Skip to main content

Profits on sale of shares when taxable as capital gains & when as business income

 
Though the Income tax laws provides for taxation of profit on transfer of capital asset under the head capital gains, there are situations/cases when the activity of buying and selling of listed shares is treated as trading activity either by the tax payer or by the revenue authorities and any profit on it is taxed as business income.

In order to minimise such disputes and to guide the tax authorities and the tax payers,  the tax department has been issuing guidelines from time to time in this regards. In this article I will attempt to discuss the criteria, which play a determining role in deciding whether it becomes as capital gains or as business income.
Factors to be considered for deciding whether the income is business income or capital gains
 
The first instruction were issued vide Instruction No. 1827 dated 31.08.1989 on taxation of surplus arising on sale of shares guiding the tax authorities on various criteria to be applied for treating holding of shares as stock in trade or capital asset.One of the most important criteria to be applied under these instruction was to find out the intention of the tax payer. Where the purchase has been made with the sole intention of resale at a profit and the purchaser does not have any intention to hold the property for himself or otherwise for enjoying it, the presence of such an intention is a relevant factor and it would raise a strong presumption that the transaction is in the nature of trade and such securities shall be treated as stock in trade and thus profit liable to be treated as business income. However in case one invests in securities for the sole purpose of  earning dividends/interest over the years, the same can not be treated as stock in trade and any profit on sale of such asset will have to be treated as capital gains.

Likewise the nature of trade or business carried on by the tax payer shall also be relevant for this purpose. In case of stock brokers any purchase and sale of securities shall be treated as business income unless there are other circumstances to warrant other treatment like intention to hold it for generating regular income in future. Likewise the volume of transactions in securities will also point towards it being in the nature of trade. So in case the tax payer has indulged in such transaction of purchase or sale of securities sporadically, the presumption of it being capital asset is very high.

One of the other indicators is whether a particular assessee is buying or selling the securities or whether he has merely invested his money with a view to earning further income or is holding it for carrying on his other business. In former case the surplus shall be treated as business income and in later case the same shall be treated as capital gains.

In addition to the nature of business, volume of transactions and  intention,  the treatment of the securities in the books of accounts by the tax payer as investment is also a guiding factor for treating the surplus as capital gains. However such treatment in the books alone would not be conclusive evidence in case some other facts points to other direction. For example where the tax payer has been dealing in the securities on almost daily basis though showing all such securities as investment. In such circumstances the treatment of such securities as investment in the books of accounts  itself is wrong.

The central government has issued revised instruction in 2007 vide Circular No. 4/2007 dated 15.06.2007 providing further clarity on the criteria to be used for treatment of specific security as stock in trade or capital asset. It has provided that whether a particular holding of shares is by way of investment or forms part of stock-in-trade is a matter where the knowledge and conduct of the tax payer is important. So it is the responsibility of the tax payer to provide evidence in support of his contention. It has further provided that it is the substance of the nature of transactions which is important factor like how the books of accounts have been maintained,  or the magnitude of purchases and sales of such securities or the ratio between purchases and sales. All these factors evaluated together will help the tax payers as well as the revenue authorities to arrive at a valid and rational conclusion.

It is not that all the holdings of securities of a particular assessee can either be treated as stock in trade or capital asset. The assessee can treat some of the shares as capital assets and some as stock in trade. The tax payer can even treat some shares of a Company as stock in trade and other shares of the same company as capita assets. So it is possible for an assessee to have two portfolios, one as an investment portfolio comprising of securities which are treated as capital assets and the other one as a trading portfolio comprising of stock-in-trade which the tax payer treats as trading assets. Where an assessee has two portfolios clearly segregated, the tax payer can have income from both the sources.

Various Courts have also held that when the assessee has shown some securities as capital assets in previous years and the same has been accepted by the income tax officials then, the tax officer can not take a different stand later on unless there are strong evidence to warrant such a change of opinion.

The government has also advised the tax officers that while evaluating whether particular security is stock in trade or capital asset,  it is totality of facts and circumstances which are to be considered and no  single principle would be decisive and can be considered in isolation. So the overall effect of all the various guidelines and principles should be considered to determine whether, in a given case, the securities are held by the assessee as investment or stock-in-trade. So what is important is to consider the distinctive character of the transaction and the security. In each case, it is the total effect of all relevant factors and circumstances that determines the character of the transaction.
-----------------------------------------------
Invest Rs 1,50,000 and Save Tax under Section 80C. Get Great Returns by Investing in Best Performing ELSS Mutual Funds

Top 10 Tax Saver Mutual Funds to invest in India for 2016

Best 10 ELSS Mutual Funds in india for 2016

1. BNP Paribas Long Term Equity Fund

2. Axis Tax Saver Fund

3. Franklin India TaxShield

4. ICICI Prudential Long Term Equity Fund

5. IDFC Tax Advantage (ELSS) Fund

6. Birla Sun Life Tax Relief 96

7. DSP BlackRock Tax Saver Fund

8. Reliance Tax Saver (ELSS) Fund

9. Religare Tax Plan

10. Birla Sun Life Tax Plan

Invest in Best Performing 2016 Tax Saver Mutual Funds Online

Invest Online

Download Application Forms

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

---------------------------------------------

Leave your comment with mail ID and we will answer them

OR

You can write to us at

PrajnaCapital [at] Gmail [dot] Com

OR

Leave a missed Call on 94 8300 8300

-----------------------------------------------

Popular posts from this blog

Rs 14,000 Crore worth of tax free bonds coming soon from NHAI , PFC

  NHAI, PFC file prospectuses, coupon rate not yet decided MORE debt investment options have opened up for investors with AAA rated tax-free bonds worth over Rs 14,000 crore lined up. The National Highway Authority of India ( NHAI ) and Power Finance Corporation ( PFC ) are offering Rs 10,000 crore and Rs 4,033.13 crore worth of tax-free bonds, respectively, as per prospectuses filed with the Securities and Exchange Board of India (Sebi). Of a Rs 5,000 crore issue by PFC, Rs 966.87 crore has already been raised through private placement on September 28 and November 1. Tax-free bonds give investors tax-free return on any amount invested. In another kind of bonds, the long-term infrastructure bonds, investments up to Rs 20,000 are tax exempt, that is this cap amount can be deducted from the taxable income. Accordingly, the NHAI prospectus has clarified that only the amount of interest from -and not the actual investment on -its new bonds will be tax-free. "NHAI's publ...

Change in Fund Manager for some of HSBC Mutual Fund Schemes

Buy Gold Mutual Funds Invest Mutual Funds Online Download Mutual Fund Application Forms Call 0 94 8300 8300 (India) However, this facility is only available to Unit holders who have been assigned a folio number by the AMC.   HSBC Mutual Fund has announced that the below mentioned schemes shall be managed by the new fund managers as stated in the table. The effective date will be July 02, 2012.   Amaresh Mishra 's will be Vice President and Assistant Fund Manager. Having done a Post graduate diploma in Business Management and Bachelor of Chemical Engineering, he has over seven years of experience in Equities and Sales.   Mr. Piyush Harlalka's designation shall be Vice President- Fixed Income. Qualified as a C.A., C.S. and holding M.B.A.( Finance degree), he has over six years of experience in Fund management and ...

How EEE and EET Tax affect Retirement Investments

  An important factor while choosing a financial product is its taxation , and for retirement savings, this is even more important as the sums involved are usually life-long savings. Here's a look at the current tax treatment of three major long-term retirement planning products, which are - Employees' Provident Fund (EPF), Public Provident Fund (PPF) and National Pension System (NPS). EPF The tax treatment is EEE, which means your money is exempt from taxes at the time of investment, accumulation and withdrawal. At the time of investment, the tax deduction is under the limit of section 80C of the Income-tax Act , which is currently Rs 1.5 lakh. Partial withdrawals are also tax-free if made after 5 years of continuous service. If withdrawals are made before 5 years of service, 10% tax will be deducted at source. Exceptions have also been provided for transfer of amount and conditions wherein the subscriber is unemployed for more than 2 months or the loss of job was beyond th...

Personal Finance: You can insure your wedding

But luck may not always be on your side. With the frequency of such attacks, as also other risks and unforeseen accidents growing, a wedding insurance is something you may want to look at if a marriage is being planned in the family. Event insurance plans like this is still in its nascent stages due to low awareness. And given the sacred nature of the ritual, nobody wants to discuss or think negative. But as wedding spends and risks grow, it makes sense to cover the potential monetary loss. The policy in those countries even covers the loss of the wedding ring, the wedding gown not reaching on time and even the expenses/loss due to late or non-appearance of the photographer which may mean staging the event once again for the photograph. In India, most insurance companies — including ICICI Lombard General Insurance, Oriental Insurance, Bajaj Allianz and National Insurance — offer wedding insurance. The policy is tailor made to individual requirements and needs. The sum insur...

DSP BlackRock MidCap Fund

Best SIP Funds Online   HOW HAS DSP BlackRock Small & Mid Cap Fund PERFORMED? With a 10-year return of 14.61%, the fund has outperformed both the category average (12.34%) and the benchmark (10%) by a good margin. Should you invest in DSP BlackRock Small & Mid Cap Fund? This fund invests predominantly in mid-cap stocks but takes a sizeable exposure in small-caps as well. The focus is on nascent companies with high growth potential. The fund manager places emphasis on quality and avoids inferior businesses even if these look tempting from a valuation perspective. Over the past year, the fund portfolio has grown, having added to some of the underperforming sectors like chemicals and healthcare. Its portfolio churn has come down significantly. The heavily diversified portfolio is run completely agnostic of its benchmark index— most bets are from outside the index—which can at times lead to bouts of underperformance as seen in the recent years....
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now