Today’s question is very crucial and need to clarify whether the gains or losses from sale of securities shall be treated as ‘Income from Business’ or ‘Capital Gain’. In this concern, it is notable that when an assessee wants to treat the sale of securities as ‘business income’, he is allowed to reduce expenses incurred in earning such business income. In such cases, the profits would be added to his total income for the financial year. If an assessee wants to treat his income as ‘Capital Gains, expenses incurred on transfer are deductible.
It is stated that there has always been a confusion around the treatment of income from sale of securities. The taxability of both heads of income i.e. ‘Business Income’ or ‘Capital Gain’ is different, and assessee, definitely, would like to prefer take the benefit and reduce tax, therefore, the treatment of income from sale of securities has always been a matter of dispute between assessee and the Income Tax Department. There have been multiple cases where the Assessing Officer has issued a notice to assessee for a different treatment for the sale of securities.
As an assessee first, we have to understand the different treatment of sale of securities under both heads of income i.e. ‘Business Income’ or ‘Capital Gain’.
|Type of securities||Head of Income||Rate of Tax|
|Equity Shares (Delivery basis)||Capital Gain||LTCG-10%
|Business income||Slab rate|
|Equity Mutual Funds||Capital Gain||LTCG-10%
|Business income||Slab rate|
|Debt Mutual Funds||Capital Gain||LTCG-10% without indexation or 20% with indexation
STCG- slab rate
|Business income||Slab rate|
|Equity Intraday||Business income||Slab rate|
|Equity F&O||Business income||Slab rate|
|Commodity Trading||Business income||Slab rate|
|Currency Trading||Business income||Slab rate|
Transactions in the stock market are different such as Intraday Transactions or Derivative Transactions or Delivery based transactions. Treatment of intraday and derivative transactions are well settled as PGBP income, but gain arising from Delivery based transactions in listed shares traded on any Recognised Stock Exchange is always a confusing and debatable issue. whether the gains or losses from sale shall be treated as “Income from Business’ or ‘Capital Gain’.
It is stated that as per the provisions of the Income Tax Act 1961 (‘IT Act’) profit/loss arising from the sale of the Listed Shares can be taxed under either of two heads of Income namely (i) ‘PGBP’ or (ii) ‘Capital Gain’ and taxation of share income as ‘Business Income’ and ‘Capital Gain’ are subject to tax at different rate of tax under the IT Act. But the said provisions of IT Act do lay down any criteria for determining the classification of income under these heads.
Profit/loss arising the sale of listed shares under PGBP
Taxable as Normal Income
For individual/HUF -as per slab rate
For others- @ 30%
Profit/loss arising the sale of listed shares under Capital Gain
Long Term- Taxable as Special Income under Section 112A @ 10%
Short Term- Taxable as Special Income under Section 111A @ 15%
It is to be notable that both the above options have their own pros and cons. For some assessee taxing share as PGBP may be beneficial while for others as Capital Gain.
As it is mentioned above that IT Act do lay down any criteria for determining the classification of income under these heads, therefore, the issue of whether transactions in shares amounts to a business or an investment activity was the subject of substantial litigation. But Central Board of Direct Taxation (‘CBDT’) just to make clarity in taxation of shares has issued various circulars and instructions to maintain uniformity and reduce litigation in assessee practice of either treating share income as capital gain/PGBP income.
(ii) Office Memorandum dated 13/12/2005.
Firstly, in year 1989, certain tests were laid down by the CBDT to distinguish between shares held as stock in trade and shares held as investment. CBDT’s office memorandum dated 13/12/2005 list following Circumstances to be considered by the Assessing Officers in determining whether a person is a trader or an investor in stocks:–
(i) Whether the purchase and sale of securities was allied to his usual trade or business/was incidental to it or was an occasional independent activity;
(ii) Whether, the purchase is made solely with the intention of resale at a profit or for long term appreciation and/or for earning dividends and interest.
(iii) Whether scale of activity is substantial;
(iv) Whether transactions were entered into continuously and regularly during the assessment year.
(v) Whether purchases are made out of own funds or borrowings;
(vi) The stated objects in the Memorandum and Articles of Association in the case of corporate assessee;
(vii) Typical holding period for securities bought and sold;
(viii) Ratio of sales to purchase and holding.
(ix) The time devoted to the activity and the extent to which it is the means of livelihood.
(x) The characterization of securities in the books of account and balance sheet as stock-in trade or investment.
(xi) Whether the securities purchased or sold are listed or unlisted.
(xii) Whether investment is in sister/related concerns or independent companies.
(xiii) Whether transaction is by promoters of the company.
(xiv) Total number of stock dealt in
(xv) Whether money has been paid or received or whether these are only book entries
Further, CBDT had issued a Circular No. 4/2007 dated 15/06/2007 which has sought to lay down certain tests in order to distinguish between shares held as stock-in-trade and shares held as investment. In order to determine whether the surplus on the sale of shares, etc, will be business income or capital gain, the Assessing Officer will be guided by the following three criteria :
(i) Whether the shares purchased were held and valued as stock-in-trade.
(ii) Whether there were substantial transactions. In this context, the magnitude of the transactions, ratio between purchases and sales, entries in the books of account; will be relevant.
(iii) Whether the object of investment in shares was to derive income by way of dividends or realizing profits by the purchase and sale thereof.
Further, as per aforesaid circular it is possible for a taxpayer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated a capital asset and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where the assessee has both the aforesaid portfolios, he may have income under both heads i,e, capital gains as well as business income. The investor, therefore, will have to classify his portfolio into two categories – one where the intention is to keep the shares for long term and two, where the intention is to trade in such shares.
It was further noted that the above instructions were partially been modified with respect to listed securities by CBDT circular No. 6/2016 dated 29/02/2016 which lays down following factors to be considered for listed securities: –
(a) Where the assessee itself, irrespective of the period of holding of the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,
(b) 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;
(c) 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 aforesaid Circulars issued by the CBDT.
Remark: The controversy substantially died down after the CBDT clarified that if a taxpayer treated his gains from shares held for more than a year as LTCG, then it had to be taxed as LTCG. It was only if such shares were classified by the taxpayer himself as stock-in-trade that the gains on sale of such shares held for more than a year could be taxed as business income. Unfortunately, the clarification does not apply to shares held for a year or less, and the litigation continues in respect of the manner of taxation of gains in respect of such shares – whether as STCG at 15% or as business income at normal slab rates.
Further, taxpayers have now been offered a choice of how they want to treat such income. Once they choose, they must however continue the same method in subsequent years too, unless there is a major change in circumstances of the case. Please note that the choice has been made applicable only to listed securities. However, in case of sale of unlisted shares for which no formal market exists for trading, the department has given its view. Income arising from transfer of unlisted shares would be taxed under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.