Navneet Singal

CBDT is working too hard and issuing a lot of circulars/notifications in respect of those issues which are a cause of dispute between the department and the assesse. Recently issued circulars regarding taxability of securities in also in one of them.

It has been a constant tug of war between assessee and tax authorities on the classification of gains arising on the transfer of shares/securities as ‘capital gains’ or ‘business income’. Due to the lower tax incidence on ‘capital gains’, taxpayers prefer a ‘capital gains’ classification, while tax authorities usually attempt to tax these gains as ‘business income’. The moot question involved in such disputes is whether the investments of taxpayer are in the nature of ‘capital assets’ or ‘stock-in-trade’. How to determine the taxability of such gains?? While there is no thumb rule to answer this question, courts have laid down certain brightline-tests such as

(1) intention of the taxpayer;

(2) period of holding;

(3) the treatment of such investments by the taxpayer in its books of accounts;

(4) the magnitude, volume, frequency of share dealings;

(5) the source of funds used to make such investments etc.,

In line with these principles, the CBDT, the tax governing body has also issued instructions in the past to be followed by the tax authorities. In a bid to reduce vexatious litigation in the matter, the CBDT has, vide its Circular No. 6/2016 dated 29 February 2016 (Circular) & Press Release Dated May 5, 2016 (through internal department letter dated May 2, 2015), issued a new set of instructions to be followed by its tax officers while assessing whether the gains arising on the transfer of listed & unlisted shares and securities should be treated as ‘capital gains’ or ‘business income’.

Listed Shares & Securities (Circular No. 6/2016 dated 29 February 2016)

The contents of the new Circular are summarized below:

A. Where the taxpayer itself opts to treat such listed shares and securities as ‘stock-in-trade’: Irrespective of the period of holding, the gains would be taxed as ‘business income’.

B. Where the taxpayer desires to treat such listed shares and securities as ‘capital assets’:

(i) If the period of holding is more than 12 months, the tax officer shall not dispute the tax treatment as ‘capital gains’; and

(ii) If the period of holding is 12 months or less, the taxability would continue to be governed by the aforesaid tests.

C. Taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent assessment years.

D. However, the Circular specifies that these instructions shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction is itself questionable.

Unlisted Shares & Securities

CBDT has decided that income arising from transfer of unlisted shares would be considered under the head ‘Capital Gain’. Requirement of period of holding in respect of unlisted securities has also been dispensed with. It is however, clarified that this would not be necessarily applied in three situations where:

A. The genuineness of transactions in unlisted shares itself is questionable; or

B. The transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or

C. The transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.

With so much frivolous litigation in tax matters, such steps from Income Tax authorities are surely welcomed. This is certainly a welcome move for the taxpayer as capital gains are charged at a lesser rate than business income. By taking away the discretion with Assessing Officer, all disputes would be put to rest.

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