Difference between trader in stocks and investor in stocks – Justice Rangarajan offers his comments
Justice Rangarajan is one of those serious judges with a sense of humour. In my first mail to him, I addressed him as ‘my lord’. He replied to me, ‘Mr. Vijay Kumar’. I asked him to call me vijay. He said if ‘vijay’ is in ‘my lord’ is out. Justice Rangarajan was a member of the ITAT from 1973 to 1994 and was vice president from 1991 to 1994. From 1994 to 1998 he was a judge of the Madras and AP High Courts. Since the last two years I was trying to get him to write for TIOL. But retired judges being more busy than serving ones, I had failed in getting him to write an article for us. Recently the CBDT had called for comments from the public on how to determine whether a person is an investor or trader. See - 19 05 2006. Here are the views of Justice Ranagarajan on the issue. We will also bring you the stinging views from a crusader in our special story.
1. First I wish to express my appreciation for initiating the process of consultation in laying down guidelines for assessing officers.
2. The question whether an activity is investment or business is a hot-point when the rate of tax is not the same for the two activities. Therefore the assessing officer will be interested in treating it as business where the tax is more, while the taxpayer would like to claim it as investment to avail the concessional rate or exemption provided.
3. In my opinion, any amount of guidelines would not solve the problem as long there is a conflict in the approaches of the two sides. The various factors outlined in the draft would have to weighted and it is anybody's guess as to what will be the weightage given by each adjudication at each higher level. As is usually said by courts, each case will have to be decided on its own facts and no case will be a precedent for others.
4. It is better to have a clearcut distinction between the two kinds of activities. One method is to require everyone who wishes to trade in stocks to register. Since such registration is already required by SEBI, those who are registered as traders would not be allowed to claim any holding as investment as long as it is part of their balance sheet. Only those who are not registered as traders with SEBI could be allowed to claim as investors. This kind of classification will remove any discretion in the matter.
5. However if the department feels that those claiming to be investors may actually be trading, then there is the other yardstick of short term and long term capital gains. The Act already provides for treating holding of more than a year as long term capital assets and there is no need to investigate whether transactions in long term capital assets of those who are not registered as traders should be taken as business.
6. It is only in the case of short term holdings that there could be a doubt whether the transactions are regularly carried out as business activity. Here again with the advent of trading online, it is possible to stipulate that such online activity in intra-day trade would be business and others as investments.
7. Modern policy making should be evidence based. So it is advisable to collect data about the number of persons other than traders registered with SEBI who indulge in online trading or inter-day short term transactions and then see whether they could be classified on clear criteria as traders or investors and such classification is worthwhile.