the Income Tax officer wanted to do.
What had happened here
Smt Dolly Khanna, in her individual capacity, has been investing in shares, securities and mutual funds for over 25 years.
For the assessment year 2020-21, she filed her income tax return (ITR) on February 12, 2021, declaring a total income of Rs 14.2614 crore. On March 12, 2021, the ITR was processed under Section 143(1) and was later selected for complete scrutiny under the E-Assessment Scheme, 2019, citing the reason "Large Capital Gain set-off with large Capital Loss (Business ITR)".
Subsequently, on June 29, 2021, she was issued a tax notice under Section 143(2) to kick off the scrutiny process. During the scrutiny, she was issued two more tax notices, calling for various details.
She promptly responded to the tax notices, furnishing evidences like her statement of category-wise capital gains/losses, transaction statements from Indusind Bank Ltd., Kotak Securities Ltd. and Emkay Global Financial Services Ltd., holding statements, copies of ITRs filed for the earlier assessment years from 2013-14 onwards along with the corresponding intimations and scrutiny assessment orders.
During the assessment process, the Income Tax Assessing Officer (AO) noted that she had reported a Short Term Capital Loss of Rs 54.23 crore and a Long Term Capital Loss of Rs 37.35 crore. The AO confronted her with these losses, and asked her to explain why the 'trading in shares' shouldn't be classified as business income/loss instead of capital gain/loss, arguing that she was actively trading securities.
She pointed out that according to the rule of consistency, for the past 25 years, she reported her gains/losses on sale of shares under the head "Income from Capital Gains" and this was accepted by the Income Tax Department. She also cited a CBDT circular ( No. 6/2016) issued by the Central Board of Direct Taxes (CBDT) dated February 29, 2016.
The AO was not happy with her explanation and issued a show-cause notice on September 7, 2022, proposing to treat the Short Term Capital Loss of Rs 54.23 crore as "Business Loss". However, the Long Term Capital Loss of Rs 37.35 crore was retained under the head "Capital Gains" without any change. Her total income was assessed at Rs 14.24 crore.
Khanna felt aggrieved and filed an appeal. On June 1, 2026, she won the case in ITAT Chennai. Advocates S. Sridhar and N. Arjun Raj represented her in ITAT Chennai.
Summary of the judgement and why Dolly Khanna won
Chartered Accountant Suresh Surana said to ET Wealth Online that Smt Dolly Khanna is a well-known investor, investing in shares, securities and mutual funds for more than 25 years. For AY 2020-21, she reported a Short-Term Capital Loss (STCL) of Rs 54.23 crore and a Long-Term Capital Loss (LTCL) of Rs 37.35 crore under the heads of income "Capital Gains".
During scrutiny proceedings, the Assessing Officer (AO) took the view that the volume and frequency of her share transactions indicated trading activity rather than investment activity.
Consequently, while the AO continued to treat the LTCL as a capital loss, he recharacterized the STCL of Rs. 54.23 crore as a business loss, thereby denying its treatment as a capital loss and changing the manner in which it could be carried forward and set off.
Surana says: "The CIT(A) upheld the AO's view, following which the matter reached the Chennai ITAT."
The Chennai ITAT ruled in favour of Ms. Khanna and held that she was an investor and not a trader in shares and securities. Accordingly, the Tribunal directed the AO to accept the STCL under the head "Capital Gains" and permit its carry forward as a capital loss.
The Tribunal placed significant reliance on the principle of consistency, noting that for more than two decades, the taxpayer had consistently disclosed gains and losses from shares under the head "Capital Gains" and the same had been accepted by the Income-tax Department, including in scrutiny assessments completed under section 143(3). In the absence of any material change in facts, the Income Tax Department could not adopt a contrary position for a single assessment year.
The Tribunal also relied on CBDT Circular No. 6/2016, which allows taxpayers to consistently treat listed shares either as investments or stock-in-trade. Since the taxpayer had consistently treated her holdings as investments and reflected them as such in her books, the Revenue could not disregard this position without fresh evidence.
Further, the Tribunal observed that the taxpayer had used her own funds, maintained no trading infrastructure or business set-up, had not claimed business-related deductions such as Securities Transaction Tax (STT), and held shares for a relatively long period, with an average holding period of approximately 580 days. These factors collectively supported the conclusion that her intention was that of an investor rather than a trader.
The Tribunal also accepted the taxpayer's explanation that the large volume of transactions undertaken during March 2020 was triggered by the extraordinary market volatility caused by the COVID-19 pandemic.
It held that liquidation of investments during a market crash to mitigate losses is consistent with prudent investment behaviour and does not, by itself, convert an investor into a trader.
Surana says: "Additionally, the Tribunal found the AO's approach to be internally inconsistent, as the LTCL was accepted as a capital loss while only the STCL was treated as a business loss, despite both arising from the same investment portfolio."
Surana says that Khanna succeeded because she was able to demonstrate a long-standing and consistently accepted investment pattern, compliance with the CBDT's guidance on classification of shares, absence of characteristics typically associated with a trading business, and a bona fide explanation for the higher transaction volume during the pandemic period.
Surana says: "The Tribunal therefore held that there was no justification for recharacterizing the STCL as a business loss and directed that the loss be carried forward under the head "Capital Gains" in accordance with the provisions of the Income Tax Act."
