Section 2(14) of the Income Tax Act 1961 propounds the definition of the term ‘capital asset’’ to include property of any kind held by the assesse, whether connected with his business or profession, but does not include any stock in trade or personal effects subject to certain exceptions. Stock in trade as excluded from the definition of the term capital asset as the profit while dealing with it taxable under the head business income.
It has been a matter of long litigation between revenue and assesse that whether the income from sale of share and security shall be treated as business income under the head capital gain or business income. The equally important question which comes for the issue of the consideration, time and again is, that whether the investment in share and securities is in the nature of capital asset or stock in trade. Over the years it has been well settled that a person can hold two different portfolios at a given point of time, one for trading purpose another for investment purpose and hence during a financial year can income under both heads capital gains from sale of shares as well as business income from sale of shares. It is also permissible as per CBDT circular no 4/2007 dated 15 June, 2007 recites the same preposition.
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Over the period courts have determined different parameters to determine whether the investment in share and securities is an investment in capital asset or investment in stock in trade. Despite the instruction 1827 dated 31st Aug 1989 and circular 4/2007 dated 15 June 2007 revenue authorities are continuously raising a question in course of assessments in due disregard of the circular and instruction issued by the CBDT.
In DCIT v E-cap partners the Mumbai bench of tribunal has held as under about the question whether the gain from sale of shares is a capital gain or business income;
- The question as to whether assessee had earn business income or capital gains depends upon the facts and circumstances of each particular case.
- The decision can be arrived at by taking into account the intention of the assessee while purchasing the shares that whether the same were acquired for investment purpose or making profit by selling them.
- The treatment given by assessee in books of account is one of the decisive factor in reaching to the conclusion that whether shares are held as investment or as stock in trade.
- Volume and frequency of transactions is one of the guiding factor to find out whether assessee is engaged engaged in the business of dealing in shares or held the shares as investment.
In the case of Sarnath Infrastructure Private Limited Lucknow bench of ITAT laid down following principles to ascertain whether the purchase of shares is in the nature of trade or investment;
- Intention of the assessee at the time of purchasing of shares. This can be ascertained by the treatment given by the assessee to the said portfolio in the books of account. For instance whether the shares are shown as closing stock/ opening stock in hand or under the head investment.
- Whether assessee had borrowed money on interest to purchase the asset ,normally money is borrowed to purchase the stock in trade.
- Frequency of purchase and sale of shares is also relevant.if purchase and sales are frequent and there is a substantial volume of transactions. Ratio between the purchase and sale and holding is also relevant. High transactions low holding indicates trading.
- Company’s memorandum and articles board resolutions etc can be looked into to ascertain the nature of holding that whether it is stock in trade or investment.
- Valuation of investment on the balance sheet date are also relevant. IF shares are valued at lower of the cost and net realisable value the portfolio is stock. If valued at cost then investment
CBDT through circular dated 6/2016 dated 29th Feb 2016 instructs the assessing officers that in holding that whether surplus generated from the sale of listed shares would be treated as capital gain or business income, following shall be taken into account;
- Where the assessee himself, opts to treat the investments as stock in trade, irrespective of the period of holding of the listed shares and securities, the income arising on sale of such shares and securities would be treated as the business income.
- In respect of the listed shares and securities held for a period of more than 12 months immediately preceding the date of transfer, if the assesse desires to treat the income arising from the transfer thereof as a capital gain, the same shall not put to dispute by the assessing officer. However, this stand once taken by the assesse assessment year, shall remain applicable in the subsequent assessment years also and the taxpayer shall not be allowed to adopt a different/ contrary stand in this regard in subsequent assessment year Refer