In keeping woth the promise of the government which set up the Tax Simplifcation Comittee to clean the mess of the disputes between the Income Tax Department and the tax payers, the CBDT has issued instruction / Circular No.6/2016 . The perusal of the circular shows that it has been issued in tune with the report of TSC .
Rules for Capital Gains vs Business Income Decision
Following rule will apply now as per CBDT circular
- If you have held on your own any investment as stock-in-trade , transfer of it it will not be disputed by the A.O to be capital gain. It will be business profit.
- If you gained out of sale of listed shares and securities held for a period of more than 12 months immediately preceding the date of its transfer and desires it to be treated as capital gains, the A.O will not dispute it. It is added, once you take this stand , you will have to continue with such stand in future years also.
- 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 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.
Read the Circular on Capital Gains vs Business Income
Government of India Ministry of Finance Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi, the zs” of February, 2016
Sub: Issue of taxability of surplus on sale of shares and securities – Capital Gains or Business
Income – Instructions in order to reduce litigation – reg.-
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. As regards shares and other securities, the same can be held either as capital assets or stock-in-trade/ 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 ot uncertainty and litigation in the past.
2. Over the years, the courts have laid down different parameters to distinguish the 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 August 31, 1989 and Circular No. 4 of 2007 dated June 15, 2007, summarized the said principles for guidance of the field formations.
3. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities. In this background, while recognizing that no universal principal in absolute terms ca_n be laid down to decide the character of income from sale of shares and securities (i.e. whether the same is in the nature of capital gain or business income), 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 ofthe 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.
4 . It is, however, clarified that the above shall not apply in respect of such transactions in shares/securities where the genuineness of the transaction itself is questionable, such as bogus claims of Long Term Capital Gain/ Short Term Capital Loss or any other sham transactions.
5. 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