Shares – Capital asset or Trading asset? CBDT clarifies
When you buy and sell shares, is it at investment or are you in the business of buying and selling shares? This has been the bone of contention in several cases. The Authority for Advance Rulings, referring to the Supreme Court decisions had propounded the following principles:-
(i)Where a company purchases and sells shares, it must be shown that they were held as stock-in-trade and that existence of the power to purchase and sell shares in the memorandum of association is not decisive of the nature of transaction;
(ii)the substantial nature of transactions, the manner of maintaining books of accounts, the magnitude of purchases and sales and the ratio between purchases and sales and the holding would furnish a good guide to determine the nature of transactions;
(iii)ordinarily the purchase and sale of shares with the motive of earning a profit, would result in the transaction being in the nature of trade/ adventure in the nature of trade; but where the object of the investment in shares of a company is to derive income by way of dividend etc. then the profits accruing by change in such investment (by sale of shares) will yield capital gain and not revenue receipt.
Now CBDT emphasizes that it is possible for a tax payer to have two portfolios
An investment portfolio of securities to be treated as capital assets, and
The trading portfolio of stock in trade securities to be treated as trading assets.
CBDT asserts that when an assessee has two portfolios he may have income under both the heads “capital gains” and “business income”. CBDT advises the assessing officers that
1.The above principles should guide them in determining whether, in a given case, the shares are held by the assessee as investment (capital gains) or as stock in trade (business profit).
2.No single principle would be decisive and the total effect of all the principles should be considered to determine whether in a given case the shares are held as investment or stock in trade.
Clear?
Also see our breaking news story Distinction between share held as stock-in-trade and investment
Income Tax Circular No. , Dated June 15, 2007