Over the years, the courts have laid down different parameters to distinguish the shares held as investments from the shares held as stock-in-trade. Disputes, however, continue to exist on the application of these principles to the facts of an individual case since the taxpayers find it difficult to prove the intention in acquiring such shares/securities.

Therefore to bring the clarity, Circulars have been issued for treatment of surplus generated from sale of Listed and Unlisted Shares. Below we have outlined the treatment of the same in simple and easy way. IT Department don’t have power to determine the nature of Capital Gain.

 

Consistency in taxability of income/loss arising from transfer of LISTED SHARES

 

With a view to reduce litigation and uncertainty in the matter, CBDT instructs that to decide the nature of the surplus generated from sale of listed shares or other securities, the following shall be taken into account–

 

• Where the assessee itself, irrespective of the period of holding the listed shares and securities, opts to treat them as stock-in-trade, the income arising from transfer of such shares/securities would be treated as its business income,

 

• In respect of listed shares and securitiesheld for a period of more than 12 months immediately preceding the date of its transfer, if the assessee desires to treat the income arising from the transfer thereof as Capital Gain, the same shall not be put to dispute by the Assessing Officer. However, this stand, once taken by the assessee in a particular Assessment Year, shall remain applicable in subsequent Assessment Years also and the taxpayers shall not be allowed to adopt a different/contrary stand in this regard in subsequent years;

 

• In all other cases, the nature of transaction (i.e. whether the same is in the nature of capital gain or business income) shall continue to be decided keeping in view the aforesaid Circulars issued by the CBDT.

 

Consistency in taxability of income/loss arising from transfer of UNLISTED SHARES

 

With a view to reduce litigation and maintain consistency in approach regarding characterisation of income from transactions in listed shares and securities, CBDT has instructed that

 

• income arising from transfer of listed shares and securities, which are held for more than twelve months would be taxed under the head ‘Capital Gain’ unless the taxpayer itself treats these as its stock- in-trade and transfer thereof as its business income

 

• In other situations, the issue was to be decided on the basis of existing Circulars issued by the CBDT on this subject

 

• income arising from transfer of unlisted shares for which no formal market exists for trading, would be considered under the head ‘Capital Gain’, irrespective of period of holding, with a view to avoid disputes/litigation and to maintain uniform approach.

 

Note: It is however, clarified that the above would not be necessarily applied in the situations where:

1. the genuineness of transactions in unlisted shares itself is questionable; or
2. the transfer of unlisted shares is related to an issue pertaining to lifting of corporate veil; or
3. the transfer of unlisted shares is made along with the control and management of underlying business and the Assessing Officer would take appropriate view in such situations.

Thus, we can say that YOU have the power to determine the nature of Capital Gain and not the IT Department.

 

For any assistance visit, taxmantra.com.

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