As per the new circular, the assessee can opt to treat income earned from sale of shares or securities as capital gains or business income and the assessment officer cannot question it for the first time
The Ministry of Finance has issued a circular (No6/2016)
for providing clarification on taxability on income earned from sale of shares and other securities and whether to treat it as capital gains or business income.
The circular gives a choice to the assessee to define the income earned from share or securities sale as capital gains or business income. It says, 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...
a) Where the assessee itself, irrespective of the period of holding 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 Central Board of Direct Taxes (CBDT).
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, according to the circular.
"It is reiterated that the above principles have been formulated with the sole objective of reducing litigation and maintaining consistency in approach on the issue of treatment of income derived from transfer of shares and securities. All the relevant provisions of the Act shall continue to apply on the transactions involving transfer of shares and securities," the circular says.
Sub-section (14) of Section 2 of the Income-tax Act, 1961 ('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. For shares and other securities, the same can be held either as capital assets or stock-in-trade or trading assets or both. Determination of the character of a particular investment in shares or other securities, whether the same is in the nature of a capital asset or stock-in-trade, is essentially a fact-specific determination and has led to a lot of uncertainty and litigation in the past, the circular pointed out.
Over the years, various courts have laid down different parameters to distinguish shares held as investments from the shares held as stock-in-trade. The Central Board of Direct Taxes ('CBDT) has also, through Instruction No. 1827, dated 31 August 1989 and Circular No.4 of 2007 dated 15 June 2007, summarising the said principles for guidance of the field formations.
However, disputes continue to exist. This was because the taxpayers were finding it difficult to prove the intention in acquiring such shares or securities. The CBDT, while recognising that major part of shares or securities transactions takes place in respect of the listed ones, and no universal principal in absolute terms can be laid down to decide the character of income from sale of shares and securities, decided to issue the new circular. It expects the clarification will help reduce litigation and uncertainty in this matter.
The Ministry also warned about misuse of these new guidelines. "It is, however, clarified that the above shall not apply in respect of such transactions in shares or securities where the genuineness of the transaction itself is questionable, such as bogus claims of long term capital gain or short term capital loss or any other sham transactions," it added.