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    Overview on Taxability of Shares

    Section 2(14) of the Income Tax Act “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. 

    However, capital asset does not include stock in trade, personal effects subject to certain exceptions. 

    Transfer of securities - capital asset (or) stock-in-trade? 

    Gain arising on transfer of shares or any other securities is taxable. It can be taxable under the head of ‘Capital Gain’ or under the head of ‘Profits or Gains from Business or Profession’. 

    It shall be taxable as Business income, if such shares are treated as stock in trade by assessee and he is involved in trading of shares and income from sale of shares is earned at regular intervals. Example: Intraday transactions can be treated as business income. 

    It shall be taxable as capital gain, if such shares are treated as investments by assessee and sale of shares during previous year is unusual transaction for him. 

    However, to bring clarification on this point whether such gain shall be taxed under the head of business income or capital gain, Central Board of Direct Taxes (CBDT) has issued one Circular No. 4/2007, Dated 15-6-2007. In this circular various principle are quoted which are to be considered by assessing officer in determining whether assessee is a trader or investor which are as follows: 

    • The first principle to verify as to how the shares were valued/held in the books of account i.e. whether they were valued as stock-in-trade at the end of the financial year for the purpose of arriving at business income or held as investment in capital assets 
    • The second principle furnishes a guide for determining the nature of transaction by verifying whether there are substantial transactions, their magnitude, etc., maintenance of books of account and finding the ratio between purchases and sales. 
    • The third principle suggests that ordinarily purchases and sales of shares with the motive of realizing profit would lead to inference of trade/adventure in the nature of trade; where the object of the investment in shares of companies is to derive income by way of dividends etc., the transactions of purchases and sales of shares would yield capital gains and not business profits. 

    Also, CBDT has issued Circular 6/2016 Dated 29-02-2016, wherein, choice was given to assessee, only w.r.t listed shares and securities, that 

    • Where assessee itself, irrespective of period of holding of 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 business income 
    • In respect of listed shares, where period of holding is more than 12 months, before transfer and assessee opts to treat it as capital gain, then income arising from transfer, would be treated as capital gain. However, this stand taken by assessee in one assessment year shall remain applicable in subsequent years also and assessee shall not be allowed to taken different stand. 

    However, such clarification was only with respect to listed securities (held for more than 12 months). In case of unlisted securities and listed securities held for less than 12 months, assessee shall refer Circular No. 4/2007, Dated 15-6-2007, which is based on judgmental approach i.e., intervals of transfer, whether regular or unusual, intension of resale etc., which shall continue to be decided keeping in view aforesaid circular by assessing officer.

    Summary of theCircular 4/2007 &Circular 6/2016:

    Listed/ Unlisted

    Option for Assessee

    Treatment for relevant

    Subsequent Ay’s

     

    (Period of Holding)

    AY

     

     

     

     

     

     

    Listed Securities held for

    Assessee opts to treat it

    Business Income

    Circular

    is silent

    about

     

    more than 12 months

    as Business Income

     

    the same

     

     

     

    Listed Securities held for

    Assessee opts to treat it

    Capital Gain

    Capital Gain

     

     

     

    more than 12 months

    as Capital Gain

     

     

     

     

     

     

    Listed Securities held for

    Assessee opts to treat it

    Business Income

    Circular

    is silent

    about

     

    less than 12 months

    as Business Income

     

    the same

     

     

     

    Listed Securities held for

    Assessee does not opt

    Assessee have to decide

    Capital

    Gain/

    Business

     

    less than 12 months

    for Business Income

    based on Circular No.

    Income

     

     

     

     

     

     

    4/2007  (Judgmental

     

     

     

     

     

     

     

    approach)

     

     

     

     

     

    Unlisted Securities

    No Option

    Assessee have to decide

    Capital

    Gain/

    Business

     

     

     

    based on Circular No.

    Income

     

     

     

     

     

     

    4/2007  (Judgmental

     

     

     

     

     

     

     

    approach)

     

     

     

     

     

     

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