Issue of taxability of surplus on sale of shares and securities capital gains or business income instructions in order to reduce litigation
Circular No. 06/2016 was issued by the Central Board of Direct Taxes on 29 February 2016. Its subject is Issue of taxability of surplus on sale of shares and securities capital gains or business income instructions in order to reduce litigation.
Tells Assessing Officers how to decide whether surplus on sale of listed shares and securities is capital gains or business income. If the assessee itself treats them as stock-in-trade, whatever the holding period, the income is business income. If listed shares or securities were held for more than twelve months immediately preceding transfer and the assessee wants the surplus taxed as capital gains, the Assessing Officer shall not dispute it — but the stand taken in one assessment year binds the assessee in later years, and a contrary stand will not be allowed. Everything else continues to be decided on the Board's earlier instruction of 31 August 1989 and its circular of 15 June 2007. The circular is issued in partial modification of those two.
Whether shares are a capital asset or stock-in-trade is a fact-specific question, taxpayers find intention hard to prove, and disputes kept arising; the Board wanted to cut litigation and keep the approach consistent, recognising that most transactions are in listed securities.
Circular No.6/2016
Government of India
Ministry of Finance
Department of Revenue
Central Board of Direct Taxes
North Block, New Delhi, the 29th of February, 2016Sub: 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 andsecurities (Le. 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 followinga) Where the assessee itself, irrespective of the 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.
(Rohit Garg)
Deputy Secretary Government of India5. 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 .
F.No.225/12/2016-ITA-11
Copy to:-
1) Chairman, CBDT and all Members, CBDT
2) OSD to Revenue Secretary
3) All Pr CCsIT/Pr. DsGIT
4) All JS/CsIT, CBDT
5) ADG(PR,PP & OI) with request for placing on official handle of the department
6) Addl. CIT, Data base Cell for uploading on Departmental Website
7) Web manager for uploading on incometaxindia.gov.in & placing in public domain
8) ITCC, Central Board of Direct Taxes (3 copies)
9) Guard file(Rohit Garg)
Deputy Secretary Government of India
In a scrutiny assessment where the Assessing Officer proposes to treat share sale surplus shown as capital gains as business income, and at the return preparation stage when deciding the head under which a portfolio's gains are offered.
An assessee sells listed shares held for eighteen months and offers the surplus as long-term capital gains. The Assessing Officer is not to dispute the head. But if the same assessee sells another long-held listed holding two years later and wants to call that surplus business income, the earlier stand holds it to capital gains.
It mentions. Circular No. 4/2007, Circular No. 6/2016
Source: the Income Tax Department’s own published text — its page for this instrument.