Issue of taxability of surplus on sale of shares and securities – Capital Gains or Business Income – Instructions in order to reduce litigation
1. Section 2(14) of the Income-tax Act, 1961 – Capital asset includes property of any kind held by an assessee, whether or not connected with his business or profession, but does not include any stock – in – trade or personal assets subject to certain exceptions. Shares and other securities can be held either as capital assets or stock-in-trade/trading assets or both.
2. Whether the nature of investment in shares or other securities, is a capital asset or stock – in – trade, is based on the facts of each transaction.
3. CBDT states the following criteria to determine whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income:
a) Business Income – Assessee himself irrespective of the period of holding the listed shares and securities, treats them as stock – in – trade, then income arising from such transfer would be treated as its business income
b) Listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer: If assessee desires to treat the income arising from the transfer thereof as Capital Gain, the Assessing Officer shall not dispute the same. However, once the assessee takes this stand, it shall remain applicable in subsequent assessment years also and the taxpayers shall not be allowed to adopt a different/contrary stand in subsequent years.
c) In all other cases, the nature of transaction shall continue to be decided based on this circular
4. The criteria stated above shall not apply in respect of such transactions in shares/securities where the genuiness of the transaction itself is questionable. Eg bogus claims for Long Term Capital Gain/ Short Term Capital Loss or any other sham transactions.
5. These principles are laid down with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities.
Read the Income Tax Circular http://www.incometaxindia.gov.in/communications/circular/circular-no-6.pdf