Deliberation on issue whether gain on sale of shares and securities taxable as Capital Gain or Business Income

In recent years, India has witnessed a notable surge in the trading of shares, reflecting a growing investor confidence and an evolving financial landscape. Several factors contribute to this trend. Firstly, the proliferation of online trading platforms has democratized access to the stock market, allowing individual investors to participate more easily. Additionally, regulatory reforms aimed at enhancing transparency and investor protection have instilled greater trust in the market. The emergence of new industries, particularly in technology and e-commerce, has sparked interest among investors, driving up trading volumes. Moreover, initiatives such as financial literacy campaigns and investor education programs have empowered individuals to make informed investment decisions, further fueling the uptick in share trading activity. As India continues on its path of economic growth and development, the trading of shares is poised to remain a dynamic and integral aspect of its financial landscape.

Taxation of shares in India can be a labyrinthine endeavour, characterized by a myriad of rules, regulations, and exceptions. One significant complexity arises from in considering whether the profits from trading in shares should be classified as capital gains (short term or long term) or as business income. Individuals should, in all respects, be clear about this as it affects income tax on shares, especially if income from this source is in a large amount.

Through his article, we will be dwelling into the topic of discussion for the treatment of the gain from the sale of shares and securities can be treated as business income or capital gains. The article comprises of the law under the Income Tax Act, guidelines placed by the income tax department from time to time through its circulars and various judgements wherein courts have dealt with this issue in detail.

To start with, we will first understand the taxation of the income from the sale of shares and securities under the Income Tax Act as capital gain and as business income. As the rules w.r.t both the above scenarios are different and have the different tax rates therefore understanding of the same is important for choosing an option of the between the taxation under the head capital gains or business income.

A. Treating the gain under the head of the Capital Gain:-

Step 1:- Classification of the shares or securities into short term or long term assets:-

In this regard, if shares or securities held for more than 12 months, then it will be treated as long term whereas if such shares or securities held for less than 12 months then it will be treated as short term.

Period of holding commenced from the date of buying of such shares and securities and ends with the selling of the such shares and securities.

Step 2:- Calculation of the gain/loss on the sale of shares or securities:-

As Capital Gains:-

Income Tax Act has prescribed the below method of the calculation from the gain/ loss on the sale of shares or securities under the head Capital Gains:-

Where:-

• Sale consideration is the amount receipt on the sale of shares or securities
• Cost of Acquisition is the amount paid on the sale of shares or securities
• Expenses on transfer is the amount incurred on the transfer while the sale of the such shares or securities.

Step 3:- Tax Rates of the gain/loss on the sale of shares or securities:-

1. Long Term Capital Gain:-

If gain is less than Rs. 1,00,000:- Exempt u/s 10(38) of the Act

If gain is more than Rs. 1,00,000:- 10% of the amount above Rs. 1,00,000

2. Short Term Capital Gain:-

The gain is taxable at the rate of 15% u/s 115A of the Act

B. Treating the gain as business income:-

Where the gain from the sale of shares and securities are from the business income then all the expenditure incurred for earning the above income can be claimed as expenses and deducted from the income.

Method of the calculation of income from the sale of shares and securities has been tabulated below:-

In this way, Income tax return can be filed by taking the benefit of expenses incurred and the person would be in a position to save tax.  The tax here would be as per slab rate depending upon the other income assessee have. (10%/ 20%/30% etc).

In the above paragraphs we have discussed about the taxation of the gains from the sale of shares and securities, now we will be discussing about how once can choose from any of the above options i.e. business income or capital gain on the basis of the circulars released by the income tax department and in light of the judgements by the various courts.

Income Tax Department had issued circular no. 06/2016 noted the determination of character of a principal investment in share or other securities as the nature of Capital asset or business is essentially a fact specific recognition and with the view to reduce the litigation and uncertainty in the matter.

Para 3 of the above circular instructs that the Assessing Officers in holding whether the surplus generated from sale of listed shares or other securities would be treated as Capital Gain or Business Income, shall take into account the following:-

1. Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade (business income), the income arising from transfer of such shares/securities would be treated as its business income.

2. In respect of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years

3. In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the other Circulars issued by the CBDT.

CBDT has released another circular no. 4/2007 dated 15 June 2007 on this issue of determination of the income from the sale of shares and securities as business income for capital gain. The above circular discussed the judgements passed by the various courts on the issue and laid down the parameter basis which one can determine the taxability as capital gain or business income.

a) Intention of the assessee:-

One of the most important parameter to decide on the above issue is intention of the assessee at the time of purchase of such shares or securities. It can be further found out from the treatment which the assessee gives in its books of accounts for these purchase of shares and securities.

The Hon’ble Gujarat High Court judgment in the case of Pr. CIT v. Bhanuprasad D Trivedi, HUF [2017] 87 taxmann.com 137 held where assessee had purchased shares with clear intention of being an investor and held shares by way of investment, gain arising out of transfer of shares should be treated as capital gains and not business income.

The Hon’ble Supreme Court in the case of CIT v. Associated Industrial Development Co. (P.) Ltd. [1971] 82 ITR 586 held that the issue regarding the holding of shares is by way of investment or forming part of stock-in-trade is a matter within the knowledge of the assessee and if he produces proof to show that he had maintained the distinction between the shares which are held as stock-in-trade and which are by way of investment, then the intention of the assessee is a main criteria to be judged.

b) How the assessee returned his income from such activities and how the department dealt with the same

This factor can afford good and cogent evidence but it cannot be conclusive evidence. If the department has accepted the transactions in the past previous years as Investments, then the AO cannot take u turn and treat the transaction as trade instead of Capital Gain. The AO has to follow the principle of consistency

c) Volume, frequency, continuity and regularity of transaction of purchase and sale of shares

Whether there is repetition and continuity, coupled with the magnitude of the transaction, bearing reasonable proposition to the strength of holding then an inference can be drawn that activity is in the nature of business. If the frequency of such purchase and sale of particular item of shares are frequent or there are substantial transactions in that item it will indicate trade. Similarly high volume and low holdings indicate trade whereas low volume of transactions and high holdings will indicate investment.

d) Whether the partnership deed or Memorandum of Association authorizes such an activity

Normally this test is applied in case of partnership firms and companies, is whether the deed of partnership or Memorandum of association, as the case may be, authorizes such an activity

e) Purpose for purchase and sale of shares

What is the purpose of the assessee for purchase and sale of shares. If the purpose is to realizing profit, then it indicates trade but if the purpose is for retention and appreciation in value then it is investment.

Conclusion:-

While taking the decision of choosing from an option for the taxation of the gain and loss from the sale of shares and securities either as Capital Gain or as business income, one should approach this in light of the intention of the assessee having regard to the legal requirements associated with the concept of the trade. It is not possible to apply a single legal test or formula for determination of the correct character of the income as it depends upon number of factors and circumstances associated to it.