The provisions of the Income Tax Act, 1961 does not provide any clear cut demarcation for treating a particular of income as capital gains or as business income. There are various rulings on this topic of High Courts and Supreme Court of India. Further, taking into consideration various rulings pronouncements, the CBDT has issued a circular No. 4/2007, dated 15-06-2007. This circular and rulings pronouncements in this regard are the guiding force in deciding a particular income from shares as income from capital gains or business income.

Lets throw some light on the following important facts in deciding whether an income is a business income or income from capital gains:

i The Income Tax Act, 1961 makes a distinction between a capital asset and a trading asset. Capital Asset is defined in section 2(14) of the Act. Long-term capital assets and gains are dealt with under section 2(29A) and section 2(29B). Short-term capital assets and gains are dealt with under section 2 (42a) and section 2 (42b). Further, trading asset is dealt with under section 28 of the Act.

Any share held for more than 12 months is treated as long term capital gains and income from any share held for less than 12 months is treated as short term capital gains under the provisions of the Income Tax Act, 1961. Further, there is no restriction for an investor to hold shares for more than 12 months in order to treat the same as investment. Further, the concept of short term capital and long term capital has paramount significance for an investor rather than a trader.

(ii) Further, basic character of a trader and that of an investor is very different, which can be summarized as below:

(a) A trader, trades in shares with objective of earning business income based on the volume based, whereas, an investor hold his portfolio till the time he gets good appreciation. Thus, the total mind set of a trader and investor is very different.

(b) A typical trader normally does not take delivery of shares and does day to day trading, where purchase and sale is done even on the same day, whereas a typical investor takes delivery of shares.

(c) That, a trader shows the remaining shares as at the year end as closing stock in trade, as a business stock in the balance, whereas a investor shows the investment in shares as investment in the balance sheet, this show the intention of the investor or the trader as the case may be.

(d) That, a trader in shares treats the closing stock as business stock in the books of accounts as per guidance of “Accounting Standard 2” as issued by the institute of Chartered Accountants of India. And thus, values the closing stock of shares at the “net realizable value” or “cost” which ever is lower, as mandate by AS 2. Whereas, an investor shows the investment in shares as investment and accounts at purchase value irrespective of market value.

(e) That, a trader, for whom purchase and sale of shares is business, treats security transaction tax as advance tax paid and claims a deduction for the same in calculating total tax liability, for an investor, the STT paid is just a sunk cost.

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