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Pay only 15% tax on short-term gains, now
July, 18th 2011

There seems to be a dim ray of hope for scores of investors who were asked to pay a higher tax for selling shares within 30 days of purchase. The Income Tax Appellate Tribunal (ITAT) has ruled that profits from the sale of shares held for less than 30 days are eligible to be treated as short-term capital gains, on which 15% tax has to be paid.

Tax officials demanded a higher tax of over 30% on the ground that since shares were sold before 30 days from the date of purchase, such gains should be considered as business income and not short-term capital gains. Since tax rules do not spell out the duration of holding and frequency of securities trades for tax treatment, tax officials often use their discretion to arrive at a claim. This has been a source of endless disputes between investors and the tax department.

The 15 June ruling by ITAT in Mumbai is the latest in a series of judicial and quasi-judicial decisions on what constitutes short-term capital gains and business income. The ITAT decision in the case of Hitesh Satishchandra Doshi followed two earlier decisions, where the ITAT drew a 30-day mark to distinguish between business income and short-term capital gains.

The Mumbai ITAT, however, held that the statute is clear only as far as the distinction between long-term and short-term capital gains is concerned. For long-term capital gains, shares have to be held for at least 12 months, and the profit from shares held for less than 12 months will be taxed as short-term capital gains.

There is no tax on long-term capital gains. The ITAT also observed that the law does not lay down a 30-day mark to distinguish between business income and short-term capital gains. It pointed to the parameters laid down by the Supreme Court for making the distinction between investment and trading in shares.

Factors such as intention of the assessee at the time of buying shares, whether the assessee borrowed money to purchase the shares and paid interest, the frequency of such purchases and disposal in that particular item, whether the purchase and sale is for realising profit or purchases are made for retention and appreciation in its value, and how the value of items has been taken in the balance sheet, are critical in determining whether a gain is business income or a short-term capital gain.

Therefore, no single factor can be said to be decisive in determining whether the nature of the transaction is trading activity or investment, the ITAT held. Each case needs to be decided on the basis of the facts of the case. Therefore, treating a transaction as investment when the holding period is more than 30 days and treating the income as business income if the holding period is less than 30 days is not correct, the ITAT observed.

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