Introduction: This article is for better understanding of Treatment of Income from Sales of shares or other securities. Here I am explaining about the possibilities one can treat the income from sale of shares and what are the benefits of it .The article also comprises the corresponding guidelines from CBDT which are self explanatory and fiercest . This question comes into mind of almost every tax payer who is earning the income from shares trading or in buying and selling of shares. This is a tricky one and should be handled with great understanding and patience.
Content: The treatment depends upon the interval of occurrence of income. Usually, if the income from sales of shares is earned by a person at regular intervals it should be treated as business income because in that case, one cannot say that he is selling the invested shares and the shares are not held as stock in trade. That’s why the people who are dealing in intraday transactions have to show the income from such share trading under business income. There is also a concept of “speculation business” which in simple words means any person if dealing in speculation of securities and earning his income from that, then such income would be taxable as speculation business income.
There are various clarifications and circulars earlier issued by CBDT in this regard, but for removing all doubts and problems faced by Income tax payers,
CBDT has issued one circular no. 4/2007, dated 15.06.2007, wherein a clear distinction between shares held as stock in trade and shares held as investment is given. In this circular CBDT has given the reference of various judicial decisions therein that brought the notice of assessing officers about the clear distinction between shares held as investment and shares held as stock.
In the case of Commissioner of Income Tax (central), Calcutta vs. Associated Industrial development company pvt. Ltd., supreme court observed that: – Whether a particular holding of shares is by way of investment or forms part of the stock-in-trade is a matter which is within the knowledge of the assessee who holds the shares and it should, in normal circumstances, be in a position to produce evidence from its records as to whether it has maintained any distinction between those shares which are its stock-in-trade and those which are held by way of investment.”
Further to this, CBDT has issued an office memorandum dated 13.12.2005, to more clarify the basis of difference between shares held as stock-in-trade and shares held as investments –
The CBDT has also issued guidelines for assessing officers on tests for distinction between shares held as stock-in-trade and shares held as investment vide office memorandum, dated 13.12.2005 [F. No. 149/287/2005-TPL]which are reproduced as under:—
“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: it means if it would be an occasional activity it is an unusual transaction and can be treated as investment and not as a business 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.: it means if the purchase is for sales only then it would be business activity and if it would be for long term then it would definitely be investment.
(iii) Whether scale of activity is substantial: means scale and quantum of activity is also an important factor;
(iv) Whether transaction was entered into continuously and regularly during the assessment year: this is called recurrence of transactions.
(v) Whether purchases are made out of own funds or borrowings: it may also be helpful because if an investor is making purchases from own funds it would most probably for the investment purpose though, it is not totally certain.
(vi) The stated objects in the Memorandum and Articles of Association in the case of corporate assessee: In case of corporate assessee the object in the memorandum is also an important factor means if it’s a stock trading company then the income would be business income.
(vii) Typical holding period for securities bought and sold: holding period is also a guiding factor.
(viii) Ratio of sales to purchase and holding: It again indicates the quantum of transactions.
(ix) The time devoted to the activity and the extent t o which it is the means of livelihood: it is a factor for judging as if a normal investor would not devote whole year in buying and selling only.
(x) The characterization of securities in the books of account and balance sheet as stock-in-trade or investment: this is also a self explanatory point
(xi) Whether the securities purchased or sold are listed or unlisted: this will help the assessing officer to a small extent but definitely more listed securities indicates the business activity.
(xii) Whether investment is in sister/related concerns or independent companies: this can be a factor also.
(xiii) Whether transaction is by promoters of the company: this will help in a way to judge whether promoters are investing in the company or not..
(xiv) total number of stock dealt in: it is again quantum
(xv) whether money has been paid or received or whether these are only book entries: this is basically for assessing officer to judge the geniunity of transactions.
CBDT has issued a circular 6/2016 dated 29.02.2016 wherein it has provided an option to the taxpayers that they would have a choice to treat and reflect their income from sale of shares as Income from business or Income from Capital gains. But, the important point here are:
1. Such type of choice has been given only to a person who is having such income from listed shares i.e. Persons having income from sales of listed shares can only avail this options for others the criteria would be same i.e. Interval of occurrence or “significant trading activity “ concept or nature of transactions.
2. Assesses will not be allowed to change his stand again that means suppose in one year the assessee has opted to show such income as business income then in subsequent years also he should show such income in such head only. For all other securities department at first instance is in favour of treating such income as capital gain unless the other factors are also considerable i.e. income at regular intervals, day to day transactions etc.
Means in which way taxability arises:
For this we need to understand from both perspectives:-
If the assessee shows his income as business income
In such case, in addition to showing income from sales /trading in securities he can claim the expenditures incurred by him in earning this income .
In this way, he can file his Income tax return and by taking benefit of expenses incurred he would be in a position to save tax .
The tax here would be as per slab rate (10%/ 20%/30% etc).
If assessee shows the income from sales of shares as Capital Gains:-
If the assessee want to opt this option in such a case he has to categorise the capital gains under long term or short term capital gains head.
Lets understand this:-
As per the provisions of Income Tax Act,
if Any Capital asset held by a tax payer for a period of not more than 36 months immediately preceeding its date of transfer will be treated as short term capital assets. Therefore, if any asset is held for more than 36 months it will be treated as long term capital assets and gain thereon will be long term capital gain.
However, in case of shares, units of mutual funds, debentures, govt. Securities, units of UTI etc. Which are listed in recognised stock exchange in India (note listing is not mandatory if transfer of shares took place before 10.07.2014) the period of holding is 12 months.
Finance Minister amended the section 2(42A) of the act and announced that from 01.04.2015 an unlisted security and a unit of mutual fund , other than equity oriented mutual fund shall be treated as short term capital assets if held for not more than 36 months.
Anyways, If the taxpayer shows their income under the head capital gains, the taxability varies in a following way:-
Long Term Capital Gain (If shares (assumes to be listed) are held for more than 12 months):-
Taxability: Exempt u/s 10(38) of IT act upto Rs 1,00,000/- and then it will be taxable at 10%.
Short Term Capital Gain: (if shares (assumes to be listed) are held for less than 12 months)
Taxability: Tax@ 15%.
For your consideration, In case of other than shares and mutual funds:
Long term capital gain tax is 20% and Short term capital gain is taxable as per Slab rates.
Now, let’s do the comparison, If I would be a Tax payer and holding shares for long period I would definitely show the income from sales of such shares as Capital gain income and would get the benefit of exemption of tax on Long Term capital gain which logically also I should do because if I am holding some security for a longer period of time it would definitely be my asset as investment and not stock in trade.
Looking at other hand when I am holding a security for a lesser period of time say less than 12 months, if I would show the income from sale of share as business income I would claim my expenditures and would tax it as per the slab rate and if I would show it as Capital gain I would show it as short term capital gain and would get it taxed @ 15% if shares or mutual fund and as per slab rate if other than shares. So, in concise I would be at par in both the situation if I am having a security other than share, but I would definitely be at a advantageous position if I am holding a share and tax it as short term capital gain @ 15% in spite of taking it to business income and going into slab (I am assuming that I am a higher tax slab category tax payer).
So, it depends…. and therefore for listed shares an easy choice and option has been given to the tax payers to opt the head of income but with a clear cut instruction to stick on the stand taken.
Whether an assessee can show both types of incomes i.e. Income from Capital gains and income from business and profession both?
The next question that would come in the taxpayer’s mind would be whether some part of income can be treated as income from capital gains and some other part can be treated as income from business and profession… for this CBDT has also clarified in its circular no. 4/2007, dated 15.06.2007 that.. It is possible for a tax payer to have two portfolios, i.e., an investment portfolio comprising of securities which are to be treated as capital assets and a trading portfolio comprising of stock-in-trade which are to be treated as trading assets. Where an assessee has two portfolios, the assessee may have income under both heads i.e., capital gains as well as business income.
Conclusion: There is not a particular standardised way the situation of taxability, period of holding and everything varies according to the situations and nature of security held by an assessee. CBDT however from the latest above mentioned circulars/ memorandums provided a help/ understanding of the concept. Now, it depends upon the tax payer or the assessee to reflect its income by giving proper justification of the same and no doubt a choice has already been given to listed security holders.
In this article I tried to cover all the points and resolve all the frequent doubts that instantly come into the mind of a tax payer who is earning such kind of income. Hope this would be useful and serve the desirable purpose.
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(Republished with Amendments by Team Taxguru)