Taxation of income from sale of listed shares: CBDT circular to reduce disputes
April, 01st 2016
A recent circular from the CBDT allowing tax payers to decide whether their gains/losses from sale of listed shares/securities should be treated as business income or as capital gains for tax purposes, is expected to help reduce tax disputes significantly. The reason why this has been a matter of much heartburn among tax payers is that whether these losses/gains are treated as business income or capital gains/losses often makes a large difference in the tax payable on such transactions.
"The circular is likely to enhance certainty in determination of the nature of income on transfer of shares and reduce litigation. The tax payers have been given an option to decide on the way they want to treat the income arising from such transfer, subject to the underlying facts and specified conditions. This is a welcome step and will go a long way in addressing the concerns of tax payers on this subject," said Vikas Vasal, Partner Tax, KPMG India.
The binding nature of the circulars on the Assessing officers will not allow them to question the classification of the income by the assessee which is why this circular is one of the most important on the subject in recent times.
"However, the circular has restricted application to listed shares and securities only and the characterization of surplus from non-listed shares and securities will continue to be decided based on facts of each case and guiding principles under earlier circulars. Therefore, litigation in this area is expected to continue." said Mr. Gitesh Malik, Director, Cap Quest Research (P) Ltd.
How the difference in tax treatment of above mentioned gains/losses impacts tax payable by the assessee is illustrated via an example below:
Example: Suppose a trader, who deals in shares, has sold some listed shares and earned a business income of Rs 40 lakhs. Out of this income of Rs 40 lakhs, Rs 30 lakhs was earned from sale of those shares which were held for more than 12 months and rest Rs 10 lakhs from those held for a shorter duration.
This would result in a tax liability of Rs 10,55,750 (Taxes @ individual slab rates)
Now, with the help of the new circular, the assessee can consider the income of Rs 30 lakhs arising from sale of shares held for more than 12 months as Capital gains.
Consequently, only Rs 10 lakhs will be taxed at slab rates resulting in a tax liability of Rs 128750 (LTCG being exempted u/s 10(38) of the ITA)
This results in the assessee reducing his tax liability by Rs 927000 i.e. 88% (approx).
About the circular
The Central Board of Direct Taxes (CBDT) issued circular No. 6/2016 on 29.2.2016 setting down certain guidelines to be followed by income tax officers in deciding whether profit/loss from sale of listed shares/securities would be treated as capital gains or business income. Several circulars and instructions have been issued previously regarding this matter however, this time the board has given the tax payer the option to decide the nature of his income arising on account of sale of listed shares/securities. The basic idea of issuing the circular is to halt the increasing litigation in this regard.
However, it needs to be clarified that while a tax-payer can decide about the nature of this income for a particular financial year, he will not be able to change the view taken in subsequent years at will unless there is a significant change in the facts and circumstances of his transactions. This means that the tax payer will have to take a one-time decision as to how the income should be treated and that treatment would be applied in subsequent years as well.
Impact of circular on tax treatment of income:
As per the recent circular:
1. In case of listed securities: if the assessee wants to treat his securities as Stock in trade giving rise to Business income (or loss), then Assessing Officers (A.O) should accept this without dispute. 2. In case of listed shares held for more than 12 months: if the assessee wants to treat the securities as Capital assets giving rise to Capital gains (or loss), then again the A.O. is bound to agree with the claim made by the assessee. Here, once the assessee treats the income as capital gain in one assessment year, the same cannot be treated as business income in subsequent years. 3. In all other cases, the principles laid down in instructions, circulars issued earlier would continue to apply.
The principles that have emerged out of previous instructions, Circulars and Landmark Judgments on the matter are summarized as under:
In deciding whether shares/securities are Capital assets or Stock in trade, the following Points are to be considered:
1. The treatment which assessee has given in his books of account, i.e., whether shown as investment or as stock in trade. 2. The existence of power to purchase and sell shares in MOA is not decisive factor that it is stock in trade. 3. Quantum of purchase and sale. 4. Ratio between purchase and sale. 5. Holding Period. 6. Intention of the assessee (whether to resale at profit, or to earn long term appreciation and dividend income) 7. Method of Valuation. 8. It is possible for the assessee to maintain 2 separate portfolios. An investment portfolio comprising of shares held as capital asset and Trading portfolio comprising of shares held as stock in trade.