Sale of shares / securities: Capital Gains or Business Income?

This document covers

1. Background
2. Tax treatment
3. Parameters laid down by CBDT and courts to distinguish as capital gains or business income

1. Background

Now a days, most of the people are investing in shares/securities either as investment or full time trading. The gains arising from sale of shares or securities can be treated either as capital gains or business income. Determining the gains from shares/securities as capital gain or business income is a fact specific and it has led to a lot of uncertainty and litigation in the past.

2. Tax treatment

Based on the period of holding, the taxable income arise from the sale of shares or securities can be considered in three different ways 1. Long Term Capital Gains, 2. Short Term Capital Gains, 3. Business Income (uncommon)

Common

1. Long Term Capital Gains:

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   • If the shares/ securities are listed on stock exchange and they are sold after 12 months, it is treated as long term capital gain and taxable @ 10%
2. Short Term Capital Gains:

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   • If the shares/ securities are listed on stock exchange and they are sold within 12 months, it is treated as short term capital gain and taxable @ 15%

Uncommon

3. Business Income:

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   • If the shares/ securities are listed on stock exchange and they are sold within 12 months or after 12 months, it can be treated as business income depending on the parameters laid by CBDT and the intention of acquiring such assets.

3. Parameters laid down by CBDT and courts to distinguish as capital gains or business income

There is no universal principal to determine gains from shares/securities as capital gains or business income. The taxpayers find it difficult to prove their intention of acquiring such shares/securities. Hence the taxpayers or Assessing officers needs to take the following parameters into account while determining the gains from shares/securities as capital gains or business income.

1. Where the taxpayer opts to treat such shares/securities as stock in trade i.e., business income:
   Irrespective of the period of holding the listed shares/securities, if the taxpayer wants to treat them as stock in trade, the gain arising from transfer of such shares/securities will be considered as business income.
   
   
2. Listed shares/securities held for a period of more than 12 months:
   If the taxpayer wants to treat the gains from listed shares/securities as Long-Term capital gain, the Assessing officer shall not dispute the same. However, the stand taken by taxpayer in 1 year should be followed in subsequent years and he is not allowed to take a contrary stand in subsequent years.
   
   
3. Other Cases(Listed shares held for less than 12 months and unlisted shares):
   It depends on facts of the each case whether to consider gains as capital gains or business income. The following principles can be applied on the facts of a case to find out whether transactions are in the nature of trade or are merely for investment purposes.
   
   
   1. Whether the purchase/ sale of securities was allied / incidental to his usual trade or business or it was an occasional activity.
   2. Whether the purchase was made solely with the intention of resale at a profit or for long term appreciation and/or earning dividends and interest.
   3. Whether the scale of activity is substantial
   4. Whether such a transaction was entered into continuously and regularly during the financial year.
   5. Time devoted to the activity and the extent to which it is the means of a livelihood.

   Ultimately, one need to prove that the intent with which one operating the trading as a business activity.