Over the past few years, there were lot of uncertainly and litigation around this point – whether the sale of shares is treated as Capital gain or Business Income.
Despite of various court rulings as well as CBDT clarifications, disputes continues to exist on the facts related to individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities.
In a recent CBDT circular, tax payers are allowed to decide whether their gains/losses from sale of listed shares/securities should be treated as business income or as capital gains for tax purposes.
As the circular is binding on the Assessing officers, they cannot question the classification of the income by the assessee.
However, the circular has restricted application to listed shares and securities only and the characterization of surplus from non-listed shares and securities will continue to be decided based on facts of each case and guiding principles under earlier circulars.
Impact of this circular
Suppose a trader / investor, who deals/invests in shares, has sold some listed shares and earned an income of Rs 50 lakhs.
Out of this income of Rs 50 lakhs, Rs 40 lakhs was earned from sale of those shares which were held for more than 12 months and rest Rs 10 lakhs from those held for a shorter duration.
If total income is considered as Business income, then Tax payable will be Rs 13.64 lakhs.
But with the new circular, he can treat shares held more than 12 months as “Investment”, then that profit is tax free. He will have to pay tax on only Rs 10 lakhs, which will be Rs 1.28 lakhs only.
Huge saving of Rs 12.36 lakhs of tax.
CBDT circular No 06/2016 dated 29-Feb-2016 (F.No.225/12/2016-ITA-11)
CBDT realizing that major part of shares/securities transactions takes place in respect of the listed ones and with a view to reduce litigation and uncertainty in the matter, in partial modification to the aforesaid Circulars, further 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:
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 CBDT.
https://www.incometaxindia.gov.in/communications/circular/circular-no-6.pdf