Death of Investment vs Business Income Controversy : Killer Amendment Suggested by Simplification Committee

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Business Income or investment income is one controversy which has never ending phenomena. But thank god, Simplification Committee has wisely suggested amendment which will end the controversy for good. The recommendation is simple and perfect. Any income from share or securities held by a person can not be regarded as Business Income by A.O in any one of the following circumstances

1. The holding in shares or securities is declared as investment and held for 12 months or more.
2. Holding is shown as investment, but the total gain is less than Rs 5 Lakhs

The definition of capital asset is therefore suggested for certain amendments.
Applicable from Assessment Year 2017-18

Here is the excerpt from report :

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-in- trade.   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 recognizing  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-in- trade.

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.


(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—

(a)  jewellery;

(b)  archaeological collections; (c)  drawings;

(d)  paintings;

(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 semi- precious 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


(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);



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”.