A tricky issue that all local stock market investors will have to grapple with has resurfaced. It relates to the tax they will have to fork out on the money made from stocks. While the matter is yet to be resolved, theres some good news for investors.

According to a recent order by the Income-Tax Appellate Tribunal (ITAT), short-term capital gains, even if generated through a large number of transactions, would attract 10% tax. In other words, the money an investor makes by exiting a stock within a year of purchase will be treated as capital gains and, not as business income which attract a 30% tax.

Even though the government and tax authorities have set certain parameters to differentiate between capital gains and business income, investors felt the norms lack clarity and lend themselves to different interpretations by assessing officers.

However, the last word on this is yet to be said since ITAT is a quasi-judicial body and its decision can be challenged in a High Court. Still, the ITAT order assumes significance as the I-T department treats short-term capital gains as business income if such gains are generated through a large number of transactions (i.e. sale and purchase of shares).

If an investor has carried out a large number of transactions in securities, the department treats him as a dealer in shares and deny him the lower rate of tax applicable on capital gains. In most cases the I-T department based its argument on the volume of transactions to classify an investor as a dealer in shares.

The recent ITAT order, given on an appeal filed by Jignesh Shah on behalf of Janak Rangwalla, a businessman, will set at rest, at least for the time being, the ongoing tussle between the I-T department and taxpayers on the tax applicable on gains from frequent share transactions.

The ITAT bench, comprising accounting member Pramod Kumar and Judicial Member Sushma Chowla, held that volume of transactions should not be the basis of considering such income as business income. In this case Mr Rangwalla had earned short-term capital gains amounting to Rs 1.47 crore, which was claimed to be adjusted against long-term capital loss.

The assessee has also declared income from speculative gains, on account of sale and purchase of shares without the delivery of shares. The assessee had also claimed long-term capital loss of over Rs 1.02 crore. Similar transactions, carried out by the assessee in preceding years, were held as capital gains. 
 
The department declined to accept the income from investment as short-term capital gains, observing that given the frequency of transactions in shares, the assessee be treated as a dealer in shares and not an investor. Therefore, the department treated it as regular business income, which attracts tax at the rate of 30%.

The ITAT held that there is no basis for treating the assessee as a trader in shares when his intention was to hold the shares in Indian companies as an investment and not as a stock in trade. The magnitude of transactions does not change the nature of transactions, the ITAT observed.