1.1 AMENDMENT RECOMMENDED TO SECTION 2(14) TO PROVIDE CLARITY REGARDING TAXABILITY OF SURPLUS ON SALE OF SHARES & SECURITIES – CAPITAL GAINS OR BUSINESS INCOME
Section 2(14) of the Act defines the term “capital asset” to include 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.
As regards shares and other securities, the same can be held either as capital asset or stock-in-trade / trading asset or both. However, the Act does not contain any specific guidelines as to the characterisation of any particular investment as capital asset or stock-in-trade / trading asset. While this characterisation is essentially a facts-specific determination, the absence of legislative guidance has resulted in a lot of uncertainty and avoidable litigation.
Over the years, the courts have laid down various tests and factors to distinguish shares held as investments from shares held as stock-intrade. The Central Board of Direct Taxes (CBDT) has also, through Instruction No. 1827, dated August 31, 1989 and Circular No. 4 of 2007, dated June 15, 2007, summarized the said principles for guidance of the field formations. Disputes, however, continue on the application of the principles to the facts of each case. Very often the tax payers experience difficulty in proving the intention in acquiring the shares and this is particularly pronounced in the case of individual tax payers who are not well-versed in keeping accounts, particularly pensioners or home-makers who invest their savings in shares and securities.
In that background, while recognising that it is extremely difficult to make changes that will address every situation, the Committee recommends that some clarity should be provided in the Act that will bring in certainty if certain objective criteria are met. This is expected to reduce litigation on this issue.
In this background the Committee recommends that the Act be amended to specifically provide in a new clause (aa) of section 2(14) that a capital asset shall include shares and securities held by an assessee for a period exceeding 12 months from the date of acquisition (other than those declared as stock-in-trade/trading asset in the return of income furnished under section 139 of the Act) and the profits or gains arising from transfer of the same shall be taxable under the head “capital gains”. Shares and securities which are held for a period not exceeding twelve months will continue to be capital assets as per the existing clause (a) of section 2(14).
The result of the amendments recommended will be that:
(i) surplus arising on transfer of shares and securities held for a period exceeding twelve months will be, in all cases, chargeable as capital gains if they are not held as stock-in-trade.
(ii) surplus arising on transfer of shares and securities held for a period less than twelve months, upto a sum of rupees five lakhs, will be chargeable as capital gains if they are not held as stock-in-trade.
It is further proposed to provide that where the profits or gains arising to an assessee from transfer of shares or securities held by him for a period which is less than twelve months and which have been offered to tax under the head “capital gains”, do not exceed rupees five lakhs during the previous year, the Assessing Officer shall not treat such profits and gains as business income, provided the shares were not held as stock-intrade.
Cases which are not covered by the above proposed amendment shall continue to be assessed on the basis of existing principles laid down by the courts and summarised by the CBDT.
The recommendations are aimed at reducing, if not altogether eliminating, a substantial chunk of litigation.
The proposed amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-18 and subsequent years.
1.2 EXISTING DEFINITION OF CAPITAL ASSET (14)
“capital asset” means—
(a) property of any kind held by an assessee, whether or not connected with his business or profession;
(b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992),
but does not include—
(i) any stock-in-trade other than the securities referred to in sub- clause (b), consumable stores or raw materials held for the purposes of his business or profession;
(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—
(b) archaeological collections;
(e) sculptures; or
(f) any work of art.
Explanation 1.—For the purposes of this sub-clause, “jewellery” includes—
(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semiprecious stone, and whether or not worked or sewn into any wearing apparel;
(b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel.
Explanation 2.—For the purposes of this clause—
(a) the expression “Foreign Institutional Investor” shall have the meaning assigned to it in clause (a) of the Explanation to section 115AD;
(b) the expression “securities” shall have the meaning assigned to it in clause (h) of section 2 of the Securities Contracts(Regulation) Act, 1956 (42 of 1956); ,
1.3 RECOMMENDED AMENDMENTS
Section 2(14) of the Act, which contains the definition of a “capital asset”, may be amended as under:
“(14) “capital asset” means—
(a) property of any kind held by an assessee, other than shares and securities referred to in clause (aa), whether or not connected with his business or profession;
(aa) shares and securities held by an assessee for a period exceeding twelve months from the date of acquisition, other than shares and securities held and disclosed by him as stock-in-trade;”
No amendment is required to the other provisions of section 2(14)
A new section 45A, appropriately titled, may be inserted after section 45 as follows:
“45A (1) Where the profits or gains arise from the transfer of shares or securities referred to clause (aa) of sub-section (14) of Section 2 and the case is one to which the provisions of sub-section (2) of Section 45 are not applicable, such profits or gains shall be chargeable under the head “capital gains”.
(2) In any other case where the profits or gains arising from transfer of shares or securities held for a period not exceeding twelve months from the date of acquisition and declared in the return of income under the head “capital gains” from such shares or securities do not exceed the sum of rupees five lakhs as computed under section 48, such profits or gains shall be chargeable under the head “capital gains”.